First Abu Dhabi Bank – Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of First Abu Dhabi Bank (FAB) at ‘AA-’ and ‘A1+’, respectively. At the same time, CI Ratings has affirmed FAB’s Bank Standalone Rating (BSR) of ‘a-’, Core financial Strength (CFS) rating of ‘a-’, and Extraordinary Support Level (ESL) of Very High. The Outlook for all ratings is Stable.

The Bank’s LT FCR is set three notches above the BSR to reflect the very high likelihood of extraordinary support from the government in case of need. The UAE government (sovereign ratings: ‘AA-’/‘A1+’/Stable) has demonstrated its support in the past and, in CI’s view, has the means and willingness to continue to provide support in the future.

FAB’s BSR is based on a CFS rating of ‘a-’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. The Bank’s large balance sheet size, D-SIB status, strong customer franchises, diversified business spread across the country and overseas, good management, very comfortable liquidity, and sound asset quality and capital ratios are principal factors supporting its CFS. Credit challenges include customer concentrations in loans and deposits and some sector concentration in UAE real estate, in common with peer banks. The Bank’s small net interest margin (NIM) contributes to its lower than peer group average operating profitability; however, risk charges have also been lower than those of other banks. Slow global economic growth and high interest rates are also credit challenges, although the UAE economy continues to do well on the back of stable oil prices despite raised geopolitical risk in the region.

OPERA reflects the UAE’s continuing dependence on hydrocarbons, although less so than neighbouring countries, with the economic risk partially mitigated by the support of the wealthy emirate of Abu Dhabi. The UAE banking sector remained strong in 2023, fuelled by improving macroeconomic performance and high hydrocarbon prices. The banking system is sound at present, with high levels of capitalisation and moderately low NPLs.

FAB is the largest bank in the UAE and functions as the Abu Dhabi government’s flagship entity. It has strong domestic franchises, and its international presence gives it a unique advantage in the country. Its businesses are diversified across many international locations and the Bank is therefore less dependent on the health of the domestic economy than many of its peers. FAB is expected to benefit from the Abu Dhabi government’s capital expenditure programme.

The balance sheet is conservatively structured with central bank balances and investments (including derivatives and repos) accounting for half of total assets, partly contributing to the Bank’s low spreads. The investment portfolio has a sizeable sovereign component, and nearly a third of loans comprised exposures to the Abu Dhabi emirate and public sector. As the government’s flagship bank, FAB handles large sums of state-owned funds that need to be invested safely. International assets are significant, but risks are low since these primarily comprise OECD central bank balances, due from banks and investments. The credit book grew at a good pace in 2023, and the Bank expects similar growth in 2024 given ongoing demand for credit amid higher GDP growth.

Sector concentration in real estate and customer concentrations in loans and deposits are high, in line with the market. The NPL ratio has been stable in recent years and is better than the sector median; the ratio of NPLs to gross non-government-related loans is on par with the median ratio. FAB’s loan-loss reserve coverage ratio, as calculated by CI, is moderately low. However the Bank’s reported ratio, including impairment reserves under capital (consisting of the excess of provisions as per UAE Central Bank norms over IFRS 9), was 95% in 2023, improving to 99% in Q1 24. The Stage 2 loans to gross loans ratio is the lowest among peer banks. Capital and good operating income provide additional cushions. Credit costs have been maintained at a stable and low 0.6% of gross loans over the last few years, but this could rise if the central bank introduces new rules requiring banks to discount the value of collateral held against NPLs over a fixed number of years. Given management’s conservative stance, strong underwriting policies and good quality of loans and advances, with a high level of government credit risk exposure, we expect overall asset quality parameters to continue to be sound.

The Bank’s key profitability ratios are not as strong as those of peers, largely due to the high levels of liquid assets and top-quality credit exposures on the balance sheet. However, FAB’s cost of risk is lower than many peers. Net interest income (NII) grew last year on the back of higher loans and investments and the benefit of higher benchmark rates, partly offset by higher placements with the Federal Reserve Bank. NIM improved in 2023. If interest rates fall this year, the growth in NII may be less robust than in the previous year. However, the Bank is implementing hedging strategies to protect the NIM trajectory. Non-interest income also recorded strong growth last year owing to higher fee and commission income and a sizeable increase in foreign exchange trading income and gains from investments and derivatives. Though volatile, income from trading activities have a sizeable portion that is recurring. Impairment charges rose moderately in 2023 following the Egyptian sovereign downgrade (the Bank has a physical presence in Egypt). Income from the sale of shares at the subsidiaries continued to boost net profit, which grew strongly last year. Business volumes are likely to grow this year partly driven by FAB’s close association with the Abu Dhabi government (although these are mostly low margin transactions). Net profit recorded a moderate y-o-y growth in Q1 24 despite provisions for a new UAE corporate income tax. We expect the Bank to report good earnings in 2024 as was the case in the previous year.

The Bank maintains strong liquidity ratios; LCR and NSFR comfortably meet regulatory requirements. The loan-to-deposit and net loans to stable funds ratios are usually the lowest among peer banks. Customer deposits have grown at a good pace in recent periods and account for a higher proportion of balance sheet funding than in the past. The growth in 2023 was largely driven by higher placements from individuals and the corporate private sector. However, government deposits are still sizeable, and although these can be volatile, a large core amount is always stable. Wholesale funds in the form of term borrowings, commercial paper issuances, due from banks and repurchase agreements are at a moderately high level; however these are well diversified across a variety of instruments and currencies. Refinance risk is mitigated by FAB’s position as the Abu Dhabi government’s flagship bank and its high credit ratings. The Bank’s large liquid asset holdings more than adequately cover short-term wholesale funds.

Capital ratios improved in 2023 owing to increased regulatory capital on the back of higher net profit and a USD1bn subordinated debt issuance, while risk weighted assets rose more slowly. CET 1 and CAR were on par with the sector median ratios, and all were higher than the regulatory minima with a moderate buffer. However, the balance sheet leverage ratio is trending downwards and is lower than the average maintained by large peers. The Bank’s internal capital generation rate has improved, and dividend payout ratios are acceptable. Given the expectation of good earnings we expect key capital ratios to be maintained at least at present levels. We also expect the principal shareholders to fully participate in any capital raising activity initiated by the Bank.

Rating Outlook

The Stable Outlook on the LT FCR and BSR indicates our expectation that the ratings are unlikely to change over the next 12 months. This reflects our view that FAB’s risk profile will be maintained at the current level given the continuing economic recovery.

Rating Dynamics: Upside Scenario

An upgrade over the next 12 months appears remote at this stage since this would require both an improvement in the Bank’s standalone profile and an upgrade of the UAE sovereign. The former could come from a much stronger capital position and a significant improvement in profitability and asset quality, while a sovereign upgrade would depend on further structural reforms and/or a significant increase in external assets.
 
Rating Dynamics: Downside Scenario

Though unlikely, a one-notch downgrade of the Bank’s LT FCR would require a deterioration of the Bank’s standalone strength or a downgrade of the sovereign’s ratings. The former could be caused by a significant weakening of financial fundamentals that the Bank may not be able to correct in a reasonable period. A downgrade of the sovereign’s ratings would be linked to a prolonged period of very low oil prices and a substantial fall in external assets.


Contact
Primary Analyst: Karti Inamdar, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Darren Stubing, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

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