Fitch Affirms Abu Dhabi Islamic Bank at 'A+'; Outlook Stable

Fitch Ratings-London/Dubai-30 October 2013

Fitch Ratings has affirmed UAE-based Abu Dhabi Islamic Bank's (ADIB) Long-term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook, and Viability Rating (VR) at 'bb'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

ADIB's IDRs, Support Rating and Support Rating Floor reflect Fitch's opinion that there would be an extremely high probability that support would be provided by the UAE authorities if needed. This is based on the ability and willingness of the UAE federal authorities to support ADIB given its UAE-wide franchise and systemic importance. Fitch has also considered the authorities' strong track record of support for the domestic banking system, particularly since the global credit crisis, including the provision of significant liquidity support.

In addition, Fitch believes that support would be forthcoming from the Abu Dhabi government (AA/Stable/F1+), which injected hybrid capital into the leading Abu Dhabi banks in early 2009.

The ADIB Sukuk Company Ltd trust certificate issuance programme and the senior unsecured notes issued under this are rated in line with the bank's IDRs and are therefore subject to the same rating drivers.

RATING SENSITIVITIES - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

The bank's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's view of the propensity or ability of the UAE and Abu Dhabi authorities to provide timely support. An upward revision is unlikely due to their current high level.

The ADIB Sukuk Company Ltd trust certificate issuance programme and the senior unsecured notes are subject to the same sensitivities.

KEY RATING DRIVERS - VR

ADIB's VR reflects the bank's underlying weak asset quality, exposure to problem financing, sizeable loan concentrations and renegotiated loan book, and consequent vulnerability to event risk and potentially high losses. It also reflects ADIB's Fitch core capital (FCC) ratio, which is below its peers, although Fitch recognises ADIB's stronger Tier 1 ratio.

The rating continues to be underpinned by the bank's strong and resilient franchise, its capacity to absorb higher losses through robust pre-impairment operating profit, and sound balance-sheet liquidity primarily due to its large and stable deposit base and good stock of liquid assets.

Income from retail and corporate financing continues to drive ADIB's income performance and the bank's net profit and margins compare well with peers. ADIB's robust pre-impairment operating profit should provide sufficient capacity to absorb impairment charges as well as moderate shocks from financing concentrations.

Impaired financing/ gross financing remains elevated at 7.6% at end-H113 (8.2% at end-2012). Reserves for impaired financing improved to 73% at end-H113. Fitch expects the overall asset quality issues and exposure to a seasoning financing book to continue to present challenges in the short term, but these are manageable.

ADIB's strong UAE-wide franchise is a rating positive. Customer deposits form the bulk of its funding requirements, and its large share of low-cost retail deposits supports its relatively low cost of funding. ADIB's financing/deposits ratio remains healthy at 89%. The vast majority of customer deposits are contractually very short term, which results in a large asset and liability maturity mismatch, although these are generally stable in practice.

ADIB's liquidity is healthy and compares well with peers. ADIB's large stock of liquid assets provides the bank with good liquidity. The bank's holding of cash and balances with the Central Bank of the UAE (CBUAE), short-term interbank and financial institution placements covered around a quarter of customer deposits at end-H113.

ADIB's FCC ratio is the lowest of its domestic and regional peers' at 9.6% at end-H113, and is on a declining trend due to strong financing book growth in H113. This does not include the new or existing hybrid Tier 1 issues. Fitch views the issue of the hybrid Tier 1 as positive. The CBUAE Tier 1 ratio is 16.9%. Fitch expects core capital to remain at current levels as loan growth should be compensated by internal capital generation.

RATING SENSITIVITIES - VR

Fitch believes that the VR remains sensitive to any deterioration in asset quality, capital or profitability. Further reductions in core capital ratios could be negative for the rating, particularly in light of the slow unwinding of legacy assets. Continued high loan growth (H113: 9.5%) could certainly impact core capital ratios.

A significant and sustained improvement in asset quality as well as an increase in capital ratios could lead to an improvement in ADIB's VR, although Fitch sees this as unlikely in the short term.

ADIB was established in 1997 with the aim of carving a niche for itself in the rapidly growing Islamic banking market in the UAE. The bank is publicly listed and accounts for approximately 5% of total banking assets in the UAE. All of ADIB's contracts, operations and transactions are carried out in accordance with Islamic sharia principles.

The rating actions are as follows:
Long-term IDR affirmed at 'A+'; Outlook Stable
Short-term IDR affirmed at 'F1'
VR affirmed at 'bb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A+'
ADIB Sukuk Company Ltd
Trust certificate issuance programme affirmed at 'A+'/'F1'
Senior unsecured certificates affirmed at 'A+'

-Ends-

Contact:
Primary Analyst
Redmond Ramsdale
Director
+971 4 424 1202
Fitch Ratings Limited
Al Thuraya Tower 1, Office 1806
Dubai Media City
P.O. Box 502030, Dubai

Secondary Analyst
Shaun Miskell
Associate Director
+971 4 424 1210
Committee Chairperson
Francesca Vasciminno
Senior Director
+39 02 879087 225

Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com.

© Press Release 2013