UAE: Abu Dhabi Commercial Bank’s Financial Strength Rating Affirmed – Foreign Currency Rating Downgraded

Global Arab Network  – Capital Intelligence has announced that it has affirmed Abu Dhabi Commercial Bank’s (ADCB) Financial Strength Rating at A- with the Bank’s large domestic franchise,

Improved operating profitability and capital adequacy being major factors supporting the rating, Global Arab Network reports according to a press statement.  Despite the Support rating of ‘1’, which reflects the extremely high likelihood of official support from the government of Abu Dhabi in case of need, the Bank’s Foreign Currency (FC)?

Long-term rating is adjusted downwards to ‘A+’ from ‘AA-‘ (a two-notch difference between FSR and FC as per CI methodology) to reflect continuing high credit risks in the UAE and their likely impact on the Bank’s weak asset quality and tight liquidity.  The FC Short-term rating is maintained at ‘A1’.  A ‘Stable Outlook has been assigned to all the ratings on the assumption that the remainder of 2011 and H1 2012 will see improvements in both asset quality and liquidity.

ADCB is a major retail and corporate bank in the UAE with strong customer franchises and a comprehensive range of products and services that generate multiple revenue streams.  The Bank’s earnings have been impacted by high impairment provision charges in recent years; however, operating profitability remained reasonably high, buoyed by good net interest and non-interest income.

The 2010 impairment provision charge included provisions on the Bank’s sizeable exposure to a Dubai government-related entity, which was classified as impaired and was subsequently restructured.

The Bank’s return on average assets (ROAA) strengthened in the first nine months of 2011 owing to lower impairment charges compared to the corresponding period of the previous year as well as extraordinary income arising from the sale of shares in an overseas associate.  The operating profitability ratio also improved on the back of higher net interest.

The Bank’s capital adequacy ratio (CAR) strengthened in 2011.  This was partly due to the sale of the Bank’s stake in an overseas associate, which led to substantially lower deductions from regulatory capital for the purposes of calculating the CAR.  The Bank has received substantial increases in capital from the government of Abu Dhabi and the federal government in recent years.

Despite improvements, ADCB’s liquidity remains tight. While the Bank’s access to Abu Dhabi government funds is a mitigating factor here, given the uncertain global economic outlook, a higher level of liquid assets would provide more comfort.

The ratio of loans to customer deposits remains high, although the customer deposit base has grown substantially in recent years primarily due to the aggressive marketing of Islamic savings products.  The Bank also regularly raises medium/long-term resources from regional and international markets, but any dependence on such funding could be a point of vulnerability in current market conditions.

ADCB was created in 1985 by the government of Abu Dhabi through the merger of three distressed retail commercial banks.  The government, through the Abu Dhabi Investment Council, owns 58% of the Bank.  ADCB is the third largest bank in the country with total assets of AED169 billion at end 2010.

The Bank has a moderately large network of branches spread across the emirates.  ADCB offers a comprehensive range of retail and corporate banking products and services and overseas operations are limited to two branches in India.