Moody's affirms ratings of ADCB, UNB and Al Hilal Bank amid three-way merger

The rating agency says the tie-up between the three lenders will be 'credit neutral'

The new banking group will carry the ADCB identity and will continue to benefit from strong institutional backing, through the government of Abu Dhabi’s majority ownership. Bloomberg

Moody's Investors Service has affirmed the local and foreign currency long-term and short-term ratings of Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank, the three Abu Dhabi lenders in the process of merging.

Despite integration challenges for ADCB, the surviving entity from the merger, the rating the agency considers the deal to be credit neutral given the similar and complementary credit profiles of ADCB and UNB, the rating agency said in its latest note on Thursday. All banks are rated investment grade.

“The affirmation of ADCB's ratings captures Moody's view that the forthcoming merger with UNB followed by the acquisition of AHB, will not significantly alter the bank's standalone risk profile,” Moody’s said.

The deal will provide “greater scale to participate in larger deals, enable cost savings and achieve revenue synergies in a highly competitive and subdued economic environment.”

The boards of ADCB and UNB earlier this week agreed to a merger to create an entity that will take over Al Hilal and become the third largest lender in the UAE with an asset base of Dh420 billion ($114bn).The entity will also become the fifth largest lender in the Arabian Gulf.

ADCB will benefit from UNB's growing retail franchise and leverage Al Hilal’s fully-fledged Islamic finance offering, Moody's noted.

The transaction, which has been recommended unanimously to shareholders by the boards of ADCB and UNB, is subject to regulatory and shareholder approvals to be sought in the coming weeks, the lenders said in a January 29 regulatory filing to Abu Dhabi Securities Exchange, where their shares are traded.

The new banking group will carry the ADCB identity and will continue to benefit from strong institutional backing, through the government of Abu Dhabi’s majority ownership. Al Hilal Bank will retain its existing name and brand, and operate as a separate Islamic banking entity within the merged entity, the said.

The merger deal follows the tie-up of two of Abu Dhabi’s biggest lenders last year, when National Bank of Abu Dhabi and First Gulf Bank became First Abu Dhabi Bank, creating a $188bn banking powerhouse. Banks in the Arabian Gulf are increasingly looking to consolidate in a bid to gain scale and cut costs.

However, Moody’s noted that the combined bank's future profit will be initially dented by non-recurring integration costs before benefiting from anticipated expense and revenue synergies. The newly created group should be able to sustain healthy level of profit following the merger, while also ensuring good levels of capital retention.

The rating action also reflects the impact on ADCB from the absorption of a higher proportion of problem loans mainly from the lower rated Al Hilal Bank. “Although the combined entity's problem loans to gross loans ratio will be at around 4.2 per cent as of September 2018, this level still compares favourably to the UAE banking system average of around 5.1 per cent,” Moody’s said.