exhibit 1 rating scorecard - key financial ratios · please see the ratings section at the ... key...
TRANSCRIPT
FINANCIAL INSTITUTIONS
CREDIT OPINION7 December 2017
Update
RATINGS
Invest bank P.S.C.Domicile United Arab Emirates
Long Term Deposit Baa3
Type LT Bank Deposits - FgnCurr
Outlook Stable
Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.
Contacts
Mik Kabeya [email protected]
Savina R Joseph +357.2569.3045Associate [email protected]
Akin Majekodunmi,CFA
+44.20.7772.8614
VP-Senior [email protected]
Henry MacNevin +44.20.7772.1635Associate [email protected]
Sean Marion [email protected]
Frederic Drevon +44.20.7772.5356MD-Global [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
Invest bank P.S.C.Update to credit analysis
SummaryInvest bank P.S.C.'s (Invest bank) Baa3 long-term deposit ratings reflect the bank's ba2Baseline Credit Assessment (BCA) and our assessment of a high probability of governmentsupport from the Government of United Arab Emirates (UAE, Aa2 stable) in case of need.This assessment reflects the UAE authorities' track record of supporting banks.
Invest bank's ba2 BCA reflects the bank's strong capitalisation and solid profitability,underpinned by a niche franchise in trade and project finance for local borrowers.However, the bank's weak and volatile asset quality, concentrated funding, limited businessdiversification and dependence on key management mitigate these strengths.
Exhibit 1
Rating Scorecard - Key financial ratios
8.6% 18.9%1.7%
4.8% 18.0%
0%
5%
10%
15%
20%
25%
30%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
*Asset Risk:Problem Loans/
Gross Loans
*Capital:Tangible Common
Equity/Risk-WeightedAssets
Profitability: NetIncome/ Tangible
Assets
Funding Structure:Market Funds/
Tangible Banking Assets
Liquid Resources: LiquidBanking Assets/Tangible
Banking Assets
Solvency Factors (LHS) Liquidity Factors (RHS)
Invest bank P.S.C. (BCA: ba2) Median ba2-rated banks
The problem loan and profitability scorecard ratios are the weaker of the average three-year ratios and the latest reported ratios.The capital scorecard ratio is the latest reported figure. The funding structure and liquid asset scorecard ratios are the latestyear-end figures. However, due to privacy issues, asset risk and capital ratios shown here correspond to latest publicly availableinformation.Source: Moody's Financial Metrics
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Credit strengths
» Strong capital provides buffer against asset risk
» Niche franchise in project and trade finance for local borrowers supports solid earnings generation
» Government support track record supports our view of a high likelihood of receiving such support, in case of need
Credit challenges
» Weak and volatile asset quality, which reflects concentrated exposure to local mid-sized corporates and SMEs
» Concentrated deposit base, which drives weak funding
» Limited business diversification, which reflects focus on commercial banking activities
» Business dependence on key management
Rating outlookThe stable outlook reflects our expectation that Invest bank's strong capital and solid earnings generation, supported by its nichefranchise, will help the bank weather the softer economic growth, despite its weak asset quality and limited diversification.
Factors that could lead to an upgradeInvest bank's ratings could be upgraded if there is (1) a material and sustainable improvement in the bank's asset risk, (2) a significantimprovement in its business diversification, or (3) a material and sustained reduction in its dependence on key management.
Factors that could lead to a downgradeInvest bank's ratings could be downgraded if there is (1) a material weakening of the bank's capital, (2) a significant deterioration inprofitability, or (3) a material weakening of funding and liquidity.
