ADCB to see drop in net income: Industry report

DUBAI — Forecasts for Abu Dhabi Commercial Bank (ADCB) point to a likely drop in net income of 6.9 per cent for FY07, to Dh1.9 billion from Dh2.1 billion in FY06, according to a research report by HC Securities Brokerage.

By Lucia Dore (Assistant Editor, Business)

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Published: Fri 20 Jul 2007, 9:51 AM

Last updated: Sat 4 Apr 2015, 10:21 PM

The decline is expected because of an estimated 33 per cent year-on-year fall in the bank's fees and commissions to Dh756.4 million — a result of the absence of the IPO-related income that amounted to Dh547.2 million in FY06, the report says. The bank's cost to income ratio is expected to rise from 24.3 per cent to 30.7 per cent with an expected increase in operating expenses of 27.2 per cent year on year due to rising staff costs.

Falling fees and commissions are also slated to overshadow a strong expected net interest income growth of 21.7 per cent year on year. Interest spreads are also expected to decline over the coming two years, falling 12bps to 2.07 per cent in FY07.

During the first half of 07, net income declined by 17.8 per cent year on year to Dh945.8 million. This was despite solid growth in net interest income and a 76.7 per cent year on year drop in provisioning charges.

The securities brokerage also believes the Abu-Dhabi based bank will not be able to grow its loan portfolio this year. It states: "Given the status quo, ADCB will not be able to grow its loan portfolio at its historical levels as it is operating at a loans-to-deposits above 100 per cent, and at an advances-to-stable resources near the maximum of 100 per cent mandated by the Central Bank."

Moreover, because the bank has a high exposure to loans on its balance sheet, any substantial growth in loans would hurt the bank's capital adequacy, "which currently fares below peers," HC notes. "ADCB had a capital adequacy of 14.7 per cent in FY06, below the sector's 16.7 per cent. Accordingly, we forecast ADCB's loans to grow at a compounded annual growth rate (CAGR) of 17 per cent over our forecast horizon," the securities brokerage says.

It also expects the bank to reduce its funding gap by growing its deposits base and raising alternative sources of funds such as euro medium term notes (EMTN). Deposits and borrowings are forecast to grow at CAGRs of 22.1 per cent and 12.8 per cent respectively for the remainder of 2007.

HC Securities also compares the performance of ADCB with the seven other UAE listed commercial banks. In terms of loans ADCB booked a market share of 11,8 per cent in FY06, ahead of National Bank of Abu Dhabi (NBAD). Only Emirates Bank International (EBI) dominates ADCB with a loans' market share of 12.4 per cent. It also ranks fourth in terms of deposits with a market share of 8.3 per cent and third in terms of assets with a market share of 9.4 per cent. The merged EBI and national Bank of Dubai (NBD) entity would lead with a market share of 20.5 per cent in terms of loans, 18.3 per cent in terms of deposits and 19.3 per cent in terms of assets.

Commenting on trends in the banking industry more generally HC Securities notes the increase in the loans-to-deposits ratio in the sector, rising from 96.8 per cent in 2003 to 102.8 per cent currently. "The slower deposits growth is partially due to the low deposit rates in the UAE, which make then a non-lucrative savings instrument," it states. Deposit interest rates reached a maximum of 5.95 per cent in 2006.

The funding gap in the sector is also expected to encourage banks to look for alternative funding sources through the issuance of euro commercial paper (ECP) and euro medium term notes, syndicated loans and convertible debt. "As long as deposit growth falls short of loans demand, we expect this trend to continue," the report states.

It also says that the asset quality of most UAE banks is high, "and accordingly, provisioning levels are particularly low." Provisions as a percentage of total sector loans declined from 14.7 per cent in 2003 to 6.4 per cent in 2006. But the pertinent question, the research report notes, is whether such low provisioning levels will be sustained given banks' high exposure to the real estate sector and stock market in their loan portfolios, especially if there is a crash.

And even though mortgage loans have increased 80 per cent year on year in 2006, up from 63 per cent in 2005, they comprise only 6 per cent of total sector loans, the analyst notes. Mortgage loans stood at Dh31.5 billion as at 31 December 2006. The reason for the low ratio is attributed to the lack of an efficient legal system.

HC Securities also believes that UAE banks are well prepared to implement the Basel II Accord. "In the short-term, we believe that UAE banks are well-prepared to implement Basel II given that they are over-capitalised with an aggregate capital adequacy of 16.7 per cent in 2006,' the report states.

And given that that the standardised approach is not significantly different from the Basel I Capital Adequacy Framework, banks are not expected to find compliance too difficult.

Banks are expected to comply with at least the standardised approach for credit risk by the end of this year and to comply with the internal ratings based approach by 2011.

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