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FINANCIAL INSTITUTIONS
CREDIT OPINION14 December 2017
Update
RATINGS
Emirates NBD PJSCDomicile United Arab Emirates
Long Term Debt A3
Type Senior Unsecured - FgnCurr
Outlook Stable
Long Term Deposit A3
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]
Jonathan Parrod +971.4.237.9546Associate [email protected]
Nondas Nicolaides +357.2569.3006VP-Sr Credit [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
Emirates NBD PJSCUpdate to credit analysis
SummaryEmirates NBD PJSC's (ENBD) A3 local and foreign currency long-term deposit ratingsincorporate a four-notch uplift from the bank's ba1 Baseline Credit Assessment (BCA). Thisuplift is based on our assessment of a very high likelihood of support from the Governmentof United Arab Emirates (Aa2 stable) in case of need. This reflects the Dubai government'slarge shareholding (55.8%) in the bank.
The bank's ba1 BCA reflects its sound capitalisation and solid profitability supported by alarge retail franchise, as well as its stable funding position, reflecting established domesticand international operations combined with a strong treasury function. The bank's relativelyweak asset quality reflecting legacy exposures, as well as the high and increasing related-party credit concentrations, continue to moderate these strengths.
Exhibit 1
Rating Scorecard - Key financial ratios - September 2017
7.0% 15.5% 1.7% 15.6% 28.6%
0%
5%
10%
15%
20%
25%
30%
35%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Asset Risk:Problem Loans/
Gross Loans
Capital:Tangible Common
Equity/Risk-WeightedAssets
Profitability:Net Income/
Tangible Assets
Funding Structure:Market Funds/
Tangible BankingAssets
Liquid Resources:Liquid Banking
Assets/TangibleBanking Assets
Solvency Factors (LHS) Liquidity Factors (RHS)
Emirates NBD PJSC (BCA: ba1) Median ba1-rated banks
So
lve
ncy F
acto
rs
Liq
uid
ity F
acto
rs
Source: Moody's Financial Metrics
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Credit strengths
» Sound capitalisation
» Large retail franchise (over 17% domestic market share), which supports solid profitability
» Established franchise and strong treasury function, which drive stable funding and liquidity
» Large government ownership (55.8%), which supports our view of a very high likelihood of government support if needed
Credit challenges
» Relatively weak asset quality, reflecting legacy exposures
» High and increasing credit concentration to related parties, which poses risk to the asset quality
Rating outlookThe stable outlook reflects our view that the bank's sound capitalisation, solid profitability and stable funding balance the risk from itsrelatively weak asset quality and concentrated related-party exposure.
Factors that could lead to an upgradeUpwards pressure on ENBD's ratings could develop through a continued material improvement in asset quality, combined with asignificant and sustained reduction in credit concentrations.
Factors that could lead to a downgradeDownwards pressure on ENBD's ratings could develop from a material deterioration in capitalisation, or a significant weakening of itsfunding and liquidity.
