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22 February, 2017

Fitch Affirms 5 UAE Banks

Maintains RWP on FGBFitch Ratings-Moscow-22 February 2017Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of five UAE banks with Stable Outlook and maintained Rating Watch Positive (RWP) on First Gulf Bank's (FGB) IDRs. The agency also downgraded the Viability Rating of Union National Bank (UNB) to 'bbb-' from 'bbb'. A full list of rating actions is at the end of this comment

Maintains RWP on FGB

Fitch Ratings-Moscow-22 February 2017

Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of five UAE banks with Stable Outlook and maintained Rating Watch Positive (RWP) on First Gulf Bank's (FGB) IDRs. The agency also downgraded the Viability Rating of Union National Bank (UNB) to 'bbb-' from 'bbb'. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

IDRs, SUPPORT RATINGS AND SUPPORT RATING FLOORS

The affirmation of National Bank of Abu Dhabi's (NBAD), Emirates NBD's (ENBD), UNB's and Abu Dhabi Commercial Bank's (ADCB) Long-Term IDRs, Support Ratings and Support Rating Floors (SRF) reflects the extremely high probability of support from the UAE authorities, and governments of Abu Dhabi (AA/Stable/F1+) and Dubai, if required. FGB's Long-Term IDRs of 'A+' also reflect the extremely high probability of support from the state.

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Fitch's view of support reflects the sovereign's strong capacity to support the banking system, sustained by UAE's sovereign wealth funds and on-going revenues from hydrocarbon production, despite lower oil prices, and the moderate size of the UAE banking sector in relation to the country's GDP. Fitch also expects high propensity from the authorities to support the banking sector, which has been demonstrated by the UAE authorities' long track record of supporting domestic banks, as well as close ties and part-government ownership links to a number of banks.

NBAD, FGB, ADCB, UNB and ENBD all have Support Rating of '1', reflecting the extremely high probability of state support. NBAD's 'AA-' Support Rating Floor reflects the bank's flagship status in the UAE and Abu Dhabi in particular, at one notch above Abu Dhabi domestic systemically important banks' (D-SIB) Support Rating Floor of 'A+'. The other three Abu Dhabi banks - FGB, UNB and ADCB - are at the D-SIB Support Rating Floor of 'A+', reflecting their high systemic importance. Abu Dhabi D-SIBs' Support Rating Floor is also one notch higher than other UAE banks, due to Abu Dhabi's superior financial flexibility.

ENBD's Support Rating Floor of 'A+' is one notch above the UAE D-SIB Support Rating Floor of 'A', reflecting the bank's flagship status in the UAE, and Dubai in particular.

The merger of FGB and NBAD is neutral to NBAD's support-driven ratings, reflecting Fitch's view that NBAD will retain its importance and status after the merger. The RWP on FGB's IDRs and SRF reflects announced merger plans with a higher-rated NBAD.

The merger of two banks will be executed in the form of a share swap with FGB shareholders receiving 1.254 NBAD shares for each FGB share. Following the issue of new shares, FGB's current shareholders will own approximately 52% of the combined bank, while NBAD's shareholders will own 48%. The government of Abu Dhabi and related entities will own approximately 37%. The combined bank will retain NBAD's legal registrations and brand, while FGB will be liquidated as a legal entity once the merger is completed (expected at end-1Q17). As a result of the merger NBAD's balance sheet will be about AED671 billion (USD183 billion) and it will be largest bank in the UAE accounting for around 27% of the banking system assets.

HSBC Bank Middle East Limited's (HBME) Support Rating of '1' reflects very strong potential institutional support from the parent, HSBC Holdings plc (HSBC, AA-/Stable). Fitch's view is based on HBME being a key and integral subsidiary of HSBC where HBME is HSBC's wholly owned bank and important for its Middle East and North African operations. A high level of integration and common branding also provide strong motivation to support in case of need, in Fitch's view.

DEBT RATINGS

The existing senior unsecured programmes, the trust certificate issuance programme of FGB Sukuk Company Ltd and HBME Sukuk Company Ltd and notes issued under these programmes are rated in line with the Long-or Short-Term IDRs of the respective banks.

ENBD's and ADCB's (issued through ADCB Finance (Cayman) Limited spv) subordinated debt is notched off the respective banks' IDRs, as is common in the GCC, reflecting Fitch's view that the probability of sovereign support remains sufficiently strong to extend to the banks' subordinated notes. The one notch difference reflects relative loss severity.

The withdrawal of HBME Sukuk Company programme rating reflects the fact HBME no longer has any sukuk outstanding. Accordingly, HBME Sukuk Company Limited is currently under liquidation.

VRs

Abu Dhabi, and by extension the UAE, is one of the largest economies in the GCC, with solid growth prospects supported by significant government spending on infrastructure projects, and an expanding non-oil private sector, particularly in Dubai. The banks all benefit from a solid operating environment, and most of them maintain sound liquidity, capital ratios, and pre-impairment operating profits (although margins were moderately pressured in 2016), enabling them to absorb higher credit costs, if necessary.

