OREANDA-NEWS. Fitch Ratings has placed First Gulf Bank's (FGB) Long - and Short-Term IDRs, Support Rating Floor (SRF) and Viability Rating (VR) on Rating Watch Positive (RWP). The agency has also affirmed all support-driven ratings of National Bank of Abu Dhabi (NBAD) with Stable Outlooks and placed NBAD's VR on Rating Watch Negative (RWN). A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS - IDRs, SUPPORT RATINGS, SUPPORT RATING FLOORS AND VIABILITY RATINGS

The RWP on FGB's IDRs and SRF reflects Fitch's view of potentially higher support propensity of the bank by the UAE authorities and the government of Abu Dhabi (AA/Stable/F1+) after completion of its merger with NBAD.

The affirmation of NBAD's SRF at 'AA-', which is one notch above Abu Dhabi domestic systemically important banks' SRF of 'A+', reflects the bank's current flagship status and high systemic importance in the UAE and Abu Dhabi in particular and Fitch's view that NBAD will retain its importance and status after the merger.

The merger of the two banks will be executed in the form of a share swap with FGB shareholders receiving 1.254 NBAD shares for each FGB share. Following the issue of new shares, FGB's current shareholders will own approximately 52% of the combined bank and NBAD shareholders will own 48%. The Government of Abu Dhabi and related entities will own approximately 37% with a further 33% owned by members of the ruling family. The combined bank will retain NBAD's legal registrations and brand, while FGB will be liquidated as a legal entity once the merger is completed.

As a result of the merger (which is expected to be completed in 1Q17) NBAD's balance sheet will be around AED642bn (USD175bn) and it will be the largest bank in the UAE accounting for around 26% of the banking system assets.

Fitch considers the UAE authorities have strong capacity to support the banking system, supported by its sovereign wealth funds and on-going revenues mostly from hydrocarbon production, despite lower oil prices and the moderate size of the UAE banking sector in relation to the country GDP. Fitch also expects there is a high willingness from the authorities to support the banking sector, which has been demonstrated by the UAE authorities' long track record of supporting domestic banks, as well as close ties and part government ownership in a number of banks.

The placement of NBAD's VR on RWN reflects the merger with a somewhat weaker bank (as reflected by a lower 'bbb' VR), together with uncertainties regarding the merger execution (including the integration of FGB) NBAD's VR will remain underpinned by a leading franchise and its flagship status, especially in Abu Dhabi, and its close links to the Abu Dhabi government as well as the strength of its management, sound asset quality and generally conservative risk management. The existing VR also factors in the bank's high loan and deposits concentration (although this should decrease after the merger, as FGB has less concentrated loans and deposits) and high related party financing. The business models and franchises of NBAD and FGB are complementary, and Fitch will assess the extent to which the strategy of the new bank and management team materially alter targeted business and customer segments.

The RWP on FGB's VR reflects our expectation that the bank's assets and liabilities will be transferred to NBAD's balance sheet, which has a higher VR of 'a-'. At the same time, FGB's VR reflects its strong retail and corporate franchise, good asset quality ratios, less related party lending than peers, sound and consistent profitability, adequate liquidity and capital ratios. The VR also considers its concentrated funding base.

KEY RATING DRIVERS - DEBT RATINGS

The existing senior unsecured programmes of both banks, the trust certificate issuance programme of FGB Sukuk Company Ltd and the notes issued under these programmes are rated in line with the Long - or Short-Term IDR of the respective bank.

RATING SENSITIVITIES - IDRs, SUPPORT RATINGS, SUPPORT RATING FLOORS AND VIABILITY RATINGS

Fitch expects to resolve the Rating Watches once the merger is completed and there is more clarity on the banks' integration and strategy/risk appetite performance prospects of the merged entity.

NBAD's and FGB's Support Rating and SRFs are sensitive to a reduction in the perceived ability or willingness of the authorities to provide support for the banking sector, or a change in Fitch's view of support in the UAE. Given the still robust fiscal position of Abu Dhabi, and by extension the UAE, the authorities' strong track record of support for local banks and no plans for resolution legislation at this stage, downward pressure is currently low.

NBAD's VR could be downgraded if the bank's risk appetite, strategy and/or business model post-merger places a greater emphasis on higher risk customer segments or the bank experiences difficulties with integrating FGB. The VR may be affirmed if NBAD demonstrates efficient integration and no material lowering of risk appetite, asset quality or capitalisation metrics.

FGB's rating will be withdrawn at the merger as the bank will disappear as a legal entity. FGB's VR could be downgraded before the merger if asset quality were to materially deteriorate, eroding the bank's healthy profitability and capital.

RATING SENSITIVITIES - DEBT RATINGS

A change in the banks' IDRs would ultimately lead to a change in the ratings of the unsecured bond and sukuk issuance programmes, the senior and subordinated notes rated under these programmes, as well as other senior or subordinated debt.

The rating actions are as follows:

National Bank of Abu Dhabi:

Long-Term IDR affirmed at 'AA-'; Stable Outlook

Short-Term IDR affirmed at 'F1+'

Viability Rating 'a-' placed on RWN

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'AA-'

EMTN programme affirmed at 'AA-'/'F1+'

ECP Programme affirmed at 'F1+'

Senior unsecured debt affirmed at 'AA-' and 'F1+'

First Gulf Bank:

Long-Term IDR 'A+' placed on RWP

Short-Term IDR 'F1' placed on RWP

Viability Rating 'bbb' placed on RWP

Support Rating affirmed at '1'

Support Rating Floor 'A+' placed on RWP

EMTN programme 'A+'/'F1' placed on RWP

ECP programme 'F1' placed on RWP

Negotiable Certificate of Deposit programme 'A+'/'F1' placed on RWP

Senior unsecured notes 'A+' placed on RWP

Senior unsecured programme 'A+'/'F1' placed on RWP

FGB Sukuk Company Limited:

Trust certificate issuance programme 'A+'/'F1' placed on RWP

Senior unsecured certificates 'A+' placed on RWP