Moody’s affirms ratings of Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank

Limassol, January 30, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the local and foreign currency long-term and short-term deposit ratings of Abu Dhabi Commercial Bank (ADCB) at A1/P-1, Union National Bank PJSC (UNB) at A1/P-1 and Al Hilal Bank PJSC (AHB) long-term and short-term issuer ratings at A2/P-1.

In addition, Moody's has affirmed the baseline credit assessments (BCAs) and adjusted BCAs, of ADCB at baa3/baa3 and UNB at baa3/baa3. Moody's has also affirmed the BCA of AHB at ba3 and upgraded its adjusted BCA to ba1 from ba3.

The outlook on all banks' long-term ratings is maintained at stable. Despite the integration challenges that Moody's expects ADCB, the surviving entity from the merger of ADCB and UNB to face, the rating agency considers that the merger is credit neutral given the similar and complementary credit profiles of ADCB and UNB. Likewise, Moody's expects the acquisition of AHB by the merged entity to be broadly credit neutral for AHB as the expected, improvement in its credit profile, very high parental support and very high government support all balance the loss of direct shareholding from the Abu Dhabi government (through the Abu Dhabi Investment Council). These rating actions follow ADCB and UNB's public announcement on 29 January 2019 that they have entered into a binding merger agreement, and that the merged entity has agreed to acquire a 100% stake in AHB. These transactions, which are subject to shareholder and regulatory approvals, are expected to be completed by June 2019. ADCB will be the surviving entity from the merger, and AHB will be a standalone Islamic subsidiary of the merged entity.

A full list of affected ratings is at the bottom of the press release.

RATINGS RATIONALE -- AFFIRMATION OF BCAs AND LONG-TERM RATINGS

-- ABU DHABI COMMERCIAL BANK (ADCB)

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.

These transactions, if successfully completed, will create the third largest bank in the United Arab Emirates (UAE) - with around $114 billion in total assets and a 15% market share - providing greater scale to participate in larger deals, enable cost savings and achieve revenue synergies in a highly competitive and subdued economic environment. While solidifying its already established corporate brand in the UAE banking space, ADCB will benefit from UNB's growing retail franchise and leverage AHB's fully-fledged Islamic finance offering.

Moody's affirmation of ADCB's BCA primarily reflects the rating agency's view that ADCB and UNB have similar and complimentary credit profiles. The banks have similar problem loans levels, UNB has higher capital buffers while both banks have similar profitability. ADCB has a larger low-cost deposit base and higher liquid resources, while UNB exhibits a lower reliance on market funding.

The BCA affirmation however also reflects the impact on ADCB from the absorption of a higher proportion of problem loans mainly from the lower rated AHB. Although the combined entity's problem loans to gross loans ratio will be at around 4.2% as of September 2018 this level still compares favorably to the UAE banking system average of around 5.1% as UNB -- a bank rated at par with ADCB -- will account for just 25% of post-acquisition assets while AHB will represent only about 10%.

Total loss absorption buffers at the combined entity level will remain healthy with a problem loans/(tangible common equity and loan loss reserves) ratio at around 19% as of September 2018 and a reported problem loan coverage at a still comfortable 116% as of the same period above the 74% global median of baa3 BCAs.

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

Furthermore, ADCB has strong liquidity and a diversified funding profile and will see its higher than average reliance on confidence sensitive market funding - at 24% of tangible banking assets as of September 2018 - reduce to around 19% post-transaction as it absorbs two banks that are largely deposit funded.

The BCA, however, still incorporates risks related to very high levels of single-name and sector concentrations -- features common to most banks in the GCC. Notwithstanding the ratings affirmations, Moody's notes that it will continue to monitor developments regarding the deal and the ultimate effects on ADCB's consolidated asset quality, capitalization and earnings.

Provided a successful completion of the overall transaction, ADCB's long-term rating affirmations capture our expectation that the bank will continue to benefit from a five-notch government support rating uplift from its baa3 BCA in line with our assessment of a very high probability of government support in case of need based on (1) the bank's increased importance as the third largest institution in the UAE ; (2) the bank's broadly unchanged ownership structure with the Abu Dhabi government remaining a majority shareholder (60%) through one of its sovereign wealth funds -- the Abu Dhabi Investment Council and; (3) the UAE authorities' ample capacity and proven track record of supporting banks in times of stress.

-- UNION NATIONAL BANK PJSC (UNB)

The affirmation of UNB's ratings reflects Moody's view that the merger will be credit neutral since the merged entity will have a similar profile as UNB. Moody's expects to withdraw the ratings of UNB once its assets and liabilities are transferred to the merged entity, following completion of the merger. Until completion of the merger, Moody's expects UNB's baa3 BCA to reflect its sound asset quality, resulting from its significant exposure to government-related business, as well as its solid capitalisation, healthy profitability and solid liquidity resources. However, the bank's funding concentrations moderate these strengths. UNB's A1 long-term deposit ratings currently incorporate a five-notch uplift from the bank's baa3 BCA, based on Moody's assessment of a very high likelihood of support from the Government of UAE, in case of need, reflecting the government's large shareholding in the bank.

-- AL HILAL BANK PJSC (AHB)

Moody's affirmation of AHB's long-term ratings reflects its expectation that AHB's financial fundamentals will gradually improve following the acquisition, as well as Moody's forthcoming expectation of a very high probability of parental support from ADCB and a very high likelihood of government support from the Government of the UAE.

The affirmation of AHB's BCA at ba3 reflects Moody's expectation that the improvement in AHB's relatively weak credit profile will improve gradually over time, as its larger and stronger parent ADCB implements its culture, governance and processes at AHB. AHB's ba3 BCA currently reflects the bank's (1) relatively weak asset quality and provisioning coverage; (2) modest capitalisation, coupled with relatively weak net profitability owing to high cost of risk and low efficiency; and (3) sound funding moderated by relatively low liquidity buffers.

