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Rating Action:

Moody's affirms United Arab Bank's Baa3 deposit ratings; downgrades BCA to ba3 from ba2 and changes the outlook to negative

25 Feb 2020

Limassol, February 25, 2020 -- Moody's Investors Service ("Moody's") has today affirmed the Baa3 long-term deposit ratings and P-3 short-term deposit ratings of United Arab Bank PJSC (UAB). Concurrently, Moody's has affirmed the bank's Baa2/P-2 and Baa2(cr)/P-2(cr) Counterparty Risk Ratings and Counterparty Risk Assessments, respectively. Moody's has also downgraded the bank's Baseline Credit Assessment (BCA) to ba3 from ba2 and affirmed its Adjusted BCA at ba2. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

UAB is a United Arab Emirates (UAE) bank with a market share of 0.7% in terms of total assets as of September 2019. UAB is an affiliate of the Qatari based The Commercial Bank (P.S.Q.C.) (CBQ; deposit ratings A3/Prime-2 stable, ba1 BCA), which has a 40% stake in the bank.

Today's decision to downgrade the bank's BCA follows the recent deterioration in UAB's standalone credit profile reflected in the bank having posted a net loss for 2019 following high provisioning charges relating to legacy assets, which in turn weakened capital adequacy, amid a more pressured operating environment. Moody's added that the BCA does however also take into account the bank's sound funding and liquidity and steps being taken to resolve legacy asset quality problems.

The affirmation of UAB's Baa3 deposit ratings reflects Moody's assessment of a moderate probability of parental support from CBQ which now translates into a one notch uplift from the bank's lowered BCA of ba3 and a high likelihood of government support in case of need, which continues to result in two additional notches of uplift from the bank's Adjusted BCA of ba2.

The negative outlook on UAB's ratings captures the potential for further downward pressure on the bank's solvency profile, across asset quality, profitability and capital adequacy.

A full list of the bank's ratings affected by today's rating action is at the end of this press release.

RATINGS RATIONALE

DOWNGRADE OF BCA

The downgrade of UAB's BCA to ba3 from ba2 reflects the bank's weaker solvency profile than previously assessed after it reported a AED470.8 million net loss for 2019 (estimated at -2.4% net income to tangible assets ratio), higher asset risk, and lower core capital buffers. While the reported loss is preliminary, Moody's believes it represents a reasonable representation of the year's result. Despite this, Moody's recognises that the bank's ba3 BCA is supported by its sound funding and liquidity profile, as well as by management action to cleanup legacy asset quality issues.

-- STRAINED PROFITABILITY

UAB's net profitability is strained by substantial provisioning needs and subdued lending activity. The bank's 2019 loss is driven by (1) provisions taken on legacy exposures as part of an ongoing cleanup effort; (2) impairments on real-estate exposures to reflect property prices that are still in a correction phase in the UAE; and (3) a re-alignment of loss given default rates with the bank's historical performance and industry averages under IFRS 9 Expected Credit Loss (ECL) calculations.

UAB's net interest margin (NIM) was at 2.0% during the first nine months of 2019 (2.4% in 2018) and we expect NIMs to remain subdued against a backdrop of decreasing interest rates. UAB's profitability profile is also constrained by subdued net loan growth combined with a strategic shift to focus lending towards lower-risk and lower yielding exposures amid a highly competitive and more challenging operating environment. The bank's net income to tangible assets ratio is estimated at -2.4% in 2019 (0.4% in 2018) compared to a 1.6% local average.

Going forward, Moody's expects the bank's profitability to remain strained because of further provisioning needs and challenges related to originating lower-risk business in a still competitive and more difficult operating context. In addition, based on the bank's recent generation capability, Moody's estimates limited scope for internal capital generation capacity to absorb potential shocks, which in turn contributes to the bank's BCA downgrade.

-- HIGH ASSET RISK

The bank's asset quality remains weak in the context of a more pressured economic environment in the UAE that will continue to challenge the medium-sized businesses to which it is exposed. Although the bank has reduced its legacy high-risk exposures between 2015 and 2018, Moody's notes that management is still pursuing an on-going cleanup exercise. This, combined with subdued net lending led to a reported problem loans to gross loans ratio increasing to 11.4% as of year-end 2019 (9.0% in 2018). The reported loan-loss reserves to problem loans ratio improved to an estimated 99% in 2019 (91% in 2018) compared to a local market average at around 101%. Going forward, Moody's expects the bank's asset quality to remain challenged, with a still on-going cleanup effort and concentration to medium-sized corporates, together with expectations that UAB will resume growing its loan book, posing downside risks amid the tougher operating environment.