Key indicators
Exhibit 2
INVEST BANK P.S.C (Consolidated Financials) [1]9-172 12-162 12-152 12-142 12-132 CAGR/Avg.3
Total Assets (AED million) 17,508 16,125 14,907 13,830 12,299 9.94
Total Assets (USD million) 4,767 4,390 4,059 3,765 3,349 9.94
Tangible Common Equity (AED million) 3,141 3,046 2,894 2,813 2,561 5.64
Tangible Common Equity (USD million) 855 829 788 766 697 5.64
Problem Loans / Gross Loans (%) - 8.6 8.7 8.2 8.9 8.65
Tangible Common Equity / Risk Weighted Assets (%) - 18.9 19.0 21.5 23.9 20.86
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) - 27.4 26.9 23.8 26.0 26.05
Net Interest Margin (%) - - 3.6 3.5 3.7 3.65
PPI / Average RWA (%) - - 3.7 4.2 4.7 4.26
Net Income / Tangible Assets (%) 1.7 1.7 1.7 2.6 2.7 2.15
Cost / Income Ratio (%) 25.4 25.5 26.0 24.3 22.2 24.75
Market Funds / Tangible Banking Assets (%) 2.8 4.8 3.6 4.8 4.3 4.15
Liquid Banking Assets / Tangible Banking Assets (%) - 18.0 17.8 18.7 19.6 18.55
Gross Loans / Due to Customers (%) - 106.6 104.4 105.1 104.9 105.35
[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel II; IFRS. [3] May include rounding differences due to scale of reported amounts. [4] Compound AnnualGrowth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latest accounting regime. [6] Simple average of Basel IIperiods presented.Source: Moody's Financial Metrics
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.
2 7 December 2017 Invest bank P.S.C.: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
ProfileInvest bank, established in 1975 in Sharjah, provides conventional banking services to corporates, SMEs and individuals. The bankoperates primarily in the UAE, where it had a market share of 0.7% of total system assets and 0.9% of net loans and deposits as ofSeptember 2017. Invest Bank is listed on the Abu Dhabi Securities Market.
Detailed credit considerationsWeak and volatile asset quality reflects concentrated exposure to local mid-sized corporates and SMEsWe expect Invest bank’s asset quality to remain weak and volatile, as the softer economic growth and business confidence in the UAEchallenge the creditworthiness of mid-sized corporates and SMEs, which together constitute the core and concentrated client base ofthe bank.
In addition, the bank’s high credit concentrations in the construction and real estate sectors will continue to pose risks to its assetquality. This concentration reflects the bank’s focus on collateralised lending as well as the country’s limited economic diversification.As of December 2016, the bank's exposure (on balance sheet) to such sectors represented 144% of its tangible common equity(TCE, 34% of its gross loans). Including lending to high-net-worth individuals, a material portion of which involves real estate as enduse or collateral, this exposure increased further to 176% of the bank's TCE (41% of its gross loans). Additionally, the bank has offbalance sheet exposures to the construction and real estate sectors equivalent to another 179% of TCE, making this a significant riskconcentration.
Exhibit 3
The bank is concentrated in the construction and real estatesectorsGross loans by industry, 2015-16
Exhibit 4
Trade exposures contribute disproportionately to delinquenciesNonperforming loans by industry, 2015-16
33%
17%12%
8%
10%
7%
12%
34%
17%13%
8%
4%
8%
16%
Construction & Real Estate Manufacturing Trade
Financial Institutions Government HNWI
Individuals Other
YE 2015
YE 2016
Source: Invest bank's financial statements
40%
21%
24%
10%4%
22%
17%
48%
9%
3%
Construction & Real Estate Manufacturing Trade
Financial Institutions Government HNWI
Individuals Other
YE 2015
YE 2016
Source: Invest bank's financial statements
Given the elevated level of restructuring and write-off of delinquent exposures over 2015-17, primarily in the construction, real estateand trade sectors, Invest bank's problem loan ratio does not fully reflect its asset risk (see Exhibit 5).
3 7 December 2017 Invest bank P.S.C.: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 5
Write-offs have increased over recent yearsProblem loans and write-offs (LHS), problem loans/write-offs (RHS)
8.47%
8.93%
8.15%
8.69% 8.59%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
0
200
400
600
800
1,000
1,200
2012 2013 2014 2015 2016
AE
D m
illio
n
Problem loans Total write-offs Problem loans % Gross loans (RHS)
Sources: Invest bank's financial statements, Moody's Investors Service
As of December 2016, Invest bank's problem loans (including loans that are more than 90 days past due but not impaired) stood at8.6% of gross loans (December 2015: 8.7%), which compared unfavourably with the 5.3% local average. As of the same period, thebank’s loan-loss reserves/problem loans was 91.9% (December 2015: 90.8%).