The upgrade of AHB's adjusted BCA to ba1 from ba3 captures Moody's assumption of a very high probability of parental support from ADCB. This reflects ADCB's post-acquisition 100% stake in AHB and AHB's flagship Islamic franchise.

-- STABLE OUTLOOKS

The stable outlook on ADCB's long-term ratings balances the expected benefits from the successful closing of the overall transaction relative to deal execution and integration risks.

For UNB, the stable outlook captures Moody's expectation that the bank's sound financial fundamentals will continue to balance the risk of its significant funding concentration.

In the case of AHB the stable outlook reflects our view that the bank's relatively weak financial fundamentals will stabilize in the next 12 to 18 months and benefit from its future association with a larger and financially stronger banking group. The stable outlook on all three banks' long-term ratings is also in line with the stable outlook on the UAE's sovereign rating, which indicates that the government's capacity to provide support is not expected to change.

WHAT COULD CHANGE THE RATINGS -- UP

Upward pressure on ADCB's rating is unlikely given its focus on a successful deal execution and integration process, however, this could materialize in the event of (1) a significant reduction in the bank's single-name and sector concentrations or (2) a material strengthening of the bank's solvency and liquidity.

UNB's ratings are at par with ADCB's and hence have limited upside potential upon a successful merger completion. At that time, ADCB will remain as the operating entity and all of the assets and liabilities of UNB will be transferred to ADCB after which we expect the ratings of UNB to be withdrawn. Upward pressure on AHB's ratings could develop from a combination of (1) a significant improvement in the bank's asset quality, capitalization and profitability; and (2) a significant reduction in its borrower and sector concentrations.

WHAT COULD CHANGE THE RATINGS -- DOWN

Downward pressure on all three banks' ratings would emanate from (1) any assessment of a weakening of the UAE government's capacity or willingness to provide support; and (2) a material deterioration in the UAE operating environment weighing on the banks' respective financial fundamentals or (3) inability from the banks to effectively integrate into the new group following the merger and acquisition. Any greater than expected weakening in the solvency and liquidity profiles of UNB and AHB, could exert negative rating pressure on ADCB since those are the banks it will absorb.

..Issuer: Abu Dhabi Commercial Bank Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed baa3

.... Baseline Credit Assessment, Affirmed baa3

.... Long-term Counterparty Risk Assessment, Affirmed Aa3(cr)

.... Short-term Counterparty Risk Assessment, Affirmed P-1(cr)

.... Long-term Counterparty Risk Rating, Affirmed Aa3

.... Short-term Counterparty Risk Rating, Affirmed P-1

.... Commercial Paper, Affirmed P-1

.... Senior Unsecured Medium-Term Note Program, Affirmed (P)A1

....Short-term Bank Deposits, Affirmed P-1

.... Long-term Bank Deposits, Affirmed A1, Outlook Remains Stable

..Outlook Action:

....Outlook Remains Stable

..Issuer: ADCB Finance (Cayman) Limited Affirmations:

.... Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A1

.... Backed Subordinate Medium-Term Note Program, Affirmed (P)Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A1, Outlook Remains Stable

Outlook Action:

....Outlook Remains Stable

..Issuer: Union National Bank PJSC Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed baa3

.... Baseline Credit Assessment, Affirmed baa3

.... Long-term Counterparty Risk Assessment, Affirmed Aa3(cr)

.... Short-term Counterparty Risk Assessment, Affirmed P-1(cr)

.... Long-term Counterparty Risk Rating, Affirmed Aa3

.... Short-term Counterparty Risk Rating, Affirmed P-1

.... Short-term Bank Deposits, Affirmed P-1

.... Senior Unsecured Medium-Term Note Program, Affirmed (P)A1

....Senior Unsecured Regular Bond/Debenture. Affirmed A1, Outlook Remains Stable

....Senior Unsecured Bank Deposits, Affirmed A1, Outlook Remains Stable

Outlook Action:

....Outlook Remains Stable

..Issuer: Al Hilal Bank PJSC Affirmations:

.... Baseline Credit Assessment, Affirmed ba3

.... Long-term Counterparty Risk Assessment, Affirmed A1(cr)

.... Short-term Counterparty Risk Assessment, Affirmed P-1(cr)

.... Long-term Counterparty Risk Rating, Affirmed A1

.... Short-term Counterparty Risk Rating, Affirmed P-1

.... Long-term Issuer Rating, Affirmed A2, Outlook Remains Stable

.... Short-term Issuer Rating, Affirmed P-1

Upgrade:

.... Adjusted Baseline Credit Assessment, Upgraded to ba1 from ba3

Outlook Action:

....Outlook Remains Stable

..Issuer: AHB Sukuk Company Ltd. Affirmations:

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A2

.... Backed Senior Unsecured Regular Bond/Debenture, Affirmed A2, Outlook Remains Stable

Outlook Action:

....Outlook Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The local market analyst for Abu Dhabi Commercial Bank, Al Hilal Bank PJSC, ADCB Finance (Cayman) Limited and AHB Sukuk Company Ltd ratings is Badis Shubailat, +971.4.237.9505. The local market analyst for Union National Bank PJSC ratings is Mik Kabeya, +971.4.237.9590.

Headquartered in Abu Dhabi, ADCB, UNB and AHB have reported total assets of around USD74.5 billion, USD28.6 billion and USD11.7 billion as of September 2018, respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nondas Nicolaides
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
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Limassol CY 3301
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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