Key indicators
Exhibit 2
Emirates NBD PJSC (Consolidated Financials) [1]9-172 12-162 12-152 12-142 12-132 CAGR/Avg.3
Total Assets (AED million) 461,084 448,004 406,560 363,021 342,061 8.34
Total Assets (USD million) 125,545 121,976 110,689 98,835 93,129 8.34
Tangible Common Equity (AED million) 41,971 38,439 34,759 30,233 26,999 12.54
Tangible Common Equity (USD million) 11,428 10,465 9,463 8,231 7,351 12.54
Problem Loans / Gross Loans (%) 7.0 6.7 7.4 8.5 15.1 8.95
Tangible Common Equity / Risk Weighted Assets (%) 15.5 15.0 14.2 13.7 11.9 14.06
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 34.5 33.4 37.4 44.1 81.8 46.35
Net Interest Margin (%) 2.2 2.2 2.5 2.6 2.4 2.45
PPI / Average RWA (%) 3.8 3.7 4.3 4.2 3.2 3.86
Net Income / Tangible Assets (%) 1.7 1.5 1.6 1.3 0.9 1.45
Cost / Income Ratio (%) 32.1 34.5 32.2 31.5 36.6 33.45
Market Funds / Tangible Banking Assets (%) 15.6 16.1 14.1 13.3 14.9 14.85
Liquid Banking Assets / Tangible Banking Assets (%) 28.6 29.2 28.0 25.6 22.5 26.85
Gross Loans / Due to Customers (%) 102.2 101.3 102.3 103.4 108.1 103.55
[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 presentedSource: 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 14 December 2017 Emirates NBD PJSC: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
ProfileENBD is a Dubai-based bank, which provides personal, priority, private and corporate banking; specialist facilities; consumer finance;and asset management services. As of 30 September 2017, the bank reported total assets of AED461.1 billion ($125.5 billion). ENBDoperates mainly in the UAE through 161 branches, as well as in Egypt (66 branches), India, Saudi Arabia, Singapore and the UnitedKingdom. The bank also has representative offices in China and Indonesia.
ENBD was established in October 2007 following the merger of Emirates Bank International and National Bank of Dubai. As of 30September 2017, the bank's largest shareholder was Investment Corporation of Dubai, which held a stake of 55.8%. InvestmentCorporation of Dubai is majority owned by the Government of Dubai. For further information on the bank’s profile, please see EmiratesNBD PJSC Company Profile, 27 March 2017.
Detailed credit considerationsRelatively weak asset quality, reflecting legacy exposuresWe expect the bank’s asset quality to remain stable because continued recoveries on legacy problem loans from corporate- andgovernment-related issuers help moderate new impaired loan formation following sluggish economic growth in 2017, particularly in thesmall and medium-sized enterprise segment and the retail segment.
ENBD’s sector concentrations (to the construction and real estate sectors) pose risks to its asset quality. Indeed, the bank’s exposureto the construction and real estate sectors represented 139% of its tangible common equity (TCE) and 18% of its loan book as ofSeptember 2017.
As of September 2017, the bank’s problem loans-to-gross loans ratio (including loans past due for over 90 days but not impaired) stoodat 7.0% (5.3% local average), lower than the 16.6% peak as of year-end 2012, which resulted from exposure to distressed government-related issuers and corporates. The decline in problem loans over 2012-17 resulted from reclassifications (around $2.3 billion DubaiWorld exposure following its second debt restructuring in 2014), write-offs of legacy retail loans (1.3% of gross loans in 2014) andsignificant recoveries since 2015 (including 1.0% of gross loans as of year-end 2015 recovered in 2016). The ratio of the bank's loan-lossreserves to problem loans stood at 109% as of September 2017 (93% local average).
High and increasing credit concentration to related parties poses risk to the asset qualityWe expect the bank's risk profile to remain constrained by its high related-party exposure to the Dubai government (as its key financingbank) despite a robust risk management. The leverage appetite of the Dubai government, particularly amid oil price weakness, posesrisk to the bank's asset quality. The resilience and diversification of the local economy (mining and quarrying accounted for only 1.3%of Dubai's nominal gross domestic product in 2016) partly moderates these concerns.
Credit concentrations are a common feature of the banks in the region, but ENBD has materially increased its credit concentration torelated parties over 2010-17. As of September 2017, the bank's related-party loans increased to 246% of total regulatory capital (338%of its TCE and 47% of net loans and advances) from 142% as of December 2010 (262% of its TCE and 32% of net loans and advances).
We believe that the bank’s compliance with UAE Central Bank regulation enforcing stricter rules on borrower concentrations (circular2013-32) is unlikely. The regulation, to be implemented in early 2019, includes caps on the banks’ exposure to local governments andto government-related commercial entities at 100% of total equity each.
Sound capitalisation provides buffer to asset riskWe expect ENBD’s sound capitalisation metrics to remain broadly stable. This will reflect the combination of a modest credit growth in2017 and high profit retention (31% dividend pay-out ratio in 2017 for 2016).
