Limassol, November 30, 2016 -- Moody's Investors Service has today affirmed Dubai Islamic Bank PJSC's
(DIB) Baa1/Prime-2 issuer ratings and ba3 baseline credit assessment
(BCA) and adjusted BCA. At the same time, Moody's changed
the outlook on the bank's long-term issuer rating to positive from
stable.
Moody's affirmation reflects DIB's (1) strong retail franchise
which provides a stable deposit base, which underpins a strong funding
and liquidity profile and (2) improving capitalization and profitability
metrics. These strengths are however moderated by significant concentration
risks coupled with challenges related to high growth.
The change in outlook to positive from stable reflects Moody's view that
DIB will sustain improvements in asset quality and loan loss coverage
levels despite the low oil-price operating environment.
In addition to this, the bank has made good progress in building
its risk management framework and control infrastructure, which
has been weighing down the bank's standalone profile. Further
supporting the rating agency's views is its expectation that Dubai's
economy and overall operating environment, where DIB has significant
operations, will remain broadly resilient.
A list of affected ratings is provided at the end of this press release.
RATINGS RATIONALE
RATIONALE FOR CHANGING OUTLOOK TO POSITIVE
-- IMPROVING ASSET AQUALITY AND COVERAGE LEVELS
According to Moody's, an important driver for the change in
outlook is its view that the bank will sustain improvements in asset quality
and coverage despite challenges in the operating environment, which
result from lower oil prices. The bank's non-performing
financing (NPF) ratio (incorporating Moody's adjustments) of 4.5%
as of September 2016 has improved significantly in recent years,
from 14.7% as of December 2012. This metric compares
favorably to around the 5.1% local average and is broadly
in line with the 4.3% median of global banks with ba3 BCAs.
The past peak NPF ratio was primarily driven by the bank's exposure
to real estate and contracting sector, which has significantly reduced
from around 37% of its overall financing book as of December 2008
to around 21% as of June 2016 and this trend is expected to continue.
Nevertheless, the sector still contributes around 35% of
the bank's current NPFs. Consistent with other UAE banks the improvements
in the NPF ratio reflect settlements, recoveries and re-classifications
of legacy restructured exposures after a sustainable period of repayment
performance combined with solid financing growth giving rise to a significant
denominator effect.
Moody's said that it expects that pressures in the small and medium
(SME) companies and retail (loans to individuals) segments may increase
problem financings for the UAE banks and DIB, the rating agency
nevertheless expects that DIB's asset quality will remain solid.
-- IMPROVING RISK MANAGEMENT AND CONTROL INFRASTRUCTURE
Today's action also considered the ongoing improvements in the bank's
risk management and control environment. The absence of an independent
risk management team and weak control environment pre-crisis contributed
to the increase in problem financings and associated financial loss and
has been weighing down on the bank's standalone profile.
However, since then the bank has established an independent and
fully functional risk management team. In addition, the bank
has also improved its reporting, control environment and processes
as a result of which there has been sizeable recoveries and commercial
resolution of problem financings.
RATIONALE FOR AFFIRMATION
-- SOLID AND IMPROVING PROFITABILITY DRIVEN BY SOLID RECURRING
INCOME AND REDUCTION IN COST OF RISK
Today's action also considered DIB's improving profitability
in recent years, with return of assets (ROA) improving to 2.3%
for 2015 and 2% for the first nine months of 2016, up from
1.4% for 2013. Such profitability metrics compare
favorably to the 1.7% UAE average and 0.9%
global median of ba3 peers. This improvement in profitability is
driven by (1) the bank's strong Islamic franchise yielding higher
margins with a gross asset yield at around 4% for the year 2015
(stable for the first nine months of 2016) against a UAE average at 3.6%
(2) a solid growth in fee and commission income (15% growth year-on-year
for the first nine months of 2016) and (3) a substantial reduction in
the bank's cost of risk which consumed 16% of operating income
down from 36% for the year 2013. Going forward, the
rating agency expects that the bank's net profitability may face
modest pressure driven by modest increase expected in funding costs and
cost of risk for the UAE banks' and DIB.
SOUND CAPITAL AND LIQUIDITY METRICS
The bank has solid capitalization metrics, as exhibited by the tangible
common equity to risk weighted assets of the bank at 12.7%
as of September 2016 which has increased from 11.2% as of
December 2015 following a successful rights issue in June 2016.
Additionally, the bank has built capital buffers through Additional
Tier1 sukuk issuances which represent around 4.3% of total
assets. Financing growth has been exerting pressures on the bank's
capitalization metrics driving the need to raise capital. Going
forward Moody's expect this to continue, albeit more slowly,
as credit growth is expected to slow down for DIB in the current low oil
price environment but remain higher than the UAE average.
The bank's standalone assessment is also supported by the bank's
liquidity and funding profile which despite high growth remains solid.
The bank's liquid assets to total asset ratio and net financing
to deposits ratio are at 21.2% and 91% respectively
as of September 2016. Such solid metrics are driven by the bank's
strong retail Islamic franchise supporting a strong deposit growth of
an average 18% for last three years.
-- GOVERNMENT SUPPORT
DIB's Baa1 issuer rating continues to benefit from five notches of government
support uplift from the ba3 BCA. This reflects Moody's view of
a very high probability of support from UAE government (Aa2, negative
outlook) in case of need. Moody's bases this view on (1) the bank's
significant market share as the fifth largest bank overall but the largest
Islamic bank in the UAE; (2) around 30% Dubai government &
related entities ownership and (3) strong track record of the UAE government
supporting all banks in the past.
WHAT COULD CHANGE THE RATING UP/DOWN
As indicated by the positive outlook, upward pressure on DIB's ratings
could materialize as a result of maintaining its strong overall performance
but more specifically profitability, asset quality and capitalization
levels.
Although not expected in the near term, downward pressure on DIB's
ratings could develop from (1) a weakening of asset quality, (2)
a reduction in size and profitability of the retail franchise and (3)
a weaker liquidity and capital position.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
January 2016. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Dubai, DIB has total assets of AED 171 billion
(approximately US$ 46.5 billion) as of 30 September 2016.
The Local Market analyst for this rating is Nitish Bhojnagarwala,
+971.4.237.9563.
LIST OF AFFECTED RATINGS:
Affirmations:
..Issuer: Dubai Islamic Bank PJSC
.... LT Issuer Rating (Foreign Currency and
Local Currency), Affirmed Baa1 Positive From Stable
.... ST Issuer Rating (Foreign Currency and
Local Currency), Affirmed P-2
.... Adjusted Baseline Credit Assessment,
Affirmed ba3
.... Baseline Credit Assessment, Affirmed
ba3
.... Counterparty Risk Assessment, Affirmed
A3(cr)
.... Counterparty Risk Assessment, Affirmed
P-2(cr)
..Issuer: DIB Sukuk Limited
.... Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1 Positive From Stable
.... Senior Unsecured MTN, Affirmed
(P)Baa1
..Issuer: Tamweel Funding III Ltd
.... BACKED Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1 Positive From Stable
Outlook Actions:
..Issuer: Dubai Islamic Bank PJSC
....Outlook, Changed To Positive From
Stable
..Issuer: DIB Sukuk Limited
....Outlook, Changed To Positive From
Stable
..Issuer: Tamweel Funding III Ltd
....Outlook, Changed To Positive From
Stable
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Nondas Nicolaides
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
