Possible FGB Fitch upgrade after NBAD merger news

Fitch Ratings has placed First Gulf Bank (FGB) on Rating Watch Positive (RWP) after a merger announcement with National Bank of Abu Dhabi (NBAD) earlier this month.

Fitch placed FGB on possible upgrade on potentially higher support propensity to the bank by the UAE authorities and the government of Abu Dhabi after completion of its merger with NBAD.

The merger of the 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 per cent of the combined bank and NBAD shareholders will own 48 per cent.

The Government of Abu Dhabi and related entities will own approximately 37 per cent with a further 33 per cent owned by members of the ruling family.

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.

As a result of the merger – which is expected to be completed in first quarter next year, NBAD's balance sheet will be around Dh642bn ($175bn) and it will be the largest bank in the UAE accounting for around 26 per cent of the banking system assets.

Fitch considers the UAE authorities have strong capacity to support the banking system, supported by its sovereign wealth funds and on-going revenues mostly from hydrocarbon production, despite lower oil prices and the moderate size of the UAE banking sector in relation to the country GDP.

Fitch also expects there is a high willingness 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 in a number of banks.

On the other hand, NBAD has been put on Rating Watch Negative (RWN), which Fitch says reflects the merger with a somewhat weaker bank, together with uncertainties regarding the merger execution (including the integration of FGB).

NBAD's VR will remain underpinned by a leading franchise and its flagship status, especially in Abu Dhabi, and its close links to the Abu Dhabi government as well as the strength of its management, sound asset quality and generally conservative risk management.

The existing VR also factors in the bank's high loan and deposits concentration (although this should decrease after the merger, as FGB has less concentrated loans and deposits) and high related party financing. The business models and franchises 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 business and customer segments.

Fitch said FGB’s positive ratings watch reflects its expectation that the bank's assets and liabilities will be transferred to NBAD's balance sheet, which has a higher VR of 'a-'.

At the same time, FGB's VR reflects its strong retail and corporate franchise, good asset quality ratios, less related party lending than peers, sound and consistent profitability, adequate liquidity and capital ratios. The VR also considers its concentrated funding base.

Fitch expects to resolve the Rating Watches once the merger is completed and there is more clarity on the banks' integration and strategy/risk appetite performance prospects of the merged entity.

FGB's rating will be withdrawn at the merger as the bank will disappear as a legal entity. The global ratings agency believes that NBAD will retain its importance and status after the merger.