Abu Dhabi Islamic Bank net profit for 2012 increases 4.0% to Dhs1.201bn after provisions of Dhs802m

Despite the continued challenging market conditions and an increasing level of regulatory uncertainty, the performance of the main banking business remained strong: the Bank welcomed its 500,000th customer in Q4 2012, and its net profit grew by 5.0% to Dhs1,495.8m from Dhs1,425.0m in 2011.

The business highlights for 2012 were:

• A primary focus on capital preservation and as such: the Bank curtailed growth in risk weighted assets thereby restricting customer financing growth to 4.8% year-on-year; and raised $1bn in new tier 1 capital in November 2012.

• Given that ADIB's core customer base is UAE Nationals, who have been the focus of extensive regulatory restrictions, the Bank decided during 2012 to expand its operations to include expatriates. The Retail Banking business, underpinned by ADIB's number 1 rating in customer service for the second consecutive year, therefore saw the customer base increase by 11.9% year-on-year to 506,689 customers.

• ADIB opened its 75th Retail branch in the UAE and installed its 549th ATM during the year, giving the Bank the third largest Retail network in the UAE. It remains on track to have 80 branches in early 2013.

• ADIB operations in the United Kingdom, Iraq and the Kingdom of Saudi Arabia continued to gain momentum as did the plans to establish new branches in Sudan, which was launched in December 2012, and Qatar.

• The deposit concentration was further reduced as current and savings account balances reached Dhs32.1bn at the end of 2012, a 25.7% year-on-year increase and significantly above the total market growth in deposits.

• The continuation of the conservative policy of non-performing asset recognition and remedial management, including the taking of an additional Dhs609.0m in credit provisions to ensure a healthy pre-collateral non-performing asset coverage ratio of 69.6% of the impaired portfolio, net of write-offs.

• The Group continued the process of bringing the legacy investment and development portfolio held by its real estate subsidiary, Burooj Properties, to account and made further impairments of Dhs190.0m in this regard.

A best practice approach to risk management continues to underpin the Bank's strategy

ADIB's management continued its rigorous approach to managing the non-performing portfolio. As a result, the Bank took an additional Dhs161.1m in credit provisions in Q4 2012, thereby increasing net credit provisions to Dhs3,098m, after Dhs516.8m in write-offs in 2012 vs. Dhs11.5m in 2011, with specific credit provisions at Dhs2,282m and collective provisions at Dhs816m. Total net credit provisions now amount to 5.7% of gross customer financing assets and represent a pre-collateral non-performing coverage ratio of 69.6% of the impaired portfolio, net of the write-offs. The Bank's collective provisions now represent 1.68% of total customer risk weighted assets, well ahead of the Central Bank's requirement of 1.5% by the end of 2014.

In addition to the credit portfolio, a further Dhs190.0m in impairments was taken against the real estate subsidiary's legacy development and investment portfolio, bringing total impairments related to this business to Dhs546.3m over the past three years as it tracked the downturn in the real estate market.

As a result, the Group net profit increased by a conservative 4.0% in 2012 to reach Dhs1,201.2m vs. 2011, and represents a 148.8% compounded net profit growth rate over the past three years.

Liquidity

The continued focus on deepening customer relationships by the Retail Banking, Private Banking and Wholesale Banking franchises, backed by a strong Treasury, meant that ADIB maintained its position as one of the most liquid banks in the UAE. At the end of 2012, customer deposits stood at Dhs61.3bn, Central Bank placements at Dhs4.9bn and the net interbank position at Dhs10.8bn. A continued focus on reducing the cost of funds and deposit concentration saw current and savings accounts grow by 25.7% year-on-year to reach Dhs32.1bn, while overall deposits increased 11.2% to Dhs61.3bn during the same period.

On the asset side, net customer financing reached a new high of Dhs51.2bn (Dhs48.8bn as at 31 December 2011) and the Bank ended the quarter with a customer financing to deposits ratio of 83.5% and an advances to stable funds ratio of 75.7%, which is significantly better than the regulatory threshold of 100%. Furthermore, it is noteworthy that ADIB's Quick Asset to Total Asset Ratio was 29.0% at year end.

