First Gulf Bank PJSC Fundamentally Sound and Expected to Stay Afloat Amid Macro Headwinds

29 April 2016

Credit Brief

First Gulf Bank PJSC

Fundamentally Sound and Expected to Stay Afloat Amid Macro Headwinds

Key Credit Highlights                                                                     

¨      Softer economic outlook from weakness in oil prices. The UAE economy is expected to grow 3.2% in 2016 if compared to 3.1% in 2015 and 4.6% in 2014, based on Moody’s estimates, reflecting slower global growth and a prolonged period of lower oil prices. FGB’s loan growth fell to 7.2% in 2015 from 11.2% in 2014.   

¨      Strong profitability coupled with operational efficiency. FGB reported a 6% YoY increase in net profit to AED6.0bn in 2015, mainly attributed to the one off revaluation gain of AED549m from investment properties. The bank’s net interest margin (NIM) declined to 3.3% in 2015 from 3.6% in 2014 (Chart 1) but is still higher than industry average of 2.8% which can also be attributed to its low cost-to-income ratio at 20.6% (vs average 36%). In addition, the bank has a fairly diversified loan book across different economic sectors (Chart 2) — where over 40% of total exposure is to the retail sector and only 11.4% is exposed to the government, public sector and energy; hence, exposure to risky sectors is manageable, in our opinion.

¨      Asset quality under pressure from rising NPLs. FGB’s loan loss coverage ratio decreased to 103% in 2015 from 127% in 2014, and non-performing loans (NPLs) ratio increased to 2.8% from 2.5%. Asset quality has been weakening at a moderate pace since 1Q15 (Chart 3), but it is still strong when compared with the c.5% NPLs and c.90% coverage among UAE peers. In addition, we noted that FGB is exposed to concentration risk with the top 5 depositors accounting for about 28% of the bank’s deposit base in 2015 (2014: 29%).

¨      Relatively strong capitalisation but pressured by funding constraints. FGB has relatively strong capitalisation metrics with Tier 1 and total capital ratios remaining stable at 16.3% and 17.5% respectively, which are well above the regulatory requirements of 8% and 12%. The bank’s loan-to-deposit ratio increased to 105.1% in 2015 from 98.9% in 2014 and 92.0% in 2013 (Chart 4), and is likely to face upward pressure due to its significant slow deposit growth of 4.2% in 2015 (2014: 7.5%; 2013: 16.7%). This can be largely attributed to the concentration to government and public sector exposures (31% of total deposits) which should contain the impact of a sharp fall in prices.

¨      High likelihood of government support. FGB’s systematic importance as the 3^rd largest bank, with about 9% of market share implies that the government will likely take measures to reduce its probability of default. This was shown in the past where the government converted the federal deposits into Tier 2 capital and recapitalized USD544.5m in FGB in 2009. However, FGB’s shareholders are predominantly UAE companies and individuals which may moderate the probability of support if compared to other Abu Dhabi banks that have strong institutional ownership by the Abu Dhabi Investment Council.