Abu Dhabi Commercial Bank's ratings affirmed

The ratings are underpinned by the Bank's ownership, and the high likelihood of support from the government of Abu Dhabi. Major rating constraints include the relatively tight, though improved, liquidity, customer concentrations in both loans and customer deposits, and the weak credit environment in some sectors such as real estate and construction. A 'Stable' Outlook has been assigned to all the ratings in view of the improvements in key ratios in H1 2012.

The Bank is continuing with its UAE- centric approach to business growth, and international expansion is now a medium-term objective and not an immediate focus. The sale of the Bank's stake in a major Malaysian banking group last year had helped to strengthen its capital adequacy ratio and improve earnings last year. Over the last few years the Bank had also reduced/written off its troubled investments in derivatives. ADCB's key profitability ratios have strengthened. The Bank's operating profit to average total assets ratio has improved due to the strong growth in net interest income on the back of widening margins. Margins continued to strengthen in H1 2012. Lower impairment charges on both loans and investments had contributed to the Bank's good results in 2011, and this continued to influence its earnings in the first half of 2012.

Asset quality ratios have improved over the last eighteen months or so. The improvement in the non-performing loans (NPLs) to gross loans ratio at end 2011 had been largely due to the removal of the Bank's exposure to Dubai World from its impaired loans list, following the successful restructuring of the loan and its adequate servicing. Moreover, other impaired loans also decreased, due to slower NPL accretions, compared to previous years. The NPL ratio rose marginally in H1 2012, but is still at a manageable level. The coverage ratio, which had strengthened in 2011, rose further at end-June 2012.

Like most of the other banks in the country, ADCB has also had to restructure a number of its corporate and retail loans. The good performance of these loans will be one of the factors determining the future health of the Bank's loan portfolio, and this will depend partly on the rate at which the health of the local economy improves. The Bank's capital provides additional cover and ADCB generates enough operating profit to provide fully for NPLs should it choose to do so.

Key liquidity ratios have improved, owing to aggressive marketing of deposit products, but they remain tight overall. The Bank's access to Abu Dhabi government funds is a mitigating factor, but a higher level of liquid assets would provide more comfort, particularly considering the fairly large amounts of medium-term liabilities maturing each year. ADCB's regularly raises medium/long-term resources from regional and international markets, but any dependence on such funding could be a point of vulnerability if market conditions change suddenly.

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 Dhs173bn at end-June 2012. The Bank has a moderately large network of branches spread across the emirates. ADCB offers a comprehensive range of retail and corporate banking products and services.