Business & Finance Club - UAE : Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed the Commercial Bank of Dubai's (CBD) Foreign Currency ratings at A long-term and A2 short term with a Stable Outlook and a Support rating of 2. The ratings are underpinned by the support of the federal government, which is very likely in case of need.

Support was demonstrated last year when the federal government agreed to convert its long-term customer deposits with CBD and other UAE banks into subordinated debt.

CBD's Financial Strength rating is maintained at A- in view of its continuing strong profitability, solid capital adequacy ratio and good asset quality (the increase in non-performing loans (NPLs) notwithstanding).

While Dubai's major private-sector groups have shown resilience so far, a long drawn out economic recovery could create additional challenges in the future. In view of the ongoing credit risks in the local market, particularly Dubai, the Negative Outlook for the Financial Strength rating is retained.

The Bank continues to be very profitable owing to its high net interest and non-interest revenues and low operating cost base. CBD has a high level of demand balances, which have remained stable over the years. This has contributed to the Bank's historically low funding cost and its wide net interest differential; its spreads have been significantly better than the peer group average for many years.

The Bank also generates good non-interest income from its profitable trade finance operations. Net profit grew modestly in 2009, due to reduced investment-related income and a decline in foreign exchange trading profits, but key profitability ratios remain high.

CBD's NPLs increased last year due to higher classifications in the Bank's construction, trade and retail credit portfolios, which reflected the economic slowdown in the country. Although the NPLs to gross loans ratio increased at end 2009, it was at a manageable level.

The Bank's solid capital adequacy ratio and good profitability are major mitigating factors. The Bank also has no exposure to the two Saudi business groups that defaulted last year and its consumer loan portfolio is comparatively small.

In addition, CBD holds sizeable collateral (in the form of mortgaged assets and cash) against its past due loans.

The Bank has moderate exposure to the real estate sector, but most of these loans were to UAE nationals/businesses who invested in the older parts of Dubai, which were less seriously impacted by the crisis than the newly developed areas of the emirate.

Moreover, CBD's customers are mainly diversified groups with multiple income streams. Liquidity ratios remained tight at end 2009 although they improved from the previous year. The Bank has access to the central bank's liquidity facilities in case of need. These have not been used or needed thus far.

CBD was established as a public limited company in 1969. It is one of the oldest local banks in the UAE. Its formation coincided with the beginning of a period of substantial growth for Dubai as a major trading centre.

The Dubai government currently has a 20% stake, while the remaining shares are held by prominent Dubai-based business groups. CBD is primarily a corporate bank with a strong trade finance business. It offers a wide range of retail banking products and services. The Bank currently operates a medium-sized network of 24 branches.
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