Capital Intelligence Ratings (CI Ratings) has raised the Financial Strength Rating (FSR) of Abu Dhabi Commercial Bank (ADCB) to ‘A’ from ‘A-’.
A strong capital adequacy ratio (CAR), good asset quality, improving liquidity, sound profitability and a solid customer franchise underpin the FSR of Abu Dhabi Commercial Bank (profile).
However, high, though declining, customer concentrations, wide maturity gaps and elevated credit risks in the operating environment are constraining factors.
The Bank’s Long- and Short-term Foreign Currency Ratings (FCRs) are affirmed at ‘A+’ and ‘A1’, respectively, and the Support Rating is ‘1’.
The ratings are underpinned by the Bank’s superior ownership, good financial fundamentals and the extremely high likelihood of support from the government of Abu Dhabi.
The Outlook for all the ratings is ‘Stable’.
The FSR was raised in view of the continuing improvement in several key asset quality ratios.
The Bank has built a high loan-loss reserve (LLR) coverage ratio and is committed to maintaining more than full coverage going forward.
Increased collective provisions were taken in H1 2016 in view of the weaker credit environment in the country, although this resulted in a decline in net profit for the half year.
The loan book continues to have high customer concentrations although levels have declined in recent periods.
In CI’s opinion the Bank has built a sufficient cushion via LLRs and capital to withstand moderate shocks from the external environment.
Its capital position remains strong; the CAR continues to be high owing to good net profit and a moderately high internal capital generation rate.
The improvement in the Bank’s key liquidity ratios last year, despite the tightening conditions in the banking sector in the second half, also underpinned the improvement in the FSR.
ADCB substantially increased its customer deposits in 2015, which along with higher medium-term borrowings and capital contributed to the improvement in the net loans to stable funds ratio.
Medium-term liabilities are at manageable levels and do not pose a refinancing risk at present.
The Bank also raised its liquid asset holdings last year. It holds a sizable stock of fixed income securities issued by banks and public sector companies against which it can easily raise short-term funding if necessary from the central bank.
Although there was some tightening of key ratios in H1 2016, they remain more than satisfactory.
ADCB has focused on lengthening the maturity profile of its time deposit base this year so as to reduce the asset/liability maturity gaps on the balance sheet.
ADCB’s profitability ratios were adversely impacted in H1 2016 by an increase in the funding cost and higher risk provisions.
This is an industry-wide phenomenon reflecting the tighter liquidity conditions and the increased cost of risk in the present credit environment.
However, it is worth noting that the Bank’s high CASA balances have helped to keep its funding cost much lower than the peer group average.
Slower business growth, particularly in the corporate banking sector, is expected to impact both net interest and non-interest income not just for ADCB but for the sector as a whole.
The Bank has taken steps to reduce its operating costs this year to partly offset lower gross income levels. ADCB’s key profitability ratios could weaken this year but are still expected to be good.
About Abu Dhabi Commercial Bank
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 AED241 billion at end June 2016. 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 Ratings (CI Ratings) can be found at http://www.ciratings.com/.