Asset quality metrics (as indicated by the banks' impaired loans ratios) were stable in 2016, although some banks, UNB in particular, reported increased restructured loans. All banks demonstrate good double-digit return on equity, although the six banks' average ROAE was moderately pressured by a narrower net interest margin due to liquidity tightening in 2H15-2016, which has since stabilised. Fitch views funding and liquidity as strong for all six banks. The market is liquid and banks do not have trouble to grow customer deposits if they are willing to pay for them.

All six banks have adequate capital ratios although, in some cases, risk-weighted assets (RWAs) are low due to significant zero-weighted government exposures, which may overestimate capital ratios. High lending concentrations also pose a risk for the banks' capitalisation. Buffers can, nevertheless, absorb moderate unexpected credit losses, supported by high levels of pre-impairment operating profit, which results in strong internal capital generation.

UNB

The downgrade of UNB' VR to 'bbb-' from 'bbb' reflects Fitch's revised assessment of the bank's risk profile relative to peers. Fitch views UNB's franchise as solid, asset quality as reasonable, although these metrics have deteriorated moderately in the last two years, and are now weaker than those of UNB's closest peers (NBAD, FGB and HBME). In addition UNB's profitability metrics have deteriorated more than in the other five banks due to a higher increase in cost of funding and a consequent decrease in the bank's net interest margin. Positively UNB's VR continues to reflect robust capitalisation.

NBAD & FGB

NBAD's VR of 'a-' is underpinned by the bank's leading franchise and flagship status, especially in Abu Dhabi. The strength of its management and close links to the Abu Dhabi government benefit both the bank's lending and funding profile. NBAD's consistently sound profitability, good asset quality and conservative risk appetite further support the VR. The RWN on NBAD's VR reflects the bank's merger with a somewhat weaker bank (as reflected by a lower 'bbb' VR) and execution risk (including integration of FGB).

FGB's VR of 'bbb' reflects the bank's strong retail and corporate franchise, good asset quality ratios, lower related-party lending than peers, sound and consistent profitability, adequate liquidity and capital ratios. The RWP on FGB's VR reflects our expectations that the bank's assets and liabilities will be transferred to NBAD's balance sheet, and NBAD's higher VR of 'a-'.

The business models of NBAD and FGB are complementary, and Fitch will assess the extent to which the strategy of the new bank and management team materially alter targeted businesses and customer segments.

ADCB

ADCB's VR reflects the bank's solid commercial franchise, experienced management, good capital buffers, sound profitability metrics underpinned by eased provision charges, adequate liquidity position, a modest proportion of impaired loans and its full coverage by reserves. However, the VR also factors in significant name and sector concentration, high related-party lending (to Abu Dhabi government) and a significant volume of renegotiated exposures as estimated by Fitch in the absence of disclosure by the bank (not an IFRS requirement).

ENBD

ENBD's VR of 'bb+' is constrained by the bank's high but improving impaired loans ratio, moderate share of restructured loans and high loan concentration. The VR also reflects the bank's leading UAE franchise, improved profitability, strong customer deposit base and healthy capital ratios.

HBME

HBME's VR benefits from the bank being part of the HSBC group, and its rating reflects its solid regional franchise, diversified and sound earnings, lower related-party lending than most local banks, adequate capital and strong liquidity. It also reflects the bank's weaker reserve coverage of impaired loans compared with peers, higher cost income ratio, high borrower concentration and a significant volume of renegotiated loans.

RATING SENSITIVITIES

IDRs, SUPPORT RATINGS AND SUPPORT RATING FLOORS

The local banks' Support Ratings and Support Rating Floors are sensitive to a reduction in the perceived ability or willingness of the authorities to provide support to the banking sector, or a change in Fitch's view of support in the UAE. Given the still robust fiscal position of Abu Dhabi, and by extension the UAE, the authorities' strong track record of support for local banks and no plans for resolution legislation at this stage, downward pressure is currently low.

Fitch expects to resolve the RWP on FGB's IDRs once the merger is completed and there is more clarity on the merged entity's integration and strategy, risk appetite and performance prospects.

HBME's Long-Term IDR is based on Fitch's expectation of available support from HSBC. Any changes in the IDR would be linked to that of HSBC or to a change in Fitch's expectation of HSBC's propensity to support its subsidiary.

RATING SENSITIVITIES - DEBT RATINGS

A change in the banks' IDRs would ultimately lead to a change in the ratings of the unsecured bond and sukuk issuance programmes, the senior and subordinated notes rated under these programmes, as well as other senior or subordinated debt.

VRs

The banks' VRs could be downgraded if asset quality and profitability metrics weaken significantly and affect the banks' capital ratios. Positive pressure could stem from a reduction in lending and deposit concentration, and lower related-party lending.

