CI Ratings has affirmed the Financial Strength Rating (FSR) of the UAE’s Rakbank at ‘A-’, given its solid capital ratios, strong profitability, overall sound asset quality and satisfactory liquidity.
Despite some weakening of key metrics, Rakbank’s overall financial position remains sound.
However, CI Ratings notes that the net non-performing loan (NPL) accretion rate has risen over the last few years and is presently very high.
In view of the continued challenging environment in the SME segment there is a strong possibility that accretions will continue to be high this year.
However, CI believes that Rakbank (profile) is in a position to absorb additional provisioning given its still high operating profit and solid capital base.
A ‘Stable’ Outlook for the FSR is therefore maintained, but with the caveat that any significant weakening of asset quality metrics could exert downward pressure on the rating.
The bank’s Long- and Short-Term Foreign Currency Ratings (FCRs) are affirmed at ‘A-‘ and ‘A2’, respectively.
The ratings are supported and constrained by the same factors impacting the FSR.
The Support Rating is maintained at ‘2’, reflecting the strong likelihood of support from the UAE authorities. The ‘Stable’ Outlook for the FCR is affirmed.
Rakbank is in the process of transitioning to a new business model to diversify its business base and generate a wider range of steady income streams.
The bank was primarily a retail and SME lender for many years but has diversified into wholesale corporate banking and FI activities in recent years.
As the proportion of wholesale banking loans increases, the bank’s average yield on loans and advances could fall in the years ahead.
However, retail and SME/business banking activities are expected to remain fairly high.
Moreover, Rakbank’s funding cost is low owing to large current and savings account balances, which have been built up over the years.
Consequently, despite declines in recent periods, the bank’s net interest margin is expected to remain high and well above the peer group average.
Rakbank’s large non-interest income base also contributes to its high gross income level.
Going forward, the bank’s operating profitability ratio, presently the highest in the sector and well above the peer group average, could fall but the bank would still be more than comfortably placed to absorb high risk charges should it become necessary.
Impaired loans have increased in recent years due to problems experienced by small and mid-sized enterprises following the oil price decline in 2015 and the subsequent slow economic growth.
The bank has also written off a substantial amount of unsecured loans.
Although the NPL ratio rose in 2015 and 2016 it is still at a moderate level.
The bank has also made substantial loan loss provisions against impaired loans and in addition it carries sizable general provisions (equivalent to 1.5% of credit risk-weighted assets) under capital; the aggregate of these provisions more than fully covered NPLs (118% at end 2016 and 113% at end H1 2017).
The bank’s large capital base provides additional cover; specific provisions and free capital together covered NPLs more than 6 times at end 2016
While there could be further impairments and write-offs this year (although the rate of increase is expected to taper) CI believes that the bank’s strong income levels and capital would provide adequate safeguards.
The bank has a moderately high level of restructured loans at present as a result of the recent economic setbacks, and although this is a constraining factor no major repercussion to asset quality is expected from this portfolio.
Rakbank remains solidly capitalized despite a decline in the capital adequacy ratio (CAR) over the last four years.
Regulatory capital consists entirely of Tier 1 funds and the CAR has been at a consistently high level for many years.
The capital to total assets ratio is also high (nearly 18%) and well above the peer group average. Although net profit is likely to remain lower than it has been in the past, CI expects the bank to maintain its CAR at a strong level at end 2017.
Rakbank’s liquidity ratios continue to be satisfactory. The bank’s loan-based key liquidity ratios improved slightly in 2016 on the back of a moderately good increase in customer deposits, while net loans expanded at a slower pace.
Short-term interbank liabilities continue to be low despite rising last year. Medium-term wholesale borrowings supplement the funding base and are moderately low.
The bank has a good stock of liquid assets; its quasi-liquid asset ratio is fairly high.
The deposit base is characterized by substantial current and savings account balances, a large percentage of which has historically proven to be stable; this contributes to the bank’s low funding cost. Customer concentration in the deposit base is low compared with other banks of similar size.
Rakbank is a small to medium-sized bank in the UAE with a strong focus on consumer and commercial banking. The bank has built a good reputation for quality customer services. It was incorporated in 1976 and is 52.8% owned by the government of Ras Al Khaimah (both directly and indirectly), one of the smaller emirates located in the northern part of the UAE. Rakbank currently operates a moderately large network of branches across the country and is still primarily a retail/SME banking institution, but with a growing wholesale banking franchise. It had total assets of almost AED 44 billion (nearly USD 12 billion) at end June 2017.
Capital Intelligence Ratings (CI Ratings) can be found at http://www.ciratings.com/.