Capital strength

ADIB adopted a multi-pronged approach to building the necessary capital to boost its Tier 1 ratio above 15%, exclusive of any stress scenario buffers, and thereby enabling the Bank to resume its growth trajectory in 2013. One aspect of this was to focus on capital preservation and optimization for most of 2012, and as a result customer asset growth was restricted to 4.8% year-on-year. A parallel thrust was a capital issue, with ADIB becoming the first bank in the region and the first Islamic Bank world-wide to complete a public Hybrid Tier 1 Capital issue, drawing orders of more than $15bn. The success of the various capital initiatives, including the innovative Tier 1 issue, saw the Bank's capital adequacy ratio at 21.42% under Basel II principles and its Basel II Tier 1 capital ratio at 18.43% by the end of 2012. ADIB's capital ratios not only continue to be above the Central Bank of the UAE's prescribed minimums of 12% for Capital Adequacy and 8% for Tier 1, but now compare favorably with the Bank's peers.

Cost management

The single digit growth environment in the UAE has not deterred ADIB from continuing to invest appropriately in its Retail Banking business to reach optimal scale and expand its coverage to new market segments. In 2012, investments were made in: distribution (with six new branches); alternative channels (89 new ATMs); and also building ADIB's regional and international capabilities. Behind this investment is a clear strategy to ensure that ADIB consolidates its position as one of the top three retail banks in the UAE while continuing to work towards the Group's long-term vision of becoming a top tier global Islamic Bank. Nonetheless, despite the expansion in the Retail network, there has been a concurrent focus on efficiency and as a result, the Group's operating expenses increased by a below-market average of 8.1% year-on-year. The Group cost to income ratio was 43.8% for FYR 2012 (42.3% - FYR 2011), while the Bank's cost to income ratio was 41.1% for FYR 2012 (39.9% - FYR 2011).

Human resources

Despite the growth of its local and international operations the Bank's headcount decreased by 118 to 1,637 during the period under review, as a result of a combined emphasis on efficiency and performance. ADIB also remains one of the leading banks in regard to Emiratisation as at the end of 2012 the Bank employed 719 UAE Nationals.

Management comment

On behalf of the Board of Directors and the management team Tirad Al Mahmoud, CEO of ADIB, said: "The UAE banking environment remained challenging during the period, in particular the slow growth in our home market as evidenced by the 3.4% growth in loans and advances across the UAE banking sector for the first 11 months of 2012. In general we have observed banks continuing to seek new ways to grow market share, including increasingly aggressive cross-border lending into the GCC and Asia.

While we are encouraged by the recent announcements of an Abu Dhabi Government-led economic recovery plan and the upturn in certain areas of Dubai's real estate and tourism, our customers are still feeling the effects of the prolonged downturn and therefore growth in the banking sector as a whole remains moderate. ADIB's strong historical focus on serving the UAE national segment has, in particular, been under regulatory deflationary pressure and as a result has impacted our Retail growth volumes.

Strategy focus and awards

"ADIB's strategy remains unchanged as we:

1. Maintained our position as the leading bank for customer service excellence in 2012, being rated number 1 in the UAE for the second consecutive year;

2. Expanded our Retail Banking business to include a greater emphasis on expatriates in addition to our market-leading UAE National customer franchise. In support of the expanded customer segment approach. 2012 saw renewed focus on increasing our range of distribution channels, expanding our branch network and growing our range of retail products and solutions; and

3. Expand our Wholesale Banking offering by acquiring new relationships across a greater range of customer segments, including the middle markets.

"This continued focus on our customer-centric strategy in 2012, combined with our strong capital and liquidity position, meant that ADIB maintained its ranking as a top-tier UAE bank and remains on track to becoming a truly global Islamic bank.

"In laying the foundations of our next growth phase we also established a new landmark in 2012 by recapitalizing the Bank through a market redefining and multiple-award winning Hybrid Tier 1 Capital issue. The $15bn order book from investors around the world not only recognized the innovation and simplicity of the instrument itself, but was a clear acknowledgment of the solidity and prospects of ADIB - and of the UAE banking sector as a whole. We are proud to have led the way in opening new avenues for banks, both Islamic and conventional, to raise capital in the future.

