Capital Intelligence affirms Abu Dhabi Commercial Bank's ratings

The ratings reflect the majority shareholding by the government of Abu Dhabi as well as the bank's systemic importance given its large size and significant domestic presence.

Capital Intelligence believes that the bank would receive substantial support in case of need.

The financial strength rating is maintained at A, but a Negative outlook is assigned in view of the deteriorating profitability and asset quality as well as continuing tight liquidity. Profitability ratios are likely to come under further pressure owing to increased provision charges.

ADCB's profitability ratios fell last year owing to a narrower interest differential and substantial increases in operating costs and risk provision charges.

Key ratios slipped further in H1 2009 due to a sharp fall in non-interest revenues and high provision charges for loans and investments. But operating costs were reined in, and an improvement in the interest differential led to a significant increase in net interest earnings.

The bank is confident of maintaining its margins this year, which could offset the fall in non-interest revenues.

However, earnings are likely to remain under pressure due to increased provision charges for loans and investments, including provisions on exposures to two large Saudi business groups which are currently experiencing financial difficulties. NPLs have risen substantially over the end 2008 level, but the NPLs to gross loans ratio is still at a manageable level.

Although the provision coverage ratio fell sharply over the half year, the sizeable increase in capital (by around Dhs10.5bn) is a major mitigant. The capital adequacy ratio was strong at June 2009.

Liquidity tightened at end 2008 and key ratios remained tight at end June 2009. The bank receives liquidity support from the government and almost a third of customer deposits comprised funds placed by government entities.

Maturity gaps are well managed and are lower than those of peers. ADCB intends to restart its Euro medium-term note programme later this year.

Maturing medium-term liabilities are likely to be refinanced since raising funds should not be a problem given the bank's Abu Dhabi government ownership.

Abu Dhabi Commercial Bank 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 65% of the bank.

ADCB is the third largest bank in the country with total assets of Dhs147bn at end 2008. The bank has a moderately large network of 39 branches, 5 kiosks and cash offices and 138 ATMs spread across the emirates. Around half the branches are located in Abu Dhabi.

ADCB offers a comprehensive range of retail and corporate banking products and services and over the years has built a strong customer franchise.

Overseas operations are limited to two branches in India and a 25% stake in RHB Bank, Malaysia (rated BBB by Capital Intelligence).