Published on 05 Feb 2021.
RAM Ratings has reaffirmed First Abu Dhabi Bank P.J.S.C.’s (FAB or the Group) AAA/Stable/P1 financial institution ratings, as well as the respective AAA/Stable and AA1/Stable ratings of the senior and subordinated notes under the Group’s RM3 billion Islamic/Conventional Medium-Term Note Programme (2010/2030). The rating action reflects our expectation that extraordinary support from the Government of Abu Dhabi (GoAD) and the United Arab Emirates (UAE) federal government will be readily extended in times of need. FAB’s systemic importance to the UAE underpins this expectation – it holds a dominant share of the UAE banking system’s deposits (32% as at end-September 2020).
Given FAB’s privileged status as the preferred bank of the Abu Dhabi government, it enjoys steady flows of lending opportunities and deposit placements from the government and government-related entities (GREs). For this very reason as well as the fact that these two segments have been the Group’s growth focus in recent years, FAB’s loans and deposits are relatively concentrated; the latter features a greater degree of concentration. As deposits from the government and GREs are largely transitory in nature, most are considered short-tenured for purposes of Basel III compliance. FAB’s liquidity coverage and net stable funding ratios stayed above the usual minimum of 100% as at end-December 2020, despite the central bank’s temporary relaxation for these indicators.
FAB has generally outperformed the UAE banking sector on the asset quality front, although its headline gross impaired loan (GIL) ratio was on an uptrend even before the outbreak of Covid-19. As the Group was already contending with the effects of an oversupplied property market on its real estate and construction portfolio, the pandemic-triggered crisis amplifies FAB’s credit risks. Heightened asset quality risks have led to banks incurring heftier provisions – seen in the Group’s higher cost of risk in FY Dec 2020 (63 bps; FY Dec 2019: 48 bps). We highlight that the spike in FAB’s provisioning expenses last year is noticeably less stark relative to peers’, as it recorded sizeable impairment writebacks following the resolution of a few legacy exposures in 2H 2020.
We continue to derive comfort from the Group’s sound loss absorption capacity – a key rating strength of FAB’s – which we believe will sustain it through this challenging and still-uncertain period. FAB remained well-capitalised with a post-dividend common equity tier-1 capital ratio of 13.3% as at end-December 2020 (end-December 2019: 13.5%). Although the Group has indicated that it will continue to reward shareholders, it also reiterated that maintaining capital strength will be a priority – we expect FAB to strike a balance between rewarding shareholders and preserving capital to weather headwinds ahead.
The Group’s pre-tax profit dipped 16% y-o-y to AED10.9 bil in fiscal 2020 (fiscal 2019: AED12.9 bil) on the back of weaker foreign exchange and investment income, higher impairment charges and a compressed net interest margin. These effects were partly moderated by one-off gains totalling AED1.1 bil as well as FAB’s strict cost discipline – its cost to income ratio had stayed low at 27%. Headwinds to banks’ earnings will remain for the most part of 2021 as uncertainties linger, which could necessitate outsized provisions if conditions worsen. Although subdued for the time being, FAB’s pre-tax return on risk-weighted assets of 2.2% in fiscal 2020 is still healthy in our view (fiscal 2019: 2.6%).
Loh Kit Yoong
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Ratings on First Abu Dhabi Bank PJSC