Wednesday 27, September 2017 by Nabilah Annuar

Abu Dhabi Commercial Bank’s ratings affirmed, with a stable outlook

Capital Intelligence Ratings (CI), the international credit rating agency, has affirmed the Financial Strength Rating (FSR) of Abu Dhabi Commercial Bank (ADCB) at ‘A’.

The Bank’s strong capital adequacy ratio (CAR), good asset quality, sound profitability (underpinned by a wide net interest margin, NIM) and satisfactory liquidity are the principal factors supporting the FSR. The high customer concentrations, wide maturity gaps, lack of disclosure on restructured loans and elevated credit risks are constraining factors. The Bank’s Long-term Foreign Currency Rating (FCR) is affirmed at ‘A+’. The one-notch uplift from the FSR is underpinned by the Support Rating of ‘1’, reflecting the extremely high likelihood of support from the government of Abu Dhabi. The Short-Term FCR is maintained at ‘A1’. The Bank’s superior ownership and good financial fundamentals support its FCRs. A ‘Stable’ Outlook is assigned to all the ratings.

ADCB’s asset quality ratios were strong at both end 2016 and end H1 2017. Although the Bank’s non-performing loan (NPL) net accretion rate has been moderately high in recent periods due to the problems in the SME and retail sectors, the NPL ratio remains low. The Bank has built a high loan-loss reserve (LLR) coverage ratio and is committed to maintaining more than full coverage going forward. While there could be some NPL accretions in the second half of this year, the Bank is also expanding its credit portfolio; underwriting standards have been tightened for loans to the affected sectors. The turmoil in the SME segment in 2015/2016 and job losses in some industries could continue to impact the Bank’s small business and retail portfolios this year. However, there are no signs as yet that the large corporate sector is in trouble. CI Ratings expects the Bank’s NPL ratio to stay low and coverage to remain above 100 per cent over the coming quarters. The loan book continues to have high customer concentrations, although levels have declined in recent periods.

The Bank’s capital position continues to be strong. Its CAR and Tier 1 ratio have been high for many years, although rising levels of risk-weighted assets (RWAs) have led to declines in these ratios in recent periods. The UAE central bank has announced the transitioning of capital standards to Basel III from end 2017 onwards, but detailed guidelines are not yet available. Whether the Bank’s AED 4 billion perpetual notes (two per cent of RWAs at end H1 2017) will be available for inclusion under Common Equity or Tier 1 capital is still to be decided by the central bank. No major impact on capital is likely from the adoption of IFRS 9 and Basel III standards this year and CI expects the Bank to maintain good capital ratios in the coming quarters. In CI’s opinion the Bank has built a sufficient cushion via LLR and capital to withstand moderate shocks from the external environment.

Key loan-based liquidity ratios were stable at end 2016 and end H1 2017. Though not as good as the peer group average, the Bank’s ratios are nevertheless satisfactory. Customer deposits have grown at a good pace, matching the expansion of net loans and advances. The deposit base has a high level of demand balances enabling the Bank to maintain a reasonably low funding cost ratio. Medium-term liabilities are at manageable levels and do not pose a refinancing risk. Asset/liability maturity mismatches continue to be high due to the sizeable amount of very short-term time deposits, although a large portion is typically renewed on maturity. Moreover, the Bank’s access to government deposits is a mitigating factor here. ADCB also has a good level of liquid and quasi-liquid assets on its balance sheet, which can be disposed of quickly to create liquidity. There is sufficient liquidity in the banking sector and CI expects ADCB’s key ratios to remain stable this year-end.

ADCB’s profitability ratios have been adversely impacted by higher funding costs and provision charges. This is an industry-wide phenomenon, reflecting the increase in deposit rates (without a compensating rise in lending rates due to competitive pressures) and higher credit costs in the present environment. However, despite declines the Bank’s NIM remains higher than the peer group average. Non-interest income levels are not high compared with many peers but the Bank’s fee and commission income continues to rise, reflecting growing business volumes. Operating costs are being tightly controlled; staff costs fell in both 2016 and H1 2017. The Bank’s ROAA and operating profitability ratio are good, although both have declined over the last few years. ADCB’s key ratios could fall further over the next few quarters, although the rate of decline may moderate.

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 62 per cent of the Bank. ADCB is the third largest bank in the country with total assets of AED 259 billion ($70.6 billion) at end June 2017. The Bank has a moderately large network of branches spread across the emirates. ADCB offers a comprehensive range of retail, corporate and investment banking products and services.

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