-- LOWER CORE CAPITAL

UAB's core capital buffers remained sound until 3Q 2019, as modest asset growth balanced limited internal capital generation, however, on the back of the year-end net loss the bank's estimated tangible common equity to risk-weighted assets ratios fell to 13.6% in 2019 from 14.9% in 2018. Also, the bank's reported total loss absorption capacity as measured by the level of problem loans as a proportion of shareholders' equity and loan loss reserves deteriorated to an estimated above 40% in 2019 from 34% 2018. Over the next 12 to 18 months, Moody's expects a strained profitability and renewed financing growth to exert further downward pressure on the bank's core capitalisation.

-- SOUND FUNDING AND LIQUIDITY MITIGATE THESE RISKS

UAB has sound funding and liquidity, which Moody's expects the bank to maintain going forward, as the bank's expected moderate credit growth limits its funding requirements. The bank's funding profile is deposit-based with a moderate reliance on market funds at around 20% of tangible banking assets as of September 2019 while it maintains healthy levels of liquid assets at 28.1% of its tangible banking assets as of the same period. The bank's net loan to deposits ratio stood at an estimated 91% in 2019. Additionally, Moody's recognises significant actions taken by management recently to actively cleanup legacy asset quality problems in addition to focusing on recoveries ahead of starting to expand the bank's loan book in 2020.

AFFIRMATION OF ADJUSTED BCA AND DEPOSIT RATINGS

The affirmation of the bank's Adjusted BCA at ba2 captures CBQ's (A3 stable, ba1 BCA) ability to extend support to its UAE associate given UAB's lower standalone credit profile with a BCA at ba3. This is underpinned by Moody's assessment of a moderate probability of affiliate support from CBQ, now resulting in a one notch uplift from the bank's ba3 BCA which reflects (1) CBQ's 40% ownership in UAB; and (2) the proven historical track record of parental support from CBQ to its associates in times of need.

The affirmation of the bank's deposit ratings also, captures Moody's continued assessment of a high probability of government support, which continues to translate into a two-notch uplift from the bank's ba2 Adjusted BCA based on the UAE authorities' ample capacity and established track record of supporting banks in times of stress.

NEGATIVE OUTLOOK REFLECTS WEAKENING SOLVENCY PROFILE

The negative outlook on UAB's ratings captures the potential for further downward pressure on the bank's solvency profile. This reflects (1) any downside risk from additional asset quality weakening in a still ongoing cleanup exercise, its concentrated exposure to mid-sized businesses and/or asset risk emanating from renewed growth amid a challenging environment; (2) the potential pressure on profitability from sustained provisioning needs; and (3) the linked downward implications on core capitalisation.

WHAT COULD MOVE THE RATINGS -- UP/DOWN

Upward pressure on UAB's ratings is limited given the negative outlook assigned to its long-term ratings. A material reduction in risk profile with improvements in asset quality combined with normalizing and sustainably higher profitability as well as higher core capital buffers could lead to a stabilisation of the ratings.

Downward rating pressure on UAB could materialise in the event of (1) additional deterioration in asset quality indicators; (2) sustained profitability pressures; (3) further weakening in core equity cushions and/or a material weakening in the bank's funding and liquidity profile; and (4) a downgrade in CBQ's BCA.

LIST OF AFFECTED RATINGS

..Issuer: United Arab Bank PJSC

Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed ba2

.... Long-term Counterparty Risk Assessment, Affirmed Baa2(cr)

.... Short-term Counterparty Risk Assessment, Affirmed P-2(cr)

.... Long-term Counterparty Risk Ratings, Affirmed Baa2

.... Short-term Counterparty Risk Ratings, Affirmed P-2

.... Long-term Bank Deposit Ratings, Affirmed Baa3, Outlook Changed to Negative from Stable

.... Short-term Bank Deposit Ratings, Affirmed P-3

Downgrades:

.... Baseline Credit Assessment, Downgraded to ba3 from ba2

Outlook Action:

....Outlook Changed to Negative from Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The local market analyst for these ratings is Badis Shubailat, +971 (423) 795-05.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Constantinos Kypreos
Senior Vice President
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
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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