The CreditWatch placement follows the November 25, 2009, announcement by the government of Dubai of a restructuring of Dubai World (not rated), including a requested standstill on all financings to the company, including its subsidiary Nakheel (not rated).
"The rating action reflects uncertainty about how the standstill agreement would affect ADCB's large exposure to Dubai World," said Standard & Poor's Credit Analyst Emmanuel Volland.
"This comes at a time when the deteriorated economic environment, including the fall of real estate prices, has already started to weigh on the bank's financial profile," added Volland.
The banks' asset quality indicators have declined sharply over the past 12 months. The ratio of nonperforming loans to total loans stood at 4.2 per cent on Sept. 30, 2009. Coverage by provisions appears low at 52.3 per cent on the same date. S&P expect asset quality to continue to deteriorate in the coming quarters. This trend could be exacerbated by the direct and indirect impact of a debt restructuring by Dubai World, which represents a major pillar of the Dubai economy. We expect ADCB's asset quality indicators to worsen also because of the bank's exposures to Ahmad Hamad Al Gossaibi Brothers (Algosaibi) and Saad Group, which defaulted on their obligations earlier in 2009. The bank holds about $360 million in exposures to Saad Group and about $244 million to Algosaibi.
The bank's capitalisation was boosted earlier this year by the issuance of AED 4 billion ($1 billion) of Tier 1 notes and the conversion of government deposits into Tier 2 capital. Adjusted total equity as a percentage of adjusted assets stood at 8.3 per cent on September 30, 2009. At the same time, the regulatory capital adequacy ratio increased almost eight percentage points to 19.4 per cent.
However, S&P view the current level of capitalisation as barely adequate due to the bank's large single-name concentration risk and potential for marked asset quality deterioration.
ADCB is the third-largest commercial bank in the United Arab Emirates (UAE), with total assets of $43.2 billion on September 30, 2009. The Abu Dhabi government has a 64.8 per cent stake in ADCB through Abu Dhabi Investment Council (ADIC, not rated). The ratings on ADCB are higher than its stand-alone credit profile (SACP) and factor in S&P’s expectation of some exceptional government support in case of need due to its high systemic importance and ownership structure. The long-term rating on ADCB is therefore two notches higher than its SACP.
S&P plan to resolve the CreditWatch placement on ADCB after we review the full details of the restructuring of Dubai World and Nakheel and weigh its impact on the bank. S&P expect to complete the review within the next three months.
"We do not anticipate lowering the ratings on the bank by more than two notches, assuming that the government would extend significant support if needed," said Volland.