• Merger to restrain FGB’s div policy, mgmt. style; Cut FGB to Neutral FGB and NBAD’s boards gave the go-ahead to the proposed merger of the two banks and released details of the transaction. Key takeaways are: i) NBAD to absorb FGB; ii) share swap means a discount of c4% for FGB’s shareholders (price as of 30 June); iii) cost synergies of AED500mn (8% of 2015 combined expenses); and iv) Chairman and CEO roles to go to FGB. We are negative on this merger deal for FGB as we believe this deal creates uncertainty around the continuation of FGB’s generous dividend policy. In addition, we believe the banks have different management philosophies, and reconciling the two on a merged platform may prove challenging. We cut our 2016-18 estimates for FGB by c5% and our FV to AED13.7 from AED14.8 after reassessing the bank’s outlook. We downgrade FGB to Neutral.
• Swap ratio favours NBAD; Chairman and CEO roles go to FGB The merger will be executed through a share swap, with FGB’s shareholders receiving 1.254 NBAD shares for each share they hold. The exchange ratio implies a discount to FGB’s shareholder of 4% based on the price on 30 June, and a discount of 15% based on the price before the first announcement on 19 June. The swap ratio implies a discount of 21% based on our pre-merger FVs of the two banks (FGB: AED14.8; NBAD: AED9.0). FGB’s current chairman and MD have been appointed Chairman designate and CEO designate of the new entity, while the CFO role went to NBAD.
• Drop FGB from MENA top 20, replace with ADCB Following the above downgrade, we add ADCB to our MENA Top 20 List to replace FGB. We still like UAE macro, and remain Overweight on the market. ADCB offers a slightly lower ROE than FGB, but trades at a significant discount (1.4x 2016 P/B versus 2.0x for FGB) – it also offers a good yield of 6.4% (2016) with a low payout ratio of 55%. ADCB also has exposure to growth in Dubai (29% of loans), where economic growth is likely to hold up better than Abu Dhabi in 2016, in our view.

Shabbir Malik
Murad Ansari
Simon Kitchen