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Rating Action:

Moody's downgrades United Arab Bank's long-term deposit rating to Baa3, changes the outlook to stable

09 Aug 2018

Limassol, August 09, 2018 -- Moody's Investors Service ("Moody's") has today downgraded United Arab Bank PJSC (UAB)'s long- and short-term deposit ratings to Baa3/P-3 from Baa2/P-2, following the one-notch downgrade of the bank's baseline credit assessment (BCA) and adjusted BCA to ba2 from ba1. Moody's also downgraded the long-term Counterparty Risk Rating to Baa2 from Baa1 and the long-term Counterparty Risk Assessment to Baa2(cr) from Baa1(cr) respectively. Moody's affirmed the bank's short-term Counterparty Risk Rating at P-2 and its short-term Counterparty Risk Assessment at P-2(cr). At the same time, Moody's has changed the outlook on the long-term deposit ratings to stable from negative.

The downgrade of UAB's ratings reflects the weakening of the bank's asset quality, as the soft economy in the UAE continues to strain the creditworthiness of small businesses and medium-sized companies.

UAB, established in 1975 in Sharjah, is a United Arab Emirates (UAE) bank with a market share of 0.8% in terms of total assets as of March 2018.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

-- DOWNGRADES OF BCA AND DEPOSIT RATINGS REFLECT THE BANK'S WEAKENING ASSET QUALITY

The downgrade of UAB's ratings reflects the weakening of the bank's asset quality, as the soft economy in the UAE continues to strain the creditworthiness of small businesses and medium-sized companies, to which the bank materially increased its exposure between 2011 and 2014. Following the bank's gradual wind down of its legacy high risk exposures between 2015 and 2017, UAB's problem loan formation has gradually slowed. UAB's reported problem loans increased to 8.8% of gross loans at June 2018, from 8.5% in December 2017. This compares unfavourably with the 5.4% UAE average. The bank's coverage of problem loans by loan loss reserves has improved to 104% at June 2018.

In addition, UAB's low profitability limits the amount of internally generated capital available to absorb potential shocks. The bank's low profitability reflects its negative net lending growth, owing to the recent clean-up exercise combined with a focus on lower-risk and lower yielding exposures amid soft economic and credit growth. The bank's net income to tangible assets ratio stood at 0.1% in 2017 (0.8% during the first half of 2018) compared to the 1.5% local average.

-- STABLE OUTLOOK REFLECTS IMPROVED CAPITALISATION, AS WELL AS STABLE FUNDING AND LIQUIDITY

UAB's stable outlook, following the downgrade, reflects the expectation that asset quality will now gradually stabilise at weak levels, as well as the bank's improved capitalisation, following a rights issue completed in March 2018. Following the recent clean-up exercise, the bank's cost of risk (loan loss provisions/gross loans) declined to 2.1% in 2017 (1.3% during the first half of 2018) from 7.1% in 2016. The AED687.5 million ($187 million) capital issuance, which increased the capital by around 400 basis points, helped the bank replenish its capital buffers and absorb the impact from the adoption of the IFRS9 accounting standards (around 176 basis points). UAB's tangible common equity increased to 14.6% of risk weighted assets as of June 2018, from 12.0% at December 2017 (14.7% UAE average).

The stable outlook also takes into account the bank's sound funding and liquidity. UAB's market funds reliance is relatively modest at 16.6% of tangible banking assets as of June 2018, and the bank has high liquid assets at 28.1% of its tangible banking assets. The bank's net loan to deposits ratio stood at 92% at June 2018.

WHAT COULD MOVE THE RATINGS UP/DOWN

Upward pressure on the ratings could materialise through a significant improvement in asset quality, combined with sustainably higher profitability.

Downward pressure on the ratings could materialise through a deterioration in asset quality, or a weakening of capitalisation buffers.

LIST OF AFFECTED RATINGS

Issuer: United Arab Bank PJSC

Downgraded:

....LT Bank Deposits, Downgraded to Baa3 from Baa2; Outlook changed To Stable From Negative

....ST Bank Deposits, Downgraded to P-3 from P-2;

....Adjusted Baseline Credit Assessment, Downgraded to ba2 from ba1;

....Baseline Credit Assessment, Downgraded to ba2 from ba1;

....LT Counterparty Risk Assessment, Downgraded to Baa2(cr) from Baa1(cr);

....LT Counterparty Risk Rating, Downgraded to Baa2 from Baa1;

Affirmed:

....ST Counterparty Risk Assessment, Affirmed at P-2(cr);

....ST Counterparty Risk Rating, Affirmed at P-2;

Outlook Action:

....Outlook, Changed To Stable From Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Sharjah, UAB reported total assets of around AED20.2 billion ($5.5 billion) as of June 2018.

The Local Market analyst for these ratings is Mik Kabeya, +971.4.237.9590.

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
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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