News Column

Capital Intelligence affirms ratings on FGB

June 26, 2014



Capital Intelligence (CI) has affirmed the Financial Strength Rating (FSR) of the UAE'sFirst Gulf Bank (FGB) at 'A+', with its strong profitability, solid capitalisation, improving liquidity and rising loan-loss reserve coverage ratio being major supporting factors.  The high level of customer concentration in the deposit base, low retail deposits and latent credit risks in an otherwise recovering economy are constraining factors.

FGB's good Q1 2014 results underpin the 'Stable' Outlook assigned to the rating. The Bank's Foreign Currency Ratings are maintained at 'A+' Long-Term and 'A1' Short-Term, with a 'Stable' Outlook. These ratings reflect the substantial official support enjoyed by the bank and its good financials overall. The Support Rating of '2' reflects its ownership by the ruling family of Abu Dhabi and the very high likelihood of official support in case of need.

FGB's loans and contingent balances have grown at a good pace in recent years, reflecting the economic revival in the country and continued spending by the Abu Dhabi government. The bank's asset quality parameters have strengthened in recent years, reflecting the improved credit environment. FGB's past due loans and watch-listed items have fallen as have renegotiated loans. Although the loan-loss reserve coverage ratio declined in 2013, the bank's large free capital base provides additional cover and its strong operating profitability can comfortably absorb higher levels of provisioning expenses.

The bank has maintained its capital adequacy ratio (CAR) at a consistently solid level over the years. There was a small decline in the CAR at end 2013 owing to the repayment (ahead of schedule) of the Ministry of Finance loan received in 2008 as part of the federal government's liquidity support to the banking sector. The bank's Tier 1 ratio has also been high. Although dividend payouts have been sizeable, FGB has ploughed back adequate amounts into its capital to support the expansion of its risk asset base. Leverage ratio was strong, with capital accounting for a fairly high portion of the balance sheet.

Liquidity ratios are good overall; key loan-based ratios have strengthened and continue to be better than the peer group average. The bank has also built up a good level of liquid asset holdings. Customer deposits have grown at a brisk pace in recent years, reflecting the increased liquidity in the system. However, like the other Abu Dhabi banks, FGB remains dependant on wholesale deposits which has led to customer concentrations in its customer deposit base. The bank's large capital, as well as its access to government funding and to international markets (in the form of medium-term liabilities), provide additional support.

FGB's key profitability ratios have been consistently strong over many years. Its operating profit to average total assets ratio and ROAA strengthened further last year and continued to be well above the peer group average. There was good growth in operating profit in 2013. This was due to increased net interest and Islamic financing income, with higher business volumes offsetting the impact of a slight narrowing of the net interest margin. The bank's non-interest income base grew strongly on the back of higher fees and commission income and income from investment properties. New business acquisitions (Islamic finance and cards) also made a good contribution to income, although cost increases were also partly due to this.  The bank has a much smaller operating cost base than many of its peers due to its smaller banking infrastructure.

FGB was established in 1979. Its shareholding structure changed in 1996, with four senior members of the ruling family of Abu Dhabi taking a sizeable interest in the bank. At year-end 2013, FGB, with AED 195 billion of assets, was ranked third among the local banks in the country. Its core activities are wholesale banking, consumer banking and treasury and global markets. FGB's operations are based primarily in the UAE, although the bank has long-term plans to expand overseas.


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Source: CPI Financial


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