First Abu Dhabi Bank P.J.S.C.

First Abu Dhabi Bank P.J.S.C.

Primary Credit Analyst: Benjamin J Young, Dubai (971) 4-372-7191; benjamin.young@ Secondary Contact: Mohamed Damak, Dubai (971) 4-372-7153; mohamed.damak@

Table Of Contents

Major Rating Factors Outlook Rationale Related Criteria Related Research

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First Abu Dhabi Bank P.J.S.C.

SACP

a-

+ Support

+2

Anchor

Business Position

bbb-

Strong +1

ALAC Support

0

Capital and Earnings

Strong +1

GRE Support

+2

Risk Position

Strong +1

Group Support

0

Funding

Average

Liquidity

0

Strong

Sovereign Support

0

+ Additional Factors

+1

Issuer Credit Rating

AA-/Stable/A-1+

Major Rating Factors

Strengths:

? Leading franchise in the United Arab Emirates (UAE).

? Strong capitalization and superior earnings generation.

? Stable base of core deposits and strong liquidity.

Weaknesses:

? Large concentration on both the asset and liability sides of the balance sheet.

? Sizable exposure to the weak real estate market in the UAE.

Outlook: Stable

S&P Global Ratings anticipates that First Abu Dhabi Bank (FAB) will maintain its strong customer franchise and its resilient financial profile over the next 12-24 months. This reflects the bank's strong earnings generation, clear strategy, robust capitalization, and sound risk management. A positive rating action on FAB over the next 12-24 months appears remote. Such an action would follow an improvement of FAB's business or financial profile, which is unlikely in our view. Moreover, we would consider an upgrade only if the bank's intrinsic creditworthiness increased by two notches. A downgrade of FAB also seems remote in the next 12-24 months because it would imply a simultaneous downgrade of the government of Abu Dhabi and a significant deterioration of the bank's asset quality, with higher-than-expected credit losses.

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Rationale

We base our ratings on FAB on our view of its entrenchment in the UAE market, where it is the market leader, its clear strategy, and conservative management. We regard the bank's capitalization as a key strength for its credit profile, underpinned by strong and high-quality capital. We anticipate that FAB's risk-adjusted capital (RAC) ratio will stay in the 13.2%-13.4% range over the next two years. The bank also benefits from strong underlying asset quality, a conservative lending and underwriting culture, and resilient metrics through the cycle. Lastly, we assess FAB's funding as average because the bank's core funding metrics are similar to those of other leading banks in the UAE. Our assessment of the bank's liquidity remains strong, given the level of liquid assets on its balance sheet. Overall, we assess the bank's stand-alone credit profile (SACP) at 'a-'.

The long-term rating on FAB benefits from two notches of uplift to reflect our view of the bank as a government-related entity (GRE) with a very high likelihood of timely and sufficient extraordinary support from the government of Abu Dhabi. We base our opinion of the likelihood of support on FAB's very strong link with the government of Abu Dhabi and very important role for the financing of the economy in Abu Dhabi and the UAE more generally. In our base-case scenario, we assume no major change in its shareholding structure and no dilution in the government's influence on FAB's strategy.

Our long-term rating on FAB also incorporates an additional notch of uplift, based on our view that the bank will outperform its peer group (as defined by banks with similar SACPs, that is, the same or one notch higher or lower). We base this view on FAB's superior earning metrics (principally the earnings buffer), enabling it to more easily cover higher-than-expected losses if needed. This key strength is not fully captured in our other rating factors.

Our issue rating on FAB's perpetual tier 1 junior subordinated debt is 'BB+', four notches below the bank's SACP, reflecting its status as a bail-in-able instrument.

Anchor: 'bbb-' for banks operating in the UAE Our bank criteria use our Banking Industry Country Risk Assessment's economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating in the UAE is 'bbb-', reflecting an economic risk score of '5' and an industry risk score of '5'.

With regard to economic risk, we view the UAE's high-income levels and strong fiscal and external positions as key strengths. The exceptional strength of the government's net asset position has counteracted the negative effect of lower oil prices on economic growth since late 2015. With oil prices stabilizing and economic growth improving, we see a degree of stabilization in the financial profiles of UAE banks. The country's real estate market remains in a correction phase, which we expect will continue in 2020 before stabilizing thereafter. Nevertheless, under our base-case scenario, repercussions will remain contained, given improved regulatory oversight and better underwriting standards.

Our assessment of industry risk reflects our view that the institutional framework in the UAE has improved in recent years, and banking regulations are broadly in line with international peers'. UAE banks traditionally operate with healthy profitability and capitalization, and we do not expect this trend to change in 2020. In our view, systemwide

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First Abu Dhabi Bank P.J.S.C.

funding will continue to benefit from a sizable share of government and GRE deposits. These traditionally provide more than 25% of resident deposits and we believe these, for the most part, are stable deposits. However, we expect total annual deposit growth to remain in the low-single digits over the next two years as infrastructure spending starts to ramp up.

Table 1

First Abu Dhabi Bank P.J.S.C. Key Figures

--Year-ended Dec. 31--

(Mil. AED)

2019*

2018

2017

2016?

2015?

Adjusted assets Customer loans (gross)

768,614 389,929

724,187 364,850

649,067 343,194

420,714 206,941

406,564 212,039

Adjusted common equity

73,408

64,052

63,300

37,126

34,456

Operating revenues

15,168

19,446

16,380

10,808

10,556

Noninterest expenses

3,933

5,127

4,742

4,013

4,083

Core earnings

9,659

12,268

9,326

5,296

5,232

*Data as of Sept. 30. ?2015-2016 figures are based on pre-merger financials for NBAD. AED--UAE dirham.

Business position: Leading franchise in the UAE Through 2019, FAB's entrenchment as the market leader in the UAE, and as the second largest bank in the Middle East--with total assets of $215 billion as of Sept. 30--has continued. The bank has maintained its strong relationships with the Abu Dhabi government and its related public entities, which we see as an unrivalled strength for its franchise. Further, Global Markets activity has increased materially over 2019, indicating that FAB is assuming market share in nontraditional revenue streams (foreign exchange gains and sales), as it seeks to leverage its strong customer relationships in other businesses. We also expect the bank to continue investing in its retail digital platforms, with the aim of gaining further market share.

The government and public sector make up around 26% and 47% respectively of FAB's total loans and total deposits as of Sept. 30, 2019 (up from 23% and 44% respectively at the end of March 2019). The loan book has a good degree of geographic diversification, with 26% of net loans outside the UAE, the bulk of which are to blue chip corporates in Europe, Asia, and other Gulf Cooperation Council (GCC) countries.

In our view, the bank has a high-quality management team with a strong track record. The bank has fully delivered all its milestones on integration, as per its agenda and outperformed cost synergy expectations over 2017 and 2018. The bank aims to optimize its international operations and at the same time reduce its risk-weighted assets, having exited from Malaysia, Sudan and Jordan and started operations in Saudi Arabia. The Saudi strategy is built around a fully digital retail offering as well as corporate economic activity between the UAE and Saudi Arabia.

Table 2 First Abu Dhabi Bank P.J.S.C. Business Position

(%) Total revenues from business line (mil. AED) Commercial banking/total revenues from business line

--Year-ended Dec. 31--

2019* 2018 2017 2016? 2015?

15,167.7 19,445.7 16,380.5 10,808.2 10,555.9

55.5

52.0

46.5

50.9

48.5

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First Abu Dhabi Bank P.J.S.C.

Table 2 First Abu Dhabi Bank P.J.S.C. Business Position (cont.)

(%)

Retail banking/total revenues from business line Commercial and retail banking/total revenues from business line Other revenues/total revenues from business line Return on average common equity

2019* 37.6 93.0 7.0 13.7

--Year-ended Dec. 31--

2018 38.7 90.7

9.3 13.2

2017 40.0 86.6 13.4 14.0

2016? N/A N/A (0.1) 13.9

2015? N/A N/A 2.5 14.9

*Data as of Sept. 30. ?2015-2016 figures are based on pre-merger financials for NBAD. N/A--Not applicable.

Capital and earnings: FAB operates with strong capitalization We regard FAB's capital and earnings as a rating positive, which reflects the bank's high level of capital and its strong core earnings generation. FAB's regulatory Tier 1 ratio reached 16.3% on Sept. 30, 2019, compared with 14.6% at year-end 2018. Given the bank's close ties with the Abu Dhabi government and some of its GREs, we see a large portion of its lending exposure as having strong credit quality, resulting in lower risk-weighted assets than its peers.

Over 2019, FAB's 7% total loan growth has predominantly stemmed from the government and public sectors, which together accounted for 81% of loan growth to the end of the third quarter. While a robust expansion plan from Abu Dhabi National Oil Company (ADNOC) and the government of Abu Dhabi's fiscal stimulus package indicates that FAB will be able to maintain similar rates of loan growth going forward, it also highlights potentially increasing levels of concentration, relatively weak private sector demand for credit, and subdued consumption.

We consider FAB's capital position as strong and well positioned against potentially increasing headwinds, notably a lower interest rate environment and continued weak private sector activity. We expect FAB's RAC ratio before adjustments to remain in the range of 13.2%-13.4%. Increased retained earnings through 2019 have helped capital formation while nontraditional revenue lines have offset reduced interest income.

Our RAC ratio before adjustments based on the bank's 2018 financial statements was 13.4%. Under our base-case scenario, we base our 13.2% to 13.4% expectations on the following factors:

? Annual loan growth of around 5%-8% in the next two years, predominantly driven by the Abu Dhabi government and related entities.

? Slight decline in interest margins given the declining interest rates and the sizable noninterest bearing deposits in FAB's funding profile.

? Mid-single-digit fee income growth. ? A cost of risk at around 60-65 basis points and a slight increase in nonperforming loans (NPLs). ? High dividend payout continued in the next two years, with a 65% payout ratio.

Table 3

First Abu Dhabi Bank P.J.S.C. Capital And Earnings

--Year-ended Dec. 31--

(%)

2019*

2018

2017 2016? 2015?

Tier 1 capital ratio

16.3

14.6

15.5

16.9

15.7

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First Abu Dhabi Bank P.J.S.C.

Table 3

First Abu Dhabi Bank P.J.S.C. Capital And Earnings (cont.)

--Year-ended Dec. 31--

(%)

2019*

2018

2017 2016? 2015?

S&P Global Ratings' RAC ratio before diversification

N/A

13.4

14.2

14.5

13.9

S&P Global Ratings' RAC ratio after diversification

N/A

12.0

12.4

14.5

14.1

Adjusted common equity/total adjusted capital

87.2

85.6

85.5

84.6

83.6

Net interest income/operating revenues

64.2

67.0

69.6

67.6

69.2

Noninterest expenses/operating revenues

25.9

26.4

29.0

37.1

38.7

Preprovision operating income/average assets

2.0

2.0

2.1

1.6

1.7

Core earnings/average managed assets

1.7

1.7

1.7

1.3

1.3

*Data as of Sept. 30. ?2015-2016 figures are based on pre-merger financials for NBAD. N/A--Not applicable.

Table 4 First Abu Dhabi Bank P.J.S.C. Risk-Adjusted Capital Framework Data

(Mil. AED)

Credit risk Government and central banks Of which regional governments and local authorities Institutions and CCPs Corporate Retail Of which mortgage Securitization? Other assets Total credit risk

Credit valuation adjustment Total credit valuation adjustment

Market risk Equity in the banking book Trading book market risk Total market risk

Operational risk Total operational risk

(Mil. AED)

Diversification adjustments RWA before diversification Total diversification/concentration adjustments RWA after diversification

Exposure*

Basel III Average Basel

RWA

III RW(%)

S&P Global Ratings RWA

288,703

--

0

--

91,977

--

296,464

--

68,721

--

15,206

--

3,961

--

22,117

--

771,942

--

--

11,250

--

0

--

31,671

--

313,096

--

61,794

--

7,050

--

792

--

33,414

--

452,016

--

--

--

0

3,072 ---

-18,864 18,864

--

24,614

--

44,213

--

68,827

-Exposure

35,696

Basel III RWA

--

Average Basel II RW (%)

36,557

S&P Global Ratings RWA

--

481,762

--

--

--

481,762

--

557,400

--

65,982

--

623,382

Average S&P Global Ratings

RW (%)

4 0

34 106

90 46 20 151 59

--

801 ---

-% of S&P Global

Ratings RWA

100 12

112

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Table 4 First Abu Dhabi Bank P.J.S.C. Risk-Adjusted Capital Framework Data (cont.)

(Mil. AED)

Tier 1 capital Tier 1 ratio (%)

S&P Global

Total adjusted Ratings RAC ratio

capital

(%)

Capital ratio Capital ratio before adjustments Capital ratio after adjustments

71,693

14.9

74,807

13.4

71,693

14.6

74,807

12.0

*Exposure at default. ?Securitization Exposure includes the securitization tranches deducted from capital in the regulatory framework. Exposure and S&P Global Ratings' risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital.AED -- United Arab Emirates Dirham. Sources: Company data as of 'Dec. 31 2018', S&P Global Ratings.

Risk position: Strong underlying asset quality We regard FAB's risk position as a rating positive, given its conservative lending and underwriting culture, coupled with its sizable lending to the low-risk domestic public sector in Abu Dhabi. These have enabled the bank to have a strong track record of lower cost of risk through the cycle than its UAE peers. The bank carries a small amount of Stage 2 loans (5.8% of total loans at Sept. 30, 2019), which sits at the lower end of the peer range of all the rated banks in the UAE as well as the GCC (see chart 1). We understand that roughly half of the increase in Stage 2 loans over 2019, from 4.7% at year-end 2018, is due to a few large exposures, some of which are likely to resolve, and the remainder are granular exposures, linked to ongoing strains in the business environment.

Chart 1

The bank's ratio of NPLs to gross loans, at 3.1% on Sept. 30, 2019, and its loan loss coverage of 109% is similar to peers'. The loan book exhibits a significant concentration, with the funded exposures of the top-20 borrowers

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First Abu Dhabi Bank P.J.S.C.

accounting for around 25% of gross loans at end-June 2019. While materialization of concentration risks is not in our base case, we believe that FAB will see a slight deterioration in its asset-quality indicators due to ongoing weakness in the real estate market and soft employment trends which we expect to continue in 2020. Under our base-case scenario, we expect some migrations between Stage 2 and 3, but we believe that the level of problematic assets will remain broadly stable. Real estate exposures totaled 21% of FAB's loan book on Sept. 30, 2019. However, the bank remains mainly exposed to the top companies in the sector.

We consider the quality of FAB's investment portfolio as good, since about two-thirds is highly rated sovereign and corporate bonds. The bank has a small portfolio of equities and mutual funds accounting for approximately 3% of its total adjusted capital on Sept. 30, 2019.

Table 5 First Abu Dhabi Bank P.J.S.C. Risk Position

(%)

Growth in customer loans Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans Net charge-offs/average customer loans Gross nonperforming assets/customer loans + other real estate owned Loan loss reserves/gross nonperforming assets

2019* 6.4

10.7 0.5

(0.0) 3.1

100.9

2018 8.4

11.6 0.5 1.3 3.1

--Year-ended Dec. 31--

2017 65.8 10.6

0.8 1.1 3.1

2016? (2.4) 11.3 0.6 0.2 2.7

103.3

120.1

114.6

2015? 5.5

11.8 0.5 0.5 2.8

104.8

*Data as of Sept. 30. ?2015-2016 figures are based on pre-merger financials for NBAD. Based on gross loans excluding acceptances and net of interest suspended. Excludes unfunded exposure provisions and IFRS 9 Risk Reserves.

Funding and liquidity: Well-established access to long-term overseas funding programs, as well as Abu Dhabi government-related deposits FAB's funding profile is similar to that of UAE peers, with a stable funding ratio of 131% on Sept. 30, 2019. The bank benefits from large deposits from the government and related public entities, which translates into markedly lower funding costs.

While lower oil prices translated into weakness in government and GRE deposits from late-2015 to mid-2016, a recovery took place in 2017 followed by 41% growth in these deposits in 2018. Government deposits have grown again over 2019, by some 15%, despite oil prices falling on average over 2019 versus 2018, in part reflecting the government's fiscal planning, including placements of government Eurobond issuance. We assume deposit behavior will normalize at lower levels, with the potential for intrayear volatility, as large deposits are placed temporarily before being drawn. We expect total deposit growth for FAB at 4%-5% over the next two years, in line with that of the system growth. At end-September 2019, 70% of the bank's funding came from customer deposits, the bulk of which is domiciled in the UAE.

We assess the bank's liquidity as strong, given the level of liquid assets on its balance sheet and based on a global peer comparison. The bank's role as the de-facto bank for the government's oil and gas endowment allows FAB to operate with a markedly stronger advantage in terms of liquidity. About 20% of the bank's balance sheet was in the form of cash on Sept. 30, 2019, and its ratio of broad liquid assets to short-term wholesale funding liabilities was 2.3x. In

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