Strong capital provides buffer against asset riskWe expect Invest bank’s strong capitalisation to remain well above its minimum target of a 14% capital adequacy ratio, despitean expected decline owing to growth and the implementation of higher regulatory standards. The bank will meet its future capitalrequirements — arising from its growth and regulatory standards implementation (Basel III and IFRS 9) — through retained profits (47%cash dividend based on its net income in 2016, paid out in 2017) and capital issuances.
As of the end of December 2016, the bank reported TCE/risk-weighted assets of 18.9%, which compared favourably with the UAEaverage of 14.2%. The bank’s Basel II Tier 1 ratio of 17.8%, total capital adequacy ratio of 18.5% and shareholders' equity/total assets of17.5% were adequate for its risk profile as of September 2017.
Niche franchise in trade and project finance for local borrowers supports solid earnings generationWe expect Invest bank’s profitability to remain solid and above that of its global ba2-rated peers. Credit growth, combined with solidinterest margins and efficient operations, will help balance the provisioning charges resulting from SME delinquencies, especially in thereal estate and manufacturing sectors. The bank’s margins will continue to reflect its exposure to high-yielding segments, which helpsoutweigh its costly corporate-deposits-based funding.
In addition, we expect the bank’s focus on providing trade, cash flow and project finance to local counterparties to further support itstopline profitability through significant fee income (17% of operating income in 2016).
Invest bank's cost/income remained stable at 25% in the first nine months of 2017 compared with that in 2016 (35% local average) asthe bank's higher operating income offsets somewhat higher costs from a larger staff base and investments in risk infrastructure. Thebank's loan-loss provisions remained high at 48% of pre-provision income in the first nine months of 2017 (51% in 2016 and 52% in2015) owing to higher loan impairment in a softer economic environment and a higher regulatory requirement for general provisions(see Exhibit 6).
4 7 December 2017 Invest bank P.S.C.: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 6
Loan-loss provisions have been volatile over recent yearsLoan-loss provisions and loan-loss provisions/pre-provision income Q1 2015-Q3 2017
19.0%
29.2%
41.8%
113.5%
42.0% 39.3%
52.2%
71.2%
28.3%
41.2%
70.0%
0%
20%
40%
60%
80%
100%
120%
0
20
40
60
80
100
120
140
160
180
Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
AE
D m
illio
n
Loan Loss Provisions Loan loss provisions % Pre-provision income (RHS)
Sources: Invest bank's financial statements, Moody's Investors Service
Concentrated deposit base drives weak fundingInvest bank's funding base is concentrated in time deposits from corporate entities (77% of its total deposits as of 2016), which exposesthe bank to potential volatility, given the tighter funding environment. Nevertheless, such deposits have so far remained stable, giventhe depth of the relationships on both sides of the balance sheet or given their related-party nature (6.2% of total deposits as of theend of September 2017).
As of September 2017, the bank’s market funds/tangible banking assets stood at 2.8% (4.8% as of 2016), which compared favourablywith the 16.3% local average.
We expect Invest bank to maintain modest liquidity resources compared with its local peers. Although a low market funding reliancewould normally result in a modest liquidity buffer requirement, the bank’s modest liquid resources pose a risk in the context of itsconcentrated deposit base.
For the purpose of our analysis, we exclude Level 3 assets from Invest bank's liquid banking assets because these assets tend to be lessliquid as they have the least observable pricing data. The bank's reported liquid banking assets/tangible banking assets stood at 18.0%as of December 2016, which compared unfavourably with the UAE average of 30.8%. The adjusted liquid banking assets/tangiblebanking assets (excluding Level 3 assets, all in the form of unquoted equity securities for Invest bank) was modest at 14.8%.
Exhibit 7
We adjust liquid resources for Level 3 assetsLiquid banking assets/tangible banking assets, 2012-16
20.0% 19.6% 18.7%
14.8% 14.8%
3.0% 3.2%
0%
5%
10%
15%
20%
25%
2012 2013 2014 2015 2016
Liquid assets % Tangible banking assets (excl. Level 3 assets) Level 3 assets % Tangible banking assets
Sources: Invest bank's financial statements, Moody's Investors Service
5 7 December 2017 Invest bank P.S.C.: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Limited business diversification reflects focus on commercial banking activitiesInvest bank’s limited business diversification constrains its standalone profile because it increases the bank’s sensitivity to stress in asingle line of business. As of December 2016, 95% of the bank's gross loans were extended to corporate counterparties.
