Fitch affirms UNB at 'A+'

Fitch Ratings has affirmed Abu Dhabi-based Union National Bank's (UNB) Long-term Issuer Default Rating (IDR) at 'A+' with a stable outlook, Short-term IDR at 'F1', Individual Rating at 'C', Support Rating at '1', Support Rating Floor at 'A+' and senior unsecured debt at 'A+'.

UNB's IDRs and Support Rating reflect the extremely high probability of support from the UAE authorities, in case of need, based on Fitch's view of UNB's importance to the UAE banking system and its substantial Abu Dhabi government ownership.

The Individual Rating reflects the bank's satisfactory capital adequacy and liquidity. It also reflects concentrations in loans and deposits, and inherent risks in the UAE operating environment, especially the stressed real estate market, although Fitch believes real estate-related risks are more manageable for UNB than for many of its peers.

Despite the still difficult operating environment in the UAE in 2010, UNB's core profitability proved robust. Core earnings continued to be strong in 2010, with increases in both net interest and fee income. Net profit rose by 17 per cent despite a substantial increase in impairment charges, which were above their historical average. Stronger net interest income was driven mainly by increasing business volumes, as UNB resumed loan growth, with a slight strengthening of margins.

Impairment charges for 2010 were 67 per cent higher than in 2009 at Dh482m, they absorbed about a quarter of pre-impairment operating profit. Loan quality deteriorated in 2010, with impaired loans rising to Dh2.5bn at end-2010, almost entirely due to impairment of the bank's Dubai World exposure. Despite this, the impaired loan ratio remained at a reasonable 4.3 per cent of gross loans. However, loans past due but not impaired also rose, as did renegotiated loans, indicating that loan quality deterioration could continue in 2011.

Reserve coverage dropped to 48 per cent at end-2010, below its historical level, but Fitch believes that this is not a major concern as unreserved impaired loans amounted to only about 11 per cent of equity. Barring a further material deterioration in loan quality, the level of unreserved impaired loans seems manageable.

Deposits, which are the main source of funding, are predominantly sourced from government/quasi-government and large corporate entities. Liquidity continued to improve in 2010, and is satisfactory. Capital ratios were also satisfactory at end-2010, with Fitch core and eligible capital ratios at 12.7 per cent and 15.3 per cent, respectively.

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