Fitch Affirms First Gulf Bank’s Rating At ‘A+’; Outlook Stable

Fitch Ratings has affirmed First Gulf Bank’s (FGB) Long-term Issuer Default Rating (IDR) at ‘A+’ with a Stable Outlook and Viability Rating (VR) at ‘bbb-‘. A full list of rating actions is at the end of this release.

FGB’s Long- and Short-term IDRs, Support Rating and Support Rating Floor reflect Fitch’s belief that there is an extremely high probability that support would be provided by the UAE authorities, if required, given the authorities’ long record of support and FGB’s importance to the UAE banking system. In addition, Fitch believes that support would be forthcoming from the Abu Dhabi government (rated ‘AA’/Stable/’F1+), which has injected hybrid capital into the leading Abu Dhabi banks. Members of the Abu Dhabi ruling family hold the majority of FGB’s shares in a private capacity.

The bank’s VR reflects the bank’s sound and consistent profitability, the strength of its local franchise, sound capitalization and adequate liquidity. It also reflects the bank’s exposure to the stressed real estate sector in the UAE, which amounted to around 19% of assets, and concentrations in loans and deposits. There is some commonality between the shareholders, board members and the bank’s large exposures, reflecting the bank’s ownership and the nature of the Abu Dhabi economy, but the bank has corporate governance procedures in place to manage this.

The IDRs, Support Rating and Support Rating Floor are sensitive to Fitch’s view of the creditworthiness of the UAE and Abu Dhabi authorities and Fitch’s view of their continuing propensity to support the banking system. The VR would be positively affected by further diversification of the loan portfolio and an improvement in the operating environment (especially the real estate sector). It would be adversely affected by a significant deterioration in asset quality, which Fitch does not expect at present. In 2011, FGB’s net income (before minority interests) increased by 4.6%, mainly the result of higher net interest income and lower net impairment charges. The bank’s cost/income ratio was well-managed at 18.9%, reflecting the bank’s efficient use of its small branch network, alternative distribution channels and low staff numbers.

Excluding the bank’s exposure to Dubai World, which has been restructured and is now performing, the non-performing loan ratio stood at 4.0% at end-2011. This ratio includes the bank’s exposure to Dubai Holding, which is currently undergoing restructuring. Overall asset quality is expected to remain stable, despite continuing stress in the real estate sector. However, the bulk of the bank’s real estate exposures are located in Abu Dhabi, which has been less affected than Dubai. In Fitch’s opinion, any further impairments will be manageable. The bank’s investment properties (5% of total assets) are also mainly located in Abu Dhabi.

FGB’s funding remains reliant on relatively concentrated, but stable, customer deposits (mainly corporate and government-related), but the bank also has diversified medium-term funding. The bank successfully raised USD1.15bn (AED4.2bn) through two sukuk issues in August 2011 and January 2012. Around

AED6.1bn of FGB’s medium-term funding matures in 2012 but Fitch believes that the bank has the capability to repay this without putting undue pressure on liquidity, either from its current resources or new debt issuance.

The bank’s Fitch core capital ratio was sound at 16.7% at end-2011. This does not include AED4bn of perpetual securities, classified as Tier 1, held by the Abu Dhabi government.

Established in 1979, FGB is the UAE’s fourth-largest listed bank by total assets, and held UAE banking system market shares of 9.8% of net loans and 9.7% of deposits at end-2011. Members of the Abu Dhabi ruling family own around 67% of the bank’s shares in a private capacity, with the balance widely held.