Moody's affirms deposit ratings of NBAD, upgrades and withdraws FGBâ€™s ratings
Following the completion of the merger between National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) on 30 March 2017, Moody's Investors Service has revised its rating actions on both entities.
Moody’s affirmed the long and short term foreign and local currency deposit and debt ratings of NBAD at Aa3/P-1, upgraded the long-term local and foreign-currency deposit and foreign-currency debt ratings of FGB to Aa3 from A2 and affirmed the short-term local and foreign-currency deposit rating of FGB at P-1.
At the same time, Moody's also affirmed their baseline credit assessments (BCA) at a3 and baa2, respectively. The outlook on NBAD's long-term deposit and debt ratings remains negative, in line with the outlook for the Aa2 long term issuer rating of the Government of the UAE.
The outlook on FGB's long-term deposit and debt ratings was changed to negative from positive, in line with the outlook for NBAD. Subsequent to the action, Moody's also said that it will withdraw the ratings of FGB.
Moody's has also assigned a provisional local and foreign currency (P)Aa3 long-term and definitive local and foreign currency Prime -1 short-term ratings to NBAD's USD 1 billion Negotiable Certificate of Deposits (NCD) programme acting through its Singapore Branch.
Following the merger, NBAD has assumed all of FGB's liabilities and assets in exchange for new NBAD shares issued to FGB's shareholders.
National Bank of Abu Dhabi
Moody's affirmation of NBAD's a3 BCA reflects its view that following the merger, the bank's financial fundamentals remain compatible with the a3 BCA, although over time the merger has the potential to enhance the bank's domestic franchise. The combination creates one of the largest banks in the GCC region, which will support organic growth opportunities and moderate NBAD's very high borrower concentrations.
The rating agency expect the stronger retail franchise of the merged entity to drive solid margins, which will support improved profitability going forward. The merged entity's net income to tangible assets will also improve to around 1.6 per cent, from NBAD's current 1.2 per cent, putting it in line with the UAE average of around 1.7 per cent. At the same time, NBAD's capitalisation is expected to benefit as a result of this merger from FGB's higher capitalisation. On a pro-forma basis as of December 2016, the TCE ratio of the combined entity is around 15.6 per cent (up from NBAD's current 14.5 per cent).
The BCA, however, also captures risks related to still very high levels of related-party exposures and significant borrower concentrations - two factors that are common to many banks in the GCC. Although asset quality remains strong, with gross NPLs standing at 3 per cent of gross loans for the combined entity, it remains below the 1.2 per cent global median for banks with a3 BCA. Additionally, NBAD has strong liquidity and a diversified funding profile, although this remains counterbalanced with a relatively high reliance on market funding (market funds to tangible assets is estimated at around 25 per cent for the combined entity).
Deposit and debt ratings
Moody's affirmation of NBAD's Aa3 deposit rating is based on very high government support assumptions for the bank, which translate into three notches of uplift from the bank's a3 BCA. Although government ownership (through the Abu Dhabi Investment Council -- 'ADIC') had been reduced to 33.5 per cent from 70 per cent as a result of this merger, Moody's continues to assign a very high likelihood of government support for NBAD's deposit ratings.
This is based on: (1) NBAD's D-SIB status (Domestic Systemically Important Bank) in the UAE, given its market share of around 27 per cent of system assets; (2) the key role of the bank in the financial operations of the Abu Dhabi government; (3) the position of the Abu Dhabi government as the single largest shareholder through both the Abu Dhabi Investment Council (around 33.5 per cent ownership) and Mubadala Development Company PJSC (3.7 per cent); and (4) the significant ownership by members of the Abu Dhabi ruling family.
The continuing negative outlook is in line with the negative outlook on the Aa2 rating of the UAE Government (assigned on 14 May 2016), which captures UAE's fiscal pressures as a result of lower oil prices, which could weaken its capacity to provide support over time.
First time ratings
Moody's has assigned provisional local and foreign currency (P)Aa3 long-term and definitive Prime -1 short-term ratings to NBAD's $1 billion Negotiable Certificate of Deposits (NCD) programme acting through its Singapore Branch. The (P)Aa3 and Prime-1 ratings on the NCD programme are aligned with NBAD's Aa3 long-term and Prime-1 short-term deposit ratings. The rating alignment reflects that from the effective merger date the NCD programme, which was previously under First Gulf Bank Singapore Branch, will be replaced by National Bank of Abu Dhabi Singapore branch as "the Issuer". It also reflects that (1) the instrument issued under the programme will be direct, unconditional, unsubordinated and unsecured obligations of NBAD (previously FGB); and (2) the instruments without any preference or priority among themselves, will rank pari passu with all other present and future unsecured and unsubordinated obligations of NBAD (previously FGB).
First Gulf Bank
Moody's affirmation of FGB's baa2 BCA reflects its view that the bank's operations and standalone profile remain well positioned at the current level, and have not changed significantly since the merger announcement. The BCA is supported by: (1) the UAE's 'Strong-' macro profile, (2) strong and growing domestic operations in the UAE, (3) solid profitability combined with high efficiency, (4) strong capitalisation and high loan loss coverage levels and (5) solid asset quality.
Following the completion of the merger all liabilities of FGB has been assumed by NBAD and the BCA of FGB will be withdrawn.
Deposit and debt ratings
FGB's deposit ratings were upgraded to Aa3 from A2, aligned with NBAD's deposit ratings, to reflect the transfer of all assets and liabilities to NBAD from the Effective Merger Date. The upgraded Aa3 deposit ratings incorporate five notches of uplift from the bank's baa2 BCA. This reflects Moody's assessment of a very high likelihood of government support in case of need, similarly to NBAD.
The change of outlook to negative is in line with the negative outlook on the long term rating of the UAE Government and captures UAE's fiscal pressures as a result of lower oil prices, which could weaken its capacity to provide support over time.
The deposit ratings assigned to FGB will be withdrawn since all liabilities will be assumed by NBAD.
The outlook on NBAD's long-term deposit and debt ratings remains negative whereas the outlook on FGB's long-term deposit and debt ratings were changed to negative, in line with the negative outlook assigned to the UAE Government.
Although Moody’s does not expect upward pressure on NBAD's ratings over the near term as indicated by the negative outlook, the rating outlook could be stabilised should the government's rating outlook also stabilise.
Downward pressure on NBAD's ratings could develop through any assessment of weakening capacity or willingness, from the UAE government, to provide support in case of need.
Downwards pressure on NBAD's BCA could develop in the event of a: (1) deterioration in the operating environment that may result in lowering the macro profile of United Arab Emirates; (2) deterioration of capitalisation or asset quality metrics; and/or (3) significant deterioration in liquidity levels and/or increases in confidence sensitive market funding.