NBAD&FGB

NBAD's VR could be downgraded if the bank's risk appetite, strategy and/or business model post-merger places a greater emphasis on higher-risk customer segments or the bank experiences difficulties with integrating FGB. The VR may be affirmed if NBAD demonstrates efficient integration, no material increase of risk appetite, and no deterioration in asset quality or capitalisation metrics.

FGB's rating will be withdrawn at the merger as the bank will cease as a legal entity. FGB's VR could be downgraded before the merger if asset quality materially deteriorates, eroding the bank's healthy profitability and capital.

UNB

Upside is currently limited. It could arise in the longer term from a reduction in concentration levels on both sides of the balance sheet and successful repayment of restructured exposures. The VR could be downgraded if its share of impaired loans materially deteriorates, causing a spike in loan impairment charges, pressuring profitability and eroding capital.

ENBD

If the bank succeeds in working out the remaining problem loans, and in reducing its large concentration to the Dubai government, an upgrade of the VR would be possible. Significant deterioration in ENBD's asset quality metrics or capital ratios, or further significant increases in loan concentration - especially to related parties - could lead to a downgrade of the VR.

ADCB

Deterioration in asset quality, elevated impairment charges and capital erosion could result in negative pressure on the VR. A longer history of the performance of renegotiated exposures and a reduction in lending concentration could be positive.

HBME

An upgrade of HBME's VR may result from a further demonstrated recovery in renegotiated loans and continued improvement of asset quality. HBME's VR would be sensitive to deterioration in asset quality or profitability metrics that in turn affect the bank's capital ratios.

The rating actions are as follows:

National Bank of Abu Dhabi:

Long-Term IDR: affirmed at 'AA-'; Stable Outlook

Short-Term IDR: affirmed at 'F1+'

Viability Rating: 'a-' maintained on RWN

Support Rating: affirmed at '1'

Support Rating Floor: affirmed at 'AA-'

EMTN programme: affirmed at 'AA-'/'F1+'

ECP programme: affirmed at 'F1+'

Senior unsecured debt: affirmed at 'AA-'/'F1+'

First Gulf Bank:

Long-Term IDR: 'A+' maintained on RWP

Short-Term IDR: 'F1' maintained on RWP

Viability Rating: 'bbb' maintained on RWP

Support Rating: affirmed at '1'

Support Rating Floor: 'A+' maintained on RWP

EMTN programme 'A+'/'F1': maintained on RWP

ECP programme 'F1': maintained on RWP

Negotiable certificate of deposit programme 'A+'/'F1' maintained on RWP

Senior unsecured notes: 'A+' maintained on RWP

Senior unsecured programme: 'A+'/'F1' maintained on RWP

FGB Sukuk Company Limited:

Trust certificate issuance programme: 'A+'/'F1' maintained on RWP

Union National Bank:

Long-Term IDR: affirmed at 'A+'; Stable Outlook

Short-Term IDR: affirmed at 'F1'

Viability Rating: downgraded to 'bbb-' from 'bbb'

Support Rating: affirmed at '1'

Support Rating Floor: affirmed at 'A+'

EMTN programme: affirmed at 'A+'/'F1'

Senior unsecured debt: affirmed at 'A+'

Abu Dhabi Commercial Bank:

Long-Term IDR: affirmed at 'A+', Stable Outlook

Short-Term IDR: affirmed at 'F1'

Viability Rating: affirmed at 'bb+'

Support Rating: affirmed at '1'

Support Rating Floor: affirmed at 'A+'

ECP programme: affirmed at 'F1'

ADCB Finance (Cayman) Limited:

GMTN programme: affirmed at 'A+'

Senior unsecured notes: affirmed at 'A+'

Subordinated notes: affirmed at 'A'

HBME:

Long-Term IDR: affirmed at 'AA-', Stable Outlook

Short-Term IDR: affirmed at 'F1+'

Viability Rating: affirmed at 'bbb'

Support Rating: affirmed at '1'

EMTN programme and senior unsecured notes: affirmed at 'AA-'/'F1+'

HBME Sukuk Company Limited:

Trust certificate issuance programme: affirmed at 'AA-' and withdrawn

ENBD:

Long-Term IDR: affirmed at 'A+'; Stable Outlook

Short-Term IDR: affirmed at 'F1'

Viability Rating: affirmed at 'bb+'

Support Rating: affirmed at '1'

Support Rating Floor: affirmed at 'A+'

ECP programme: affirmed at 'F1'

Senior unsecured notes: affirmed at 'A+'/'F1'

Subordinated notes: affirmed at 'A'

Senior unsecured programme: affirmed at 'A+'/'F1'

-Ends-

Contacts: 
Primary Analyst
Anton Lopatin 
Director
+7 495 956 70 96 
Fitch Ratings CIS Limited 
26 Valovaya Street 
Moscow 115054

Secondary Analyst
Nicolas Charreyron
Analyst
+971 4 424 1208

Committee Chairperson
Alexander Danilov
Senior Director 
+7 495 956 2408

Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com 
Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com .

Additional information is available on www.fitchratings.com

© Press Release 2017