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Capital Intelligence affirms ratings on Abu Dhabi Commercial Bank (ADCB).

Capital Intelligence (CI) has affirmed the Financial Strength Rating of the UAE's Abu Dhabi Commercial Bank (ADCB) at 'A-' with its improving asset quality, and particularly its good loan-loss reserve coverage, good operating profitability and return on average assets (ROAA), and solid capital adequacy being major supporting factors. Customer concentrations in both loans and customer deposits and tighter than sector-average liquidity ratios are major rating constraints. The Foreign Currency Ratings are maintained at 'A+' Long-Term and 'A1' Short-Term and the Support Rating is '1'. The ratings are underpinned by the Bank's ownership, good financial fundamentals and the high likelihood of support from the government of Abu Dhabi. A 'Stable' Outlook has been assigned to all the ratings.

ADCB is a large UAE bank that is majority owned by the government of Abu Dhabi. The Bank's asset quality ratios have strengthened over the last few years with non-performing loans (NPLs) declining due to recoveries, write-offs and reduced accretions. ADCB's coverage ratio has also strengthened and at end H1 2014 loan-loss reserves exceeded NPLs. Recent press reports indicating that Dubai World (DW), which had successfully restructured its large debt in 2010, is in negotiations with creditor banks for an extension of the maturity period of its second bullet repayment raises apprehensions that ADCB, like most of the other creditors of DW, may have been a little hasty in classifying its exposure to DW as unimpaired. However, further provisioning for DW is unlikely to be necessary. ADCB's loan portfolio is characterised by sizeable customer concentrations (although there was an improvement in 2013) and a high level of lending to the real estate sector, which is nevertheless performing well.

Capitalisation continues to be strong with both the capital adequacy ratio (CAR) and the Tier 1 ratio at high levels. ADCB's key liquidity ratios are tighter than the peer group average, although there was a small improvement in H1 2014 owing to moderately good customer deposit growth. The Bank's demand and savings account balances have risen at a robust pace in recent years, pushing up the core, stable deposit base. Medium- and long-term liabilities are at a moderately high level. ADCB's short-term interbank liabilities, including issuance of Euro commercial paper, have also risen in recent periods and the Bank's net liquid asset ratio continues to be very low. However, this is partly compensated by the Bank's sizeable investments in fixed-income securities issued by public sector companies and banks, against which it can raise overnight funding from the Central Bank.

The Bank's profitability ratios are good. Both ROAA and the operating profitability ratio have been better than the peer group average in recent years. The 2013 net and operating profit had benefited from one-off items of income. In H1 2014, the growth in net profit was driven by a strong increase in fees and commissions and a sharply lower provisioning cost. ADCB's margins have widened in recent years partly owing to the rising level of low-cost deposits in its customer deposit base; its net interest margin is now slightly better than the peer group average. Impairment charges are currently low as a result of improving asset quality, and operating costs continue to be well managed.

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 AED195 billion at end-June 2014. 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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Publication:CPI Financial
Geographic Code:7UNIT
Date:Nov 5, 2014
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