Fitch Ratings has affirmed National Bank of Ras Al-Khaimah’s (RAKBANK) long-term issuer default rating (IDR) at BBB+ with a stable outlook and viability rating (VR) at bb+.
RAKBANK’S long- and short-term IDRs, support rating and support rating floor reflect Fitch’s view that there would be a high probability of support for the bank from the UAE federal authorities if required. This is based on the bank’s systemic importance as a leading retail bank and deposit taker, the strong history of support for local banks from the UAE authorities and the Ras Al-Khaimah government’s 52% stake in the bank.
The ratings would be sensitive to a reduced perceived ability from the UAE federal authorities to support, such as through a downgrade in Abu Dhabi’s sovereign rating of AA/stable. Abu Dhabi is the largest and wealthiest emirate in the UAE federation. The ratings could also be sensitive to a change in the UAE federal authorities’ perceived willingness to support RAKBANK.
The bank’s VR is constrained by its relatively small franchise (2% of UAE banking assets), rising credit risk exposure due to its expansion in small business banking and pressure on liquidity from a widening asset liability maturity mismatch. The rating also reflects strong profitability and performance metrics through the global financial crisis and the subsequent downturn in the UAE economy. We also consider RAKBANK’s leading retail business, strong risk management framework, high revenue generation capability, and healthy capitalisation. Balance sheet liquidity is supported by a large stable customer deposit base and holdings of liquid assets.
Asset quality deteriorated slightly in 2012, mainly in mortgages and personal loans. Despite serving riskier segments than peers (which have broader franchises), the bank’s NPL ratio is one of the lowest in the market (2012: 2.5%) as RAKBANK had no exposure to major corporate restructurings given its niche focus. Due to the bank’s size, the senior management team (all experienced retail bankers) take a ‘hands-on’ approach to running the bank. However, as the bank expands, a stronger operational infrastructure is essential, in Fitch’s view. Positively, the bank is addressing this by formalising and reorganising internal structures and processes.
The VR could be negatively affected if the bank’s expansion in business banking leads to a sharp rise in NPLs or problem loans (restructured loans and past due loans). However, risk to asset quality is counterbalanced in the interim by its strong capital position. Any worsening in the bank’s asset liability maturity mismatch (due to the likely rise in longer term lending) could also lead to a downgrade.
The rating could be upgraded if the bank fully addresses its issues in funding and liquidity, a further diversification of the business and an overall improvement in the operating environment.
Rakbank operates a unique retail bank with a strong brand. Headquartered in the Emirate of Ras Al-Khaimah, the bank has a UAE-wide network of 32 branches supported by a range of alternative delivery channels. The government of Ras Al Khaimah (‘A’/Stable/’F1’) holds a stake of 52.3% in the bank, while 6.17% is held by a prominent UAE individual, Ahmed Essa Ahmed Al Naeem. The bank is listed on the Abu Dhabi Securities Exchange. Rakbank’s key attributes are experience in retail banking, strong senior management team, high service quality standards, product differentiation and a strong risk management culture and framework. The bank’s main lending products are personal loans, business finance, credit cards and mortgages.