Abu Dhabi Commercial Bank: Financial services

THE COMPANY: Abu Dhabi Commercial Bank (ADCB) was formed in 1985 when Khalij Commercial Bank merged with Emirates Commercial Bank and Federal Commercial Bank, and changed its name. ADCB’s principal activities include: wholesale banking, consumer banking, treasury and investment-related services. Additionally, the bank offers services to its customers including financing facility, cash management services, trade services, debit cards, credit cards, deposit accounts services, treasury services and investment-related services. Moreover, it operates through its network of 48 full service branches in the UAE, its two branches in India and its one branch in the UK.

The government of Abu Dhabi through the Abu Dhabi Investment Council and Tasameem Real Estate Company holds 64.05% of ADCB shares; the remainder is held by other institutions and individuals. ADCB is one of the largest banks in the UAE in terms of shareholder funds and market capitalisation.

FINANCIAL PERFORMANCE: While the reported shareholder profits of ADCB in 2012 showed a decline of 45% year-on-year (y-o-y), its recurring profits ( exclusive of the one-time gain from the sale of its stake in Malaysian lender RHB) showed a different story by rising strongly to Dh736m ($200.33m) from 2Q11’s Dh19m ($5.17m). The improvement in recurring profits is attributable to the accelerating growth in traditional lending income, increasingly tighter operating expenses and lower provisions.

After four succeeding quarters that saw y-o-y income from conventional banking decline, ADCB recorded a positive growth of 10% in its lending income in 2Q12. It is noteworthy that the improvements in lending income came significantly from increased interest income to customers as the latter grew by 10% y-o-y and 8% quarter-on-quarter. If this development continues in successive quarters, then this could be the beginning of another growth trajectory for ADCB’s traditional banking business. Net interest income from lending advanced by almost 40% y-o-y while operating expenses fell more than 4%. Meanwhile, provisions for non-performing assets dropped by more than 47% in 2Q12 from their level in 2Q11. Although ADCB’s reported profits of Dh733m ($100.51m) declined by 45% y-o-y, the result stayed above Al Ramz’s estimate of Dh616m ($167.67m) as well as the overall consensus estimate of Dh661m ($179.91m).

Despite the still struggling growth in credit volume and the evolving rules pertaining to banking operations, ADCB seems to be handling challenges admirably. In the last quarter, ADCB has been able to limit the decline in overall net loans, and at the same time improve retail loans as well as contractor finance and loans for property investments, which all three combined accounted for more than 25% of the total.

Furthermore, ADCB appears to be moving towards the long-term benefits of the central bank’s structural changes, as fee-based income has recovered after falling in the previous three quarters, and the non-performing loans ratio has dropped to 4.7% in June 2012 from 5.5% in March 2012.

If there is one thing that UAE banks, including ADCB, may boast of in the international banking community, it is that they are highly capitalised, with the sector’s overall average capital adequacy ratio (CAR) at 23% as of end-2011, which is more than twice the 8% prescribed by the Basel Committee. ADCB’s CAR of 22.34% in June 2012, while lower than the 23.19% recorded in March 2012, remains ahead of the 12% floor set by the central bank as well as these floors set by international banking authorities.

SHARE PRICE PERFORMANCE: ADCB’s share price is up 18% year-to-date. It has hit a year-high of Dh3.45 ($0.94) a share following the strong quarterly results as of June 30, 2012. Medium-term support level is seen at Dh2.89 ($0.79) a share, followed by Dh2.56 ($0.70). Resistance over the medium term is seen at Dh3.45 ($0.94) a share. Note that these sentimental barriers were spotted as of September 30, 2012 and were based on a closing price of Dh3.26 ($0.89) a share.