Moody's Investors Service has assigned A2/Prime-1 local- and foreign-currency deposit ratings and a D+ financial strength rating (FSR) to First Gulf Bank PJSC (FGB), United Arab Emirates (UAE).
All ratings assigned to FGB carry stable outlooks. The D+ financial strength rating maps to a Baseline Credit Assessment of Ba1 and reflects the bank's moderate, but rapidly expanding franchise and its satisfactory financial fundamentals, underpinned by its large capital base, sound asset quality, good liquidity and profitability and efficient control over its costs. Profitability has been bolstered as the loan book has expanded rapidly and fees and commissions have been growing, benefiting from wider profit margins. Equity market-related and revaluation gains have made substantial contributions to FGB's profitability in the last two years. However, the growing competition, overheating property market and volatility in the equity market represent challenges and could adversely affect credit quality and profitability, which has been growing, underpinned by robust loan growth and good credit spreads.
FGB relies significantly on its corporate clientele for its asset and liability business. At this time credit quality is good, delinquent loans have been contained and provision cover improved. While these have been the catalyst for the bank's strong performance, they have also led to significant credit concentration and related-party exposure. Wholesale funding from the international markets has diversified the bank's funding book, improving its liability and maturity profile. However there is a very strong concentration of deposits with heavy reliance on corporate clients.
Tapping the equity markets through a convertible bond issue followed by a rights issue has further strengthened FGB's capital base. FGB has also leveraged its strong association with the government of Abu Dhabi to gain lucrative retail business, and receives additional funding resources from the government to undertake the National Housing Loan programme initiative. Retail banking as yet represents only a small, but growing, proportion of the bank's assets.
Moody's assesses a very high likelihood of systemic support from the UAE authorities in case of need based on the bank's importance to the banking system and its strong relationship with the Abu Dhabi government and ruling family. FGB is the seventh-largest bank in terms of assets and third in terms of equity, enjoying market shares of around 8% of customer deposits and 7% of banking assets in the UAE. Given that FGB is 62% owned by members of the ruling family of Abu Dhabi, such a very high likelihood of systemic support lifts its local- and foreign-currency ratings to A2/Prime-1, a five-notch uplift from the Baseline Credit Assessment of Ba1.
Going forward, the bank's FSR could benefit from (a) significant expansion and further diversification of the franchise in an increasingly competitive operating environment, within an acceptable risk profile, and (b) a stronger financial performance and much reduced concentration. On the other hand, the FSR could be lowered in the case of (a) a sharp decline in earning power and profitability, (b) an increase in non-performing loans that would impact asset quality, (c) a significant rise in the bank's leverage, and (d) a severe deterioration in the operating environment.
First Gulf Bank is headquartered in Abu Dhabi, United Arab Emirates, and reported total assets of AED47.8 billion (USD13.0 billion) at year-end 2006.
