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Rating Action:

Moody's affirms Dubai Islamic Bank's Baa1 issuer ratings; outlook changed to positive from stable

30 Nov 2016

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

No Related Data.
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