DUBAI ISLAMIC BANK
Fitch Ratings has affirmed
A full list of rating actions is below.
Fitch has withdrawn the Long-Term rating and Long-Term rating (xgs) of the sukuk programme housed under
Key Rating Drivers
DIB's IDRs are driven by potential support from the
The bank's VR reflects asset quality that is generally weaker than peers, and concentration risks in light of which capitalisation is only adequate. The VR also reflects the bank's established domestic franchise, healthy profitability, and sound funding and liquidity. DIB's 'bb+' VR is one notch below the 'bbb-' implied VR due to the following adjustment reason: Asset Quality.
Favourable Operating Environment: Operating conditions are solid for
Solid Domestic Islamic Franchise: DIB is the fourth-largest bank in the
High Concentration Persists: DIB has a high but stable exposure to the real estate and contracting sectors (end-1H23: combined 21% of gross financing). Retail financing comprised 27% of total financing, of which around 40% is to
Stable Asset Quality: DIB's impaired financing declined slightly to 6.5% at end-1H23 (end-2022: 6.7%), supported by some write-offs and low impaired financing generation (1H23: annualised 0.5%), but remains above Fitch-rated peers. Coverage of impaired financing by total provisions remains fairly weak (70%, compared to 100% sector average) reflecting the bank's reliance on collateral. We forecast DIB's impaired financing ratio to decline to 6% by end-2024
Healthy Profitability: The bank's operating profit/risk-weighted assets (RWAs) increased to 2.6% year-on-year in 1H23 from 2.4% supported by a 13% increase in net financing income, stable impairment charges and strong cost control. The former was driven by a 30bp expansion in the bank's net financing margin (NFM) on the back of higher rates and DIB's substantial share of CASA deposits. Fitch expects the NFM to moderate in 2024 driving a slight decline in the operating profit/RWAs ratio.
Only
Sound Funding and Liquidity: The funding profile remained stable with customer deposits accounting for 83% of total non-equity funding at end-1H23, of which a healthy 39% were CASAs. Deposit concentration remains, but is below peers' reflecting the bank's strong retail franchise, and largely relates to government-related entities where balances have been stable historically.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
DIB's Long-Term IDR would be downgraded following a downgrade of its GSR. The latter is likely to stem from either a weaker ability of the sovereign to support the bank, which would be reflected in a
A material deterioration in DIB's asset-quality metrics, affecting the bank's capitalisation or profitability, is likely to lead to a downgrade of the VR.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of DIB's Long-Term IDR could come from an upgrade of its GSR. The latter is likely to stem from a stronger ability of the
An upgrade of DIB's VR could come from a record of sound, improved asset quality (with impaired loans ratio sustainably below 4%) and a reduction in single-name and sector concentration.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
DIB's Short-Term IDR of 'F1' is the lower of the two options corresponding to an 'A' Long Term IDR, as described in Fitch's Rating Definitions. This is because a significant proportion of
The ratings of DIB's senior unsecured sukuk programme, housed under a special-purpose vehicle,
DIB's Long-Term IDR (xgs) is driven by its VR, and its Short-Term IDR (xgs) is driven by its Long-Term IDR (xgs).
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
DIB's Long-Term IDR (xgs) would mirror changes to its VR.
A downgrade of DIB's Short-Term IDR (xgs) would come from a downgrade of its Long-Term IDR (xgs). An upgrade of DIB's Short-Term IDR (xgs) is sensitive to an upgrade of its Long-Term IDR (xgs).
The senior unsecured debt ratings are sensitive to changes in DIB's Long-Term IDR and its Long-Term IDR (xgs).
VR ADJUSTMENTS
The Operating Environment score of 'bbb' has been assigned below the 'aa' category implied score for the
The Capitalisation & Leverage score of 'bb+' has been assigned below the implied category score of 'bbb' due to the following adjustment reason: reserve coverage and asset valuation (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
DIB's IDRs are linked to the
ESG Considerations
As an Islamic bank DIB needs to ensure compliance of its entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a Governance Structure relevance score of '4' for the bank, which has a negative impact on the bank's credit profile in combination with other factors.
In addition, Islamic banks have an ESG Relevance Score of '3' for exposure to social impacts, above sector guidance for an ESG relevance score of '2' for comparable conventional banks, which reflects certain sharia limitations being embedded in Islamic banks' operations and obligations, although this only has a minimal credit impact on the entities.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of '3' - ESG issues are credit neutral or have only a minimal credit impact on DIB, either due to their nature or the way in which they are being managed by DIB. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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