(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Abu Dhabi Commercial Bank (ADCB) at ‘A+’ and ‘A1’, respectively. At the same time, CI Ratings has affirmed ADCB’s Bank Standalone Rating (BSR) of ‘bbb+’, Core financial Strength (CFS) rating of ‘bbb+’, and Extraordinary Support Level (ESL) of Very High. The Outlook for the ratings is Stable.
The Bank’s LT FCR is set three notches above the BSR to reflect the ESL of Very High from the UAE government (sovereign ratings: ‘AA-’/‘A1+’/Stable) which has a good track record of supporting the banking system. It is our current expectation that the UAE government would be willing and is financially capable of assisting ADCB if required. Our ordinary support assessment takes into account the wealthy Abu Dhabi government’s majority ownership of the Bank, ADCB’s large size and good franchise, as well as its D-SIB status.
The Bank’s BSR is derived from a CFS rating of ‘bbb+’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. Our OPERA assessment of the UAE reflects the country’s continuing dependence on hydrocarbons, although less so than neighbouring countries, with the economic risk partially mitigated by the support of the wealthy emirate of Abu Dhabi. It also reflects the overall sound financial position of the banking sector.
The Bank’s good overall profitability along with sound liquidity and capital ratios and moderately good asset quality are principal credit strengths. In addition, the Bank’s large size and its position as the third largest bank in the country, with good customer franchises and a diversified business in the UAE also underpin the ratings. The principal challenges are a loan-loss reserve (LLR) coverage ratio that continues to be lower than the peer group average, and high customer concentration in loans and deposits, though this is in common with most banks in the country. The operating environment remains moderately challenging due to the slow global recovery; however, the UAE economy is performing well on the back of favourable oil prices.
ADCB’s wide customer franchise and relatively well-diversified business base, along with its strong digital focus exhibit characteristics of stability and provide good growth potential. Although balance sheet assets are spread across the world (mainly through investments and due from banks), most of the Bank’s earnings are derived from the UAE branches. It does however have a small, but growing, overseas physical presence. Management is stable and capable.
The quality of the moderately large investment book is good – the bulk of exposures are to governments, highly rated banks and public sector entities. Sector concentration in real estate has fallen in recent periods and is at an acceptable level. Customer concentration in loans is high, albeit in line with the sector. The Bank has a moderate sized retail credit portfolio which contributes to good income generation. The government remains an important borrowing customer and, while spreads on this portfolio may be low, these are low-risk exposures.
The quality of the loan portfolio has improved in recent years due to write-offs, recoveries and lower transfers to Stage 3. NPLs declined between 2021 and 2023, and with the strong growth in lending the NPL ratio has fallen and is slightly better than the sector average. Stage 2 loans are moderately low. CI includes AED3.3bn of restructured loans relating to the NMC Healthcare Group (which collapsed in 2020) under NPLs, however the Bank reports it as unimpaired and its NPL ratio was therefore 100bps lower than CI’s figure in H1 24. The debt has been converted into a loan to a new company (NMC Holdco) and is valued at FVTPL. NMC Holdco is managing the healthcare operations and will repay after the business has been turned around. The LLR coverage ratio has also improved over the years but remains only at a moderate level. The Bank’s reported coverage ratio excluding NMC Holdco was 95% in H1 24, much higher than CI’s ratio.
Although provisioning expenses have been on the high side, these are comfortably absorbed by operating profits. Capital buffers are also improving; the extended NPL ratio is however still below the average for the sector. We expect ADCB’s asset quality ratio to improve, or at the very least remain stable, given that loan expansion is likely to be robust this year and that growth is primarily led by credit to government related entities (GREs).
Profitability ratios continue to be good, reflecting ADCB’s strong franchise and diversified revenue streams, however key ratios are not as strong as peer metrics partly due to the Bank’s narrower net interest margin (NIM) and lower non-interest income base compared to other banks in the country. The changing loan mix in favour of government and GRE credit also contributes to its comparatively smaller NIM. Although higher interest rates and a rising proportion of time deposits in the customer deposit base have pushed up the funding cost, the Bank was able to widen its NIM thanks to strong credit growth. Costs continue to be well managed, and the Bank recorded strong growth in operating profit in 2023 and H1 24. We expect income growth to continue to be strong in the intermediate term. Impairment charges remained high last year but declined y-o-y in H1 24. The Bank posted good net profit growth in both 2023 and H1 24.
Liquidity is comfortable with the Bank adequately meeting all regulatory ratios. Loan-based liquidity ratios are good and liquid asset buffers are sizeable. We expect key ratios to be maintained at current levels. Customer deposit growth continues to be strong and is likely to support the growing credit book. While the CASA ratio has declined due to higher interest rates, there has been y-o-y growth and balances are at a good level with cash management and trade finance businesses making good contributions. Granular retail deposits have also risen. The deposit base is supplemented by an acceptable level of wholesale borrowings. There are customer concentrations in the deposit base – a feature of all Abu Dhabi banks – partly due to the availability of government deposits, which are however considered stable.
ADCB’s capital ratios have been maintained at good levels over the years. Key ratios strengthened slightly in 2023 due to growth in net profit and lower cash dividends paid for 2022, as well as AT1 debt issued to the Bank’s majority shareholder and limited other comprehensive income (due to unrealised investment gains). There was a further marginal rise in key parameters in H1 24. Capital comprises mainly common equity supplemented by small general provisions and AT1 capital issued to the Abu Dhabi government. Capital is only slightly impaired by unprovided NPLs. We expect the Bank to maintain a stable capital adequacy ratio this year given that the additional assets it intends to book will continue to have low average risk weighting, while retained earnings are likely to improve further. Historically, ADCB has built its capital through retained earnings, but it can expect substantial support from its majority shareholder, the government of Abu Dhabi, in case of need.
Rating Outlook
The Stable Outlook for the LT FCR and BSR indicates our expectation that the ratings will not change over the next 12 months.
Rating Dynamics: Upside Scenario
A one-notch upgrade of the LT FCR and BSR or a revision of the Outlook to Positive would require an improvement in the Bank’s standalone profile. This could come from a significant improvement in LLR coverage, better profitability, and a stronger capital position.
Rating Dynamics: Downside Scenario
A one-notch downgrade of the Bank’s LT FCR or a change in the Outlook to Negative, although seen as being unlikely, could result from a significant deterioration in the Bank’s standalone strength. A one-notch downgrade of the BSR or a change in the Outlook to Negative could be caused by a weakening of financial fundamentals to an extent that the Bank may not be able to correct in a reasonable period. Any change in our assessment of the support level could also negatively impact the ratings.
Contact
Primary Analyst: Karti Inamdar, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Darren Stubing, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst
About the Ratings
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