As of September 2017, the bank reported a TCE-to-risk-weighted assets ratio of 15.5% (15.0% as of year-end 2016), which is above the14.2% UAE average. In addition, the bank reported a Basel II Tier 1 ratio of 18.8% and a total capital adequacy ratio of 21.2%.
As per the local regulatory regime, banks use a zero RWA weight on credit extended to the Dubai government. For the purpose of ourinternal analysis, we adjust ENBD’s risk weight on its AED138 billion (ca. $38 billion) exposure to the Dubai government and otherrelated parties. This adjustment decreases the bank's TCE ratio to a relatively weak level compared with the local average.
3 14 December 2017 Emirates NBD PJSC: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Large retail banking franchise (over 17% domestic market share) supports solid profitabilityWe expect the bank’s profitability to remain solid and above its global peers. The factors driving profitability will be resilient net interestmargins, combined with efficient operations and stable provisioning charges.
We expect the bank’s gradual loan book re-pricing, combined with its low cost deposit balances derived from its large retail franchise(with the largest branch network in the country and advanced digital technology), to continue to offset the pressure from rising interestrates in the country. In addition, continued recoveries of legacy bad loans dating the 2008 global financial crisis will moderate theimpact of new delinquencies (particularly in the retail and SME sectors) following sluggish economic growth in 2017.
The bank's net interest margin were stable at 2.2% in the first nine months of 2017 compared to the year 2016, as the bank maintainedits gross yields and funding cost stable. The bank’s cost-to-income ratio improved to 32% during the first nine months of 2017 (35%local average) from 35% in 2016, as the bank implemented cost control measures. The cost of risk improved as well, with loan-lossprovisioning consuming 22% of pre-provision income for the first nine months of 2017, from 27% in 2016.
Established franchise and strong treasury function drive stable funding and liquidityWe expect ENBD to maintain its strong access to stable and low cost current and savings accounts (57% of deposits as of September2017). This stable deposit base reflects ENBD’s solid retail franchise, with the bank being the second-largest entity (deposits marketshare of around 20% as of September 2017) in the fragmented UAE market. In addition, ENBD benefits from a well-establishedcorporate franchise, supported by its strong ties with the Dubai government and a long history of local operations.
We expect ENBD to maintain deep access to international capital and money markets through its treasury function, which is one ofthe most active in the Gulf Cooperation Council. In addition, the bank’s market issuance will continue to support its term structure byreducing asset-liability maturity mismatches that result from its deposit-funded balance sheet. As of September 2017, the bank hadoutstanding AED42.2 billion ($11.5 billion) of debt and sukuk term funding, with a large majority (over 80%) due in more than twoyears. As of year-end 2016, only 8% of deposits had a residual maturity of more than 12 months.
In addition, we expect the bank to maintain a diversified funding base in terms of depositor and currency. The bank’s granular retaildeposit base (58% of deposits at end-2016), combined with its market funding raised in various currencies, contribute to its fundingdiversification.
As of September 2017, the bank’s market funds remained stable at 15.6% of tangible banking assets from 16.1% as of year-end2016. Liquid banking assets were solid, at 28.6% of tangible banking assets. ENBD’s net loans-to-deposits ratio stood at 94% as ofSeptember 2017, compared to from 93% as of year-end 2016 (91% local average). As of September 2017, the bank's liquidity coverageratio (LCR) stood at 139%, well above the regulatory minimum threshold of 80% for 2017.
4 14 December 2017 Emirates NBD PJSC: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Support and structural considerationsGovernment supportENBD's A3 deposit rating incorporates four notches of uplift from the bank's ba1 BCA. This view reflects our assessment of a veryhigh probability of government support in case of need, given the Dubai government's 55.8% ownership stake in ENBD through theInvestment Corporation of Dubai, the bank's importance to the local financial system (deposits market share of around 20%) and theUAE's strong track record of supporting banks in times of stress.
