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Rating Action:

Moody's assigns Baa1/P-2 deposit ratings to National Bank of Fujairah

28 Mar 2014

First time ratings

Limassol, March 28, 2014 -- Moody's Investors Service has today assigned to National Bank of Fujairah (NBF) deposit ratings of Baa1/Prime-2 and a standalone bank financial strength rating (BFSR) of D+, which is equivalent to a baseline credit assessment (BCA) of ba1. All long-term ratings carry stable outlook.

NBF's standalone BCA reflects its (1) small but growing franchise in the United Arab Emirates (UAE), supported by an improving risk management framework, (2) solid capitalization metrics underpinned by stable profitability and (3) solid liquidity metrics despite rapid asset growth. These strengths are moderated by (1) NBF's improving but still relatively weak, asset quality and (2) high balance sheet concentrations.

NBF's Baa1 deposit rating incorporate a high three notches of uplift from the bank's ba1 BCA, which reflects Moody's assessment of a high probability of systemic support from UAE government, in case of need.

RATINGS RATIONALE

-- SMALL BUT GROWING FRANCHISE SUPPORTED BY AN IMPROVING RISK MANAGEMENT FRAMEWORK

National Bank of Fujairah (NBF) is amongst the smallest banks in the UAE holding only a 1% market share in terms of assets, loans and deposits. However, the bank has materially grown its balance sheet since 2009, whilst also strengthening its risk management framework following stresses during the crisis period.

Pre-crisis, NBF had a sizeable investment portfolio, which led to a net loss of AED50m in 2008, and also suffered further from the impairment of several large Dubai-based corporate exposures. A new, stronger management team has been in place since 2009 and has refocused NBF towards its core strengths in corporate and commercial banking, particularly in the fast growing and resilient trade finance area. This focus has resulted in high loan growth (albeit from a low base) of 16% CAGR between 2009 and 2013, compared to UAE average of 4%, and represented 91% of the net income as of year-end 2013.

Over the same period, NBF also strengthened its risk management framework through enhanced infrastructure with stricter controls and processes. When coupled with a more conservative risk culture, these developments bring NBF's risk management on par with other - sometimes larger - UAE banks and provide a foundation for balanced future growth.

-- SOLID CAPITALIZATION UNDERPINNED BY STABLE PROFITABILITY

NBF has built up solid capital buffers over recent years reflecting its stable profitability and retention policies. This places the bank on a solid foundation for future growth. NBF's income structure benefits from a significant fee and commission contribution of 25% of net operating revenues compared to 19% UAE average. This is increasingly driven by the provision of treasury services to its corporate clients and the profitable trade finance focus for the bank, which has supported consistent and healthy net interest margins around 3% over the last four years, above the 2.8% UAE average.

With consistent profit retention in excess of 60% NBF generates significant internal capital that has strengthened its Tier 1 ratio, currently 14.4% as of year-end 2013 (12.3% in 2012), which, despite being below UAE average of around 16%, remains well above the 13% median for global banks with same BCA. We expect that this metric will stay stable despite the future loan growth expected.

-- SOLID LIQUIDITY METRICS DESPITE RAPID ASSET GROWTH

Despite experiencing rapid asset growth since 2009, NBF has gradually developed solid liquidity buffers that are in line with its UAE peers. The net loans to deposits ratio has decreased from 113% in 2011 to 96% in 2013 and is now in line with local peers, while liquid assets increased to a sound 27% of total assets from 20% over the same period. Customer deposits now fund 70% of total assets as of year-end 2013, compared with 62% in 2011, 77% of which are term deposits that - when coupled with the short-term nature of its trade financing book -- help reduce the sizable asset-liability maturity mismatch prevalent across all GCC banks. Going forward, loan growth should continue being mainly funded through customer deposits and liquidity metrics should remain stable thanks to a conservative liquidity risk management.

--IMPROVING BUT RELATIVELY WEAK ASSET QUALITY AND HIGH BALANCE SHEET CONCENTRATIONS

NBF's asset quality and concentration levels remain weaker than global peers with BCAs of ba1, although both have improved since 2011 and remain on an improving trend.

In line with some other UAE banks and partly due to the exposure to troubled Dubai government related entities, asset quality had deteriorated between 2008 and 2010, with the non-performing loan ratio peaking at 11.6% in 2010. Since 2011, the reported NPL ratio has declined materially to 4.6% in 2013 (excluding some government related restructuring), which compares to Moody's UAE average of around 9% (which includes large government related restructurings that Moody's considers impaired) and remains weak compared to the 3% median of global banks with a ba1 BCA. This reduction is driven primarily by a combination of write-offs, restructurings and loan growth and we expect problem loan levels to continue to decline in line with loan growth and the improved operating environment.

The improvement in risk management coupled with the fast growth experienced over recent years has also resulted in a reduction in both asset and deposit concentration levels below UAE average, even if those remain high relative to global medians. NBF has also seen significant improvement in the coverage ratio to 118%, well above local average and global peers.

-- SUPPORT ASSUMPTIONS

NBF's Baa1 deposit rating incorporates a high three notches of uplift from its ba1 BCA. This reflects Moody's assessment of a high likelihood of systemic (government) support in case of need. The rating agency bases this view on (1) the 40% ownership of Government of Fujairah and 15% of other Government related entities and (2) the UAE's strong track record of supporting banks in times of stress.

WHAT COULD CHANGE THE RATINGS - UP/DOWN

Upward pressure on NBF's ratings could develop from a combination of the following: (1) a considerable expansion and diversification of the franchise; (2) a material reduction in the single-name borrower concentration; or (3) improved asset quality and capitalization metrics.

Downwards pressure on NBF's ratings could develop from: (1) material weakening of franchise leading to a decline in profitability; (2) material weakening of financial fundamentals; or (3) significant deterioration in asset quality.

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Dubai, National Bank of Fujairah reported total consolidated assets of AED 21.5 billion (approximately $5.9 billion) as of end December 2013.

The Local Market analyst for this rating is Olivier Panis +971.4.2379.533.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Christos Theofilou
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns Baa1/P-2 deposit ratings to National Bank of Fujairah
No Related Data.
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