Capital Intelligence has affirmed the Financial Strength Rating (FSR) 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 and rising operating profitability and ROAA and solid capital adequacy being major supporting factors.
Abu Dhabi Commercial Bank‘s customer concentrations in both loans and deposits and tighter than sector-average liquidity ratios are constraints. There are upward pressures on the FSR, but an increase in the rating would require liquidity ratios to strengthen further. 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.
Asset quality ratios have strengthened over the last few years owing to write-offs, recoveries and low non-performing loans (NPL) accretions. The NPL ratio is currently good and better than the peer group average. Impaired loans are more than fully provided and the loan-loss reserve coverage ratio has strengthened over the years and remains above average for the sector. Abu Dhabi Commercial Bank’s capital base provides additional cover. The capital adequacy ratio is maintained at a strong level and the Tier 1 ratio is high.
Liquidity ratios are at acceptable levels but, despite improvements in 2014 and H1 2015, key ratios continue to be tighter than the peer group average. Customer deposits and capital account for around three-quarters of the balance sheet. Medium/long-term wholesale borrowings and short-term interbank liabilities provide additional funding support. However, tightening liquidity across the GCC economies would make it difficult to raise additional funds at favorable prices. The Bank’s CASA balances have grown at a robust pace in recent periods, but the deposit base continues to be characterized by a high level of customer concentrations, partly because of the sizable funding received from the government. Abu Dhabi Commercial Bank’s net liquid asset ratio continues to be low despite improvement.
The Bank’s profitability ratios are good. ROAA has strengthened in recent periods owing to lower provisioning expenses reflecting the improvement in asset quality; the ratio has been higher than the peer group average in recent years. The operating profitability ratio has risen over the last four years (notwithstanding a dip in 2014) due to the general improvement in margins and strong growth in fees and commissions. Rising CASA levels have pushed the average funding cost down and this is now better than the sector average. Abu Dhabi Commercial Bank’s non-interest income to average total assets ratio, though good, is still below those of many other large banks in the country. Operating costs continue to be well managed.
The government, through the Abu Dhabi Investment Council, owns 58% of the Bank. Abu Dhabi Commercial Bank is the third largest bank in the country with total assets of AED 208 billion at end-June 2015. 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.
Capital Intelligence (CI) ratings can be found at www.ciratings.com.