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 performanceobligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.
The CR Assessment is positioned at A2(cr).The CR Assessment, prior to government support, is positioned one notch above the Adjusted BCA of ba1, reflecting our view that itsprobability of default is lower than that of deposits. We believe senior obligations represented by the CR Assessment will be more likelypreserved in order to limit contagion, minimise losses and avoid disruption of critical functions.
The CR Assessment also benefits from four notches of systemic support, in line with our support assumptions on deposits. Thisassumption reflects our view that any support provided by government authorities to a bank, which benefits senior unsecured debt ordeposits, is very likely to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with our beliefthat governments 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, we have sourced data relating to systemwide trends and market shares from the central bank. Bank-specificfigures originate from banks' reports and Moody's Banking Financial Metrics. All figures are based on our own chart of account andmay be adjusted for analytical purposes. Please refer to the document Financial Statement Adjustments in the Analysis of FinancialInstitutions, 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 judgement. When read inconjunction with our research, a fulsome presentation of our judgement 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.
5 14 December 2017 Emirates NBD PJSC: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Rating methodology and scorecard factors
Exhibit 3
Emirates NBD PJSCMacro FactorsWeighted Macro Profile Strong - 100%
Factor HistoricRatio
MacroAdjusted
Score
CreditTrend
Assigned Score Key driver #1 Key driver #2
SolvencyAsset RiskProblem Loans / Gross Loans 7.4% ba2 ← → b2 Single name
concentrationSector concentration
CapitalTCE / RWA 15.5% a3 ← → baa3 Risk-weighted
capitalisationProfitabilityNet Income / Tangible Assets 1.5% a3 ← → a3 Return on assets
Combined Solvency Score baa2 ba1LiquidityFunding StructureMarket Funds / Tangible Banking Assets 16.1% baa2 ← → a3 Extent of market
funding relianceLiquid ResourcesLiquid Banking Assets / Tangible Banking Assets 29.2% baa2 ← → baa2 Stock of liquid assets
Combined Liquidity Score baa2 baa1Financial Profile baa3
Business Diversification 0Opacity and Complexity 0Corporate Behavior -1
Total Qualitative Adjustments -1Sovereign or Affiliate constraint: Aa2Scorecard Calculated BCA range baa3-ba2Assigned BCA ba1Affiliate Support notching 0Adjusted BCA ba1
Instrument class Loss GivenFailure notching
AdditionalNotching
Preliminary RatingAssessment
GovernmentSupport notching
Local CurrencyRating
ForeignCurrency
RatingCounterparty Risk Assessment 1 0 baa3 (cr) 4 A2 (cr) --Deposits 0 0 ba1 4 A3 A3Senior unsecured bank debt 0 0 ba1 4 A3 A3Dated subordinated bank debt -1 0 ba2 3 -- (P)Baa2Source: Moody's Financial Metrics
6 14 December 2017 Emirates NBD PJSC: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Ratings
Exhibit 4Category Moody's RatingEMIRATES NBD PJSC
Outlook StableBank Deposits A3/P-2Baseline Credit Assessment ba1Adjusted Baseline Credit Assessment ba1Counterparty Risk Assessment A2(cr)/P-1(cr)Senior Unsecured A3Subordinate MTN (P)Baa2Commercial Paper P-2Other Short Term (P)P-2
EMIRATES NBD GLOBAL FUNDING LIMITED
Outlook StableBkd Sr Unsec MTN (P)A3Bkd Subordinate MTN (P)Baa2
EIB SUKUK COMPANY LTD.
Outlook StableBkd Senior Unsecured A3
Source: Moody's Investors Service
7 14 December 2017 Emirates NBD PJSC: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
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8 14 December 2017 Emirates NBD PJSC: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Contacts
Mik Kabeya [email protected]
Jonathan Parrod +971.4.237.9546Associate [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
9 14 December 2017 Emirates NBD PJSC: Update to credit analysis