"Turning to customer deposits, the Bank further evidenced its strong liquidity capabilities by improving the advances to stable funds ratio to 75.7% at 31 December 2012. Most notably, our focus on building current and saving accounts saw their combined balances grow by 25.7% over the course of the year. The result is that not only does ADIB meet both the new Basel III based liquidity ratios, but additionally, deposit concentration risk continues to decline.

"With regards to provisioning, we remained prudent in classifying our impaired portfolio and taking provisions - and suspending the accrual of profit - in line with our 90 days past due and conservative collateral recognition approach. As a result, we added a further Dhs556.2m in individual provisions during 2012, vs. Dhs558.7m during 2011, while maintaining our collective provisions well above the Central Bank guidelines of 1.5%. Since 2007, total credit provisions and impairments have increased to Dhs3,736m, net of write-offs, from Dhs404m.

"In addition to our best practice approach to the recognition of problem credits, ongoing work by the two remedial management units established in 2009 is bearing fruit, with a 5.3% decrease in the total non-performing accounts in 2012. Despite this, however, we retain the view that it is too early to call a meaningful improvement in the credit environment. Furthermore, while we will continue to assist customers in the sustainable restructuring of their financing, we reiterate that those who resist ADIB's efforts to work constructively with them to find ways of honoring their credit obligations will face all available remedies on our part, since it is our duty also to protect both our depositors' and shareholders' rights.

Other ADIB Group companies:

ADIB Securities
Commenting on the performance of other Group companies besides the core banking business, "Despite the improvement in the local equity market indices, the continued lack of liquidity in the equity markets remains a major concern. It is therefore particularly pleasing that ADIB Securities, our stock-brokerage subsidiary, continued to perform, with a net profit of Dhs5.7m in 2012, up 134.4% from the previous year. ADIB Securities has a market share of 8.8% and remains one of the top three brokers in the UAE. It is an integral part of our wealth management proposition, which is focused on enhancing savings, investment and related wealth diversification portfolios of our customers."

Burooj Properties
With regard to Burooj, the Group's real estate subsidiary, "We continue to bring Burooj's legacy development and investment portfolio to account. All properties and commitments in Burooj's portfolio are regularly subjected to independent review in order to determine the real value of each property with reference to the recent market conditions, existing prices and estimates of the net present value of future cash flows. The resultant value is compared to the carrying value of the properties in order to determine the impairments. Our approach to valuing Burooj's portfolio, first adopted in late 2010, resulted in a further Dhs190.0m in impairments in 2012 and a consequent loss of Dhs305.2m versus the loss of Dhs274.1m in 2011. Despite some welcome signs of recovery in the sector, these have been isolated and the real estate market in general remains under pressure. Therefore, we believe Burooj will incur further losses in 2013."

Outlook for 2013
Providing guidance on the Bank's direction for 2013, "Our outlook is moderately conservative. We remain concerned about the impact of the slow pace of the global economic recovery on our customers. Therefore, we expect 2013 to be yet another year of moderate asset growth coupled with stiff competition between banks, which will place pressure on credit margins. As far as ADIB is concerned, until we see clear evidence of a sustainable recovery we will continue to take prudent measures as necessary in regard to both the Bank and Burooj portfolios in 2013. Notwithstanding, we will continue to invest across all segments and business units for long-term growth potential and market leadership."

Dividend
The Board of Directors is recommending a cash dividend per share of Dhs0.2540, equivalent to 50% of 2012 net profit, to the shareholders at the Annual General Assembly.

Approvals
These results, including the cash dividend, are subject to approval by the Central Bank of the UAE and the shareholders at the Annual General Assembly.

Gratitude
The Board of Directors, executive management and members of ADIB staff wish to extend their sincere appreciation and gratitude to His Highness Sheikh Khalifa Bin Zayed Al Nahyan, the President of the UAE and Ruler of Abu Dhabi, to His Highness Sheikh Mohammed Bin Zayed Al Nahyan, Abu Dhabi Crown Prince and Deputy Supreme Commander of the UAE Armed Forces, to the UAE Central Bank and to the Emirates Securities and Commodities Authority, our shareholders and our clients for their continued trust in and support of ADIB.