Capital Intelligence has raised the Financial Strength Rating (FSR) of Commercial Bank International (CBI) to ‘BB’ from ‘BB-’ in view of the improvement in asset quality ratios in 2015.
Commercial Bank International
’s good operating profitability is a major supporting factor along with Qatar National Bank (QNB)’s funding support and the proposed increase in capital over the next twelve months. The still weak asset quality and the impaired capital base are constraining factors. Additionally, the bank’s loan-based liquidity ratios were tight at end H1 2015, although CI understands that this has eased somewhat in Q3 FY2015. There are also customer concentrations in both loans and deposits. The Outlook for the FSR is changed to ‘Stable’ from ‘Positive’.
The Foreign Currency (FC) Ratings are maintained at ‘BB’ Long-Term and ‘B’ Short-Term with the Support Rating at ‘3’ and the Outlook at ‘Stable’. The FC Ratings are underpinned by the high likelihood of support from both the federal government and the principal shareholder in case of need. The Bank’s overall weak financials are a major constraining factor for the FC Ratings.
Management has successfully reduced the level of impaired loans in recent years partly through write-offs and recoveries. However, the non-performing loans (NPLs) to gross loans ratio remains much higher than the peer group average, and the coverage ratio continues to be low. After several years of strong growth the bank reined in its credit expansion in H1 2015 partly to conserve capital, which has grown at a slow pace. A capital increase has been proposed over the next twelve months. Loan-based liquidity ratios had strengthened in 2014, but tightened again at end H1 2015 owing to efforts to reduce the level of wholesale deposits in the customer deposit base, although the situation is believed to have eased somewhat in Q3 2015. All major liquidity ratios remain tighter than the peer group average. CBI’s liabilities include short-term and medium-term borrowings from QNB and its related parties; QNB is expected to provide funding support if required.
Commercial Bank International’s operating profitability is reasonably good. Although there was a small decline in operating profit in H1 2015 over the same period in the previous year, the good growth in non-interest income, and particularly fees and commissions, in recent periods is encouraging. The cost to income ratio had risen in H1 2015, but this was mainly due to increased investments in the Bank’s businesses, which should help to generate more income in the coming years. The bank’s net interest margin has fallen steadily over the last few years, but remained better than the peer group average up until 2014. Net profit declined in both 2014 and H1 2015 owing to provisioning expenses, which are likely to remain high in 2016 as well.
Commercial Bank International is owned 40% by Qatar National Bank, one of the Gulf region’s largest and strongest banks. With total assets of AED 16.8 billion at end H1 2015, CBI ranks among the UAE’s smaller banks. CBI is primarily a corporate bank with a moderate sized retail banking business. Trade finance continues to be its mainstay.
Capital Intelligence (CI) ratings can be found at www.ciratings.com.