Fitch Ratings has downgraded UAE-based Dubai Bank’s Individual Rating to ‘F’ from ‘D/E’ and removed it from Rating Watch Negative (RWN) following the announcement by the Government of Dubai that it has intervened in the bank, taking full control of the bank, and it will provide a significant capital injection.
Simultaneously, the agency has affirmed Dubai Bank’s Long-term Issuer Default Rating (IDR) at ‘BBB-‘, Short-term IDR at ‘F3’, Support Rating at ‘2’ and Support Rating Floor at ‘BBB-‘. The ratings on the bank’s Sukuk Programme were also affirmed at ‘BBB-‘ (although there is no issuance).
The outlook on the Long-term IDR has been revised to Stable from Negative reflecting the clarity over Dubai Bank’s future ownership and the demonstration of external support to the bank.
The downgrade of the Individual Rating to ‘F’ reflects Fitch’s view that Dubai Bank would have failed and it needed external support. The Individual Rating will be reviewed following a full assessment of the bank’s recent performance and financial position, expected within the next three months.
Fitch downgraded Dubai Bank’s Individual Rating in March 2011 due to its weakening financial position. This reflected Fitch’s view that the bank’s FYE10 results would be adversely affected by substantial loan impairment charges due to significant exposure to related party entities, several of which are undergoing debt restructuring. Potential large losses for FYE10 raised the increased possibility that external support would be required if Dubai Bank’s equity were to substantially erode.
“The affirmation of Dubai Bank’s IDRs and Support Rating reflects that timely support will be forthcoming from the Government of Dubai and ultimately from the UAE authorities. The Central Bank of the UAE has been actively involved in the negotiations. This level of support confirms Fitch’s view that there is a high probability of external support available to UAE banks, if required. Further uplift to Dubai Bank’s Long-term IDR may arise in the future once Fitch has been able to assess the extent of the bank’s franchise and systemic importance following the change of ownership, Fitch said.
Following the capital injection, Dubai Bank, a small Islamic bank, will be fully owned by the Dubai Government. It was previously owned by Dubai Banking Group, which in turn is 70% owned by Dubai Holding and 30% owned by the property developer, Emaar (32% owned by the government of Dubai). The bank’s new strategy appears to be progressing well.
The bank has reorganised operations and has positioned itself as a retail bank for premium customers with merchant banking on the corporate side (mainly mid-sized corporates). Dubai Bank continues to reduce related party business. Fitch understands that Dubai Bank’s liquidity position has improved significantly in 2011 with the bank successfully growing its customer deposit base.