Business dependence on key managementInvest bank’s dependence on key management poses risk to its credit profile. The senior management's strong client knowledge andextensive operational involvement drive the bank's solid position as a boutique player, with a relatively small but loyal client base.
We expect the bank’s recent and ongoing initiatives to reduce this dependence to take time, especially in the context of an evolvingrisk management and governance framework.
Support and structural considerationsGovernment track record supports our view that Invest Bank has a high probability of receiving government supportInvest bank's Baa3 long-term deposit rating incorporates a high probability of government support in case of need, which translatesinto a two-notch uplift from its ba2 BCA. The uplift reflects our assessment of a high likelihood of systemic support in case of need,based on the UAE government's strong track record of supporting all banks, including banks without government ownership.
Counterparty Risk (CR) AssessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default, and (2) apply to counterparty obligations and contractual commitments rather than debt or depositinstruments.
The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations(servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.
Invest bank's CR Assessment is positioned at Baa2 (cr).
The CR Assessment, prior to government support, is positioned one notch above the bank's Adjusted BCA of ba2, reflecting our viewthat its probability of default is lower than that of deposits. We believe senior obligations represented by the CR Assessment will bemore likely preserved in order to limit contagion, minimise losses and avoid disruption of critical functions.
The CR Assessment also benefits from two notches of systemic support, in line with our support assumptions on deposits. Thisreflects our view that any support provided by governmental authorities to a bank which benefits senior unsecured debt or depositsis very likely to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with our belief thatgovernments are likely to maintain such operations as a going-concern in order to reduce contagion and preserve a bank's criticalfunctions.
Source of facts and figures cited in this reportUnless noted otherwise, data related to systemwide trends are estimated based on Moody's rated universe in the UAE and are as ofJune 2017. Global averages were last updated in November 2017 and are based on latest audited full year data. Bank-specific figuresoriginate from the bank's reports and Moody's Banking Financial Metrics.
All figures are based on our own chart of account and may be adjusted for analytical purposes. Please refer to the document FinancialStatement Adjustments in the Analysis of Financial Institutions, published on 13 June 2017.
About Moody's Bank ScorecardOur scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.
6 7 December 2017 Invest bank P.S.C.: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Rating methodology and scorecard factors
Exhibit 8
INVEST BANK P.S.CMacro FactorsWeighted Macro Profile Strong - 100%
Factor HistoricRatio
MacroAdjusted
Score
CreditTrend
Assigned Score Key driver #1 Key driver #2
SolvencyAsset RiskProblem Loans / Gross Loans -- -- -- ba3 Single name
concentrationSector concentration
CapitalTCE / RWA -- -- -- a2 Expected trend Capital retentionProfitabilityNet Income / Tangible Assets 1.7% a3 ← → baa1 Expected trend
Combined Solvency Score baa2 baa2LiquidityFunding StructureMarket Funds / Tangible Banking Assets 4.8% a1 ← → ba1 Deposit quality Lack of market access
Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 18.0% ba1 ← → ba2 Expected trend
Combined Liquidity Score baa1 ba1Financial Profile baa3
Business Diversification -1Opacity and Complexity 0Corporate Behavior -1
Total Qualitative Adjustments -2Sovereign or Affiliate constraint: Aa2Scorecard Calculated BCA range ba1-ba3Assigned BCA ba2Affiliate Support notching 0Adjusted BCA ba2
Instrument class Loss GivenFailure notching
AdditionalNotching
Preliminary RatingAssessment
GovernmentSupport notching
Local CurrencyRating
ForeignCurrency
RatingCounterparty Risk Assessment 1 0 ba1 (cr) 2 Baa2 (cr) --Deposits 0 0 ba2 2 Baa3 Baa3Source: Moody's Financial Metrics
Ratings
Exhibit 9Category Moody's RatingINVEST BANK P.S.C.
Outlook StableBank Deposits Baa3/P-3Baseline Credit Assessment ba2Adjusted Baseline Credit Assessment ba2Counterparty Risk Assessment Baa2(cr)/P-2(cr)
Source: Moody's Investors Service
7 7 December 2017 Invest bank P.S.C.: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
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8 7 December 2017 Invest bank P.S.C.: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
9 7 December 2017 Invest bank P.S.C.: Update to credit analysis