Fitch revises HSBC Bank Middle East's rating to B/C

Fitch revises HSBC Bank Middle East's rating to B/C

Fitch Ratings has downgraded HSBC Bank Middle East's (HBME) individual rating to "B/C" from "B" and the bank remains on negative watch due to impact of deteriorating operating environment on its profitability and asset quality, said a statement.

It also affirmed HBME's ratings at Long-term issuer default (IDR) 'AA-' with negative outlook, short-term IDR 'F1+' and support '1'.

Profitability has been pressured over the past year by higher impairment charges although from a low base. Loan quality deteriorated substantially during the first half of 2009 with stresses most evident in the personal lending portfolio, but also for commercial and corporate exposures where loan impairment charges rose with the deterioration in the economy.

In addition, there were a few individually significant loan impairment charges recorded on exposures to large regional business groups in financial difficulty. Fitch expects ongoing asset quality problems and further impairment costs to impact the bank's 2009 profitability and impairment charges are likely to remain elevated into 2010.

Liquidity remains sound and is managed more conservatively than that of most of the bank's peers.

Capitalisation is adequate especially given HBME's position as part of the HSBC Group, its access to group funds if needed and the HSBC Group's ability to provide capital when required.

The ratings agency also downgraded Oman's United Finance Company's (UFC) National Long-term rating to 'BB+' from 'BBB' and placed it on Rating Watch Negative (RWN). At the same time, Fitch downgraded UFC's National Short-term rating to 'B' from 'F3'.

UFC is the leading finance and leasing company in Oman with an estimated market share of 28 per cent of Omani finance and leasing assets at end-2008. The downgrade reflects significant pressure on UFC's concentrated wholesale funding, its tightened liquidity, declining profitability and a sharp rise in impaired loans.

UFC is reliant on concentrated local and GCC bank term loans and overdrafts for funding. Total funding from banks fell 24 per cent in nine months of 2009 to OR70.4 million (Dh673.01m) as term loans matured and new funding was scarce. This resulted in UFC reducing the loan book by a similar proportion. Fitch believes that the global credit crisis has resulted in tighter liquidity in the regional banking system and a reduced appetite for lending to non-bank financial institutions such as UFC.

Fitch believes that the company could face difficulty in raising medium-term funding; this raises concerns around the sustainability of UFC's business model.

UFC's operating profits fell 91 per cent year-on-year in nine-months, driven by rising impairment charges, margin pressure from increasing funding costs, and a decline in the size of the loan portfolio.

Asset quality has significantly weakened; impaired loans were a high 21 per cent of gross loans at end of nine months. Impaired loans net of impairment reserves were a high 60 per cent of equity.