Abu Dhabi Commercial Bank - ADCB

Abu Dhabi Commercial Bank

Primary Credit Analyst: Timucin Engin, Dubai (971) 4-372-7150; timucin.engin@ Secondary Contact: Nadim Amatouri, Dubai (971) 4-372-7157; nadim.amatouri@

Table Of Contents

Major Rating Factors Outlook Rationale Related Criteria And Research

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Abu Dhabi Commercial Bank

SACP

bbb

+ Support

+3

Anchor

bbb-

Business Position

Adequate 0

GRE Support

+3

Capital and Earnings

Risk Position

Strong +1 Adequate 0

Group Support

0

Funding

Average

0

Sovereign

Support

0

Liquidity

Adequate

+ Additional Factors

0

Issuer Credit Rating

A/Stable/A-1

Major Rating Factors

Strengths:

? High systemic importance in the United Arab Emirates (UAE).

? Majority ownership by, and privileged relationship with, the government of Abu Dhabi.

? Solid domestic commercial position, translating into above-average operational efficiency.

? Strong capitalization and healthy earnings generation.

Weaknesses:

? High concentration risks on both sides of the balance sheet.

? Sizable lending exposure to the restructured Dubai World.

Outlook: Stable

The stable outlook on Abu Dhabi Commercial Bank (ADCB) reflects Standard & Poor's Ratings Services' expectations that the bank's business and financial profiles will remain largely unchanged over the next two years, despite our expectation of a gradual weakening in operating conditions in the UAE.

A positive rating action over the next 18?24 months is unlikely, as it would require more than one notch of improvement in ADCB's stand-alone credit profile (SACP). Although the bank's risk-adjusted capital (RAC) ratio before adjustments has improved over the past few years, we believe it would be very challenging for the bank to operate with a ratio comfortably above 15% over the long term.

Although we believe it unlikely, we would downgrade the bank if we were to witness a sharp and unexpected deterioration in its asset quality.

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Rationale

Our ratings on ADCB reflect its anchor of 'bbb-', as the bank's balance sheet is largely based in the UAE. We also factor in our view of ADCB's "adequate" business position, given the bank's well-established presence in the UAE and good retail franchise; "strong" capital and earnings, reflecting the bank's high capital and strong core earnings generation; "adequate" risk position, in line with declining nonperforming loans and healthy loan loss coverage; "average" funding; and "adequate" liquidity, as our criteria define these terms.

We assess ADCB's SACP at 'bbb'. We view ADCB as a government-related entity (GRE). We consider that there is a "high" likelihood that the government of the Emirate of Abu Dhabi would provide timely and sufficient extraordinary support to ADCB in the event of financial distress. Consequently, the long-term rating on the bank incorporates three notches of uplift from its SACP. In accordance with our criteria for rating GREs, our view of the "high" likelihood of extraordinary government support is based on our assessment of ADCB's "very strong" link with, and "important" role for, the Abu Dhabi government.

Anchor: 'bbb-' for banks operating in the UAE Our bank criteria use our Banking Industry Country Risk Assessment's economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating in the UAE is 'bbb-', reflecting an economic risk score of '5' and an industry risk score of '5'.

We view the UAE's economy and its high income levels as key strengths. On the other hand, the country's real estate prices have increased at a very fast pace over the past two years and we expect a degree of correction in 2015. In addition, although UAE banks' reported asset quality metrics are strong and have been improving over the past few years, many banks are structurally exposed to high single-name concentrations and there is a fair level of restructured exposures in the system. With regard to industry risk, we believe that the UAE's institutional framework poses an intermediate risk, reflecting the large number of key regulations the authorities have implemented over the past five years. Although UAE banks operate with healthy profitability metrics, a large number of key banks are controlled by either government-based institutions or ruling families, which we believe is a weakness in terms of competitive dynamics. UAE banks have improved their funding profile over the past few years as credit growth has lagged behind deposit growth. We still consider that funding conditions pose intermediate risk.

Table 1 Abu Dhabi Commercial Bank Key Figures

--Year ended Dec. 31--

(Mil. AED)

2015* 2014 2013 2012 2011

Adjusted assets

212,157 203,984 183,081 180,704 183,602

Customer loans (gross) 152,317 147,340 138,539 129,659 130,467

Adjusted common equity 22,525 20,062 18,807 18,773 17,242

Operating revenues

4,234 7,529 7,320 6,595 6,228

Operating expenses

1,360 2,537 2,328 2,038 2,032

Core earnings

2,544 4,227 3,650 2,842 1,778

*Data as of June 30. AED--UAE dirham.

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Business position: ADCB has a well-established franchise in the UAE We regard ADCB's business position as "adequate," which reflects ADCB's well-established presence in the UAE as the third-largest bank with total assets of around $58 billion on June 30, 2015. The Abu Dhabi government is ADCB's major shareholder, holding a 58.1% stake through the Abu Dhabi Investment Council.

Given ADCB's well-established franchise in the UAE and its strong relationship with the Abu Dhabi government, we expect the bank to protect its market position. The bank's revenues are largely driven by its loan book, itself largely domestic, and therefore directly tied to domestic conditions. The bank continues to maintain over a 10% market share in the UAE in terms of assets.

ADCB maintains a strong customer base thanks to its good distribution network and brand recognition in the UAE. It enjoys strong revenues in the UAE from its retail business.

In our view, ADCB has a high-quality management team. By focusing on improving deposit granularity, increasing the amount of low-cost current account deposits, and lengthening funding tenors, the bank has improved its funding profile substantially since 2008. As the bank sharply decelerated lending growth in the same period, its liquidity metrics improved. Although most UAE banks saw a contraction in their net interest margins over the past few years, in line with the low interest rate environment, ADCB was able to improve its margins thanks to the increase in its current accounts. In addition to its declining credit losses, the improving margins enabled the bank to enhance its returns.

Table 2 Abu Dhabi Commercial Bank Business Position

--Year ended Dec. 31--

(%) Total revenues from business line (mil. AED) Wholesalebanking/total revenues from business line Consumer banking/total revenues from business line Commercial and retail banking/total revenues from business line Other revenues/total revenues from business line Return on equity

2015* 4,234

32.1 42.9 74.9 25.1 22.4

2014 7,529

26.4 42.7 69.1 30.9 19.0

2013 7,320

26.3 41.7 68.0 32.0 16.6

2012 6,595

28.8 45.9 74.7 25.3 14.3

2011 7,542

40.8 38.4 79.2 20.8 20.9

*Data as of June 30. AED--UAE dirham.

Capital and earnings: ADCB operates with strong capitalization We regard ADCB's capital and earnings as "strong." This reflects the bank's high level of capital, its strong core earnings generation, and manageable dividend payout policy, which enables it to maintain its capitalization.

Over the past few years, ADCB's management has focused on improving the bank's overall funding and liquidity, while balance sheet growth took a back seat. Consequently, the bank grew its gross loans and assets by an average of 4.1% between 2009 and 2014. In the meantime, given the decline in its credit losses and the improvement in its net interest margins, the bank's return on average assets improved to 2.1% by year-end 2014, from a very low 0.23% at year-end 2010. As the bank maintained a relatively conservative dividend pay-out, its regulatory capital ratio improved to 21% by year-end 2014, from a 16.7% in 2010, while its Tier I ratio stood at 17%.

The bank's risk-adjusted capital (RAC) ratio before adjustments, based on 2014 financial statements, stood at an

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estimated 14.7%. We expect this ratio to remain comfortably between 14.0% and 14.5% over the next two years. Specifically, we expect:

? Around 6%?7% lending and balance sheet growth, given the bank's conservative stance toward new lending in a slowing economy.

? Largely flat net interest margins. The bank has improved its net interest margins over the past few years thanks to the increasing weight of current accounts in its deposit base. We do not foresee any additional gains on this front, as we expect a gradual deterioration in the UAE's overall liquidity conditions in the context of weaker oil prices.

? Declining credit losses as a major contributor to the bank's earnings growth over the past few years. We no longer expect major declines in the bank's credit losses as we expect the UAE's asset quality cycle to gradually weaken.

Table 3 Abu Dhabi Commercial Bank Capital And Earnings

--Year ended Dec. 31--

(%) Tier 1 capital ratio S&P RAC ratio before diversification S&P RAC ratio after diversification Adjusted common equity/total adjusted capital Net interest income/operating revenues Fee income/operating revenues Market-sensitive income/operating revenues Operating expenses/operating revenues Preprovision operating income/average assets Core earnings/average managed assets

2015* 16.1 N.M. N.M. 84.9 75.2 16.9 4.5 32.1 2.8 2.4

2014 17.0 14.7 11.5 83.4 74.2 16.5

5.7 33.7

2.6 2.2

2013 16.6 13.3 11.2 82.5 74.2 13.6

8.7 31.8

2.7 2.0

2012 17.5 10.8

9.3 82.4 79.0 14.3

4.2 30.9

2.5 1.6

*Data as of June 30. N.M.--Not meaningful.

Table 4 Abu Dhabi Commercial Bank Risk-Adjusted Capital Framework Data

2011 15.9 11.5

9.4 81.2 75.2 14.4

5.2 32.6

2.3 1.0

(AED 000s)

Exposure* Basel II RWA

Average Basel II RW (%)

Standard & Poor's RWA

Credit risk

Government and central

42,030,505

--

banks

Institutions

44,451,741

--

Corporate

81,079,115

--

Retail

27,204,949

--

Of which mortgage

5,404,096

--

Securitization

0

--

Other assets

3,549,272

--

Total credit risk

198,315,582

--

--

1,353,293

--

19,785,854

--

86,776,048

--

24,084,162

--

2,354,967

--

0

--

5,318,006

--

137,317,364

Market risk

Equity in the banking book?

727,448

--

Trading book market risk

--

--

--

7,223,545

--

4,497,075

Average Standard & Poor's RW (%)

3

45 107

89 44

0 150

69

993

--

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Table 4

Abu Dhabi Commercial Bank Risk-Adjusted Capital Framework Data (cