First Abu Dhabi Bank Ratings Affirmed with a Stable Outlook

First Abu Dhabi Bank Ratings Affirmed with a Stable Outlook

Capital Intelligence Ratings (CI Ratings or CI) announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of First Abu Dhabi Bank (FAB) at ‘AA-’ and ‘A1+’, respectively.

At the same time, CI Ratings has affirmed FAB’s Bank Standalone Rating (BSR) of ‘a-’, Core Financial Strength (CFS) rating of ‘a-’, and Extraordinary Support Level (ESL) of Very High. The Outlook for all ratings is Stable.

The Bank’s LT FCR is set three notches above the BSR to reflect the very high likelihood of extraordinary support from the government in case of need. The UAE government (sovereign ratings: ‘AA-’/‘A1+’/Stable) has demonstrated its support in the past and, in CI’s view, has the means and willingness to continue to provide support in the future.

Operating Environment

FAB’s BSR is based on a CFS rating of ‘a-’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’.

A large balance sheet size, D-SIB status, strong customer franchises, diversified business spread across the country and internationally, good management, very comfortable liquidity, and sound asset quality and capital ratios are principal factors supporting the CFS.

Credit challenges, in common with peers, are customer concentrations in loans and deposits and sector concentration in UAE real estate.

The Bank’s small net interest margin (NIM) contributes to its lower than peer group average (though steadily rising) operating profitability; however, risk charges have also been lower than peers.

A global slowdown due to US-led tariff wars and a sustained decline in oil prices which could threaten UAE government revenues are also major credit challenges.

At present, the UAE economy, and particularly the non-oil sectors, continues to do well despite the elevated geopolitical risk in the region.

economic risk

The OPERA for UAE indicates modest risk and reflects the relative dependence of the economy on hydrocarbons, moderate institutional strength and limited monetary policy flexibility.

Moreover, the economic risk is partially mitigated by the support of the wealthy emirate of Abu Dhabi to the federation, and the availability of a very large buffer of external assets under the management of the country’s sovereign wealth funds.

The UAE banking sector remained strong in 2024, with high levels of capitalisation and moderately low NPLs.

FAB is the largest bank in the UAE and functions as the Abu Dhabi government’s flagship entity. It has strong domestic franchises, and its international presence gives it a unique advantage in the country.

Its businesses are diversified across many international locations and the Bank is therefore less dependent on the health of the domestic economy than many of its peers.

FAB is expected to benefit from the Abu Dhabi government’s capital expenditure programme.

central bank

The balance sheet structure is conservative, with central bank balances and investments (including derivatives and repos) accounting for almost half of total assets, partly contributing to the Bank’s low spreads.

The investment portfolio has a sizeable sovereign component.

International assets are significant, but risks are low since these primarily comprise OECD central bank balances, due from banks and investments. Loans grew at a healthy pace last year, reflecting higher exposures to the private corporate sector, the government and public sector; a similar growth is likely this year.

Asset quality is sound overall.  The NPL ratio improved last year due to sales of NPLs and lower new NPL accretions; there was a further slight improvement in the NPL and coverage ratios in Q1 25.

FAB’s Stage 2 loans have fallen steadily over the last four years to a peer group low 1.9% in Q1 25.  Its loan-loss reserve coverage ratio, as calculated by CI, is moderate at 75% at end-2024.

However, the Bank’s reported ratio, including impairment reserves under capital (consisting of the excess of central bank mandated provisions over IFRS 9, which are not included under capital for CAR purposes), was 96% last year.

The coverage ratio could rise this year following the introduction of a new credit risk mitigation standard requiring a more aggressive discounting of collateral held against NPLs. Capital and operating profit provide an additional buffer.

Credit costs have been low over the last five years.  Given management’s conservative stance, strong underwriting policies and good quality of loans and advances, with a high level of government credit risk exposure, we expect overall asset quality parameters to continue to be sound this year.

FAB is profitable

FAB is profitable with stable and good quality earnings. The operating profitability ratio has strengthened over the last four years, reflecting growth in business volumes, a wider NIM, and growth in fees, commissions, trading gains and miscellaneous income.

Operating costs are well managed, and the cost-to-income ratio is low.  FAB’s operating profit on average assets ratio continues to be lower than the sector median ratio.

This is largely due to a lower than peer group average NIM, reflecting high levels of liquid assets on which yields are low.

Due to hedges and favourable asset/liability repricing, the Bank’s NIM trajectory last year was contrary to the sector, which saw a narrowing on account of lower benchmark rates.

Net profit growth in 2024 was modest with good operating profit growth offset by an increased net impairment charge, higher provisions for local income taxes (applicable for the first time last year) and the absence of extraordinary income unlike 2023.  However, ROAA remained stable at a good level.

Business volumes

Business volumes are likely to rise this year partly driven by FAB’s close association with the Abu Dhabi government (although these are mostly low margin transactions) and partly higher exposures to the private sector.

We expect a good increase in operating income and net profit in 2025.

The Bank’s Q1 25 performance was good and both operating profitability and ROAA continued to rise; although net interest income growth was modest in the first quarter (reflecting a narrower NIM) and the Bank’s effective income tax rate was higher than in 2024, this was offset by strong growth in non-interest income, good cost control and lower risk charges.

The Bank maintains strong loan-based liquidity ratios, which are among the best in the sector.

Customer deposit growth moderated in 2024 due to lower government deposits, but private corporate and retail deposits continued to rise.

Government deposits are still sizeable and, although these can be volatile, a large core amount is always stable. Customer concentration levels are high, in line with the sector.

Wholesale funds in the form of term borrowings, commercial paper issuances, due from banks and repurchase agreements are moderately high; however, these are well diversified across a variety of instruments, currencies and maturities.

Refinance risk is mitigated by FAB’s position as the Abu Dhabi government’s flagship bank and its high credit ratings.

The Bank’s large liquid asset holdings more than adequately cover short-term wholesale funds. Loan-based liquidity ratios strengthened in Q1 25 due to strong growth in customer deposits.

Capital ratios have largely been stable over the last two years, with the growth in risk weighted assets adequately supported by regulatory capital.  The Bank’s CAR at end-2024 was on par with the sector median and well above the regulatory minimum with a good buffer. The balance sheet leverage ratio is at a moderately good level, but below the average for the five largest CI-rated banks in the country. The Bank’s internal capital generation rate is considered moderate and dividend payout ratios are acceptable. Given the expectation of good earnings, key capital ratios are likely to be maintained at least at present levels. We also expect the principal shareholders to fully participate in any capital raising activity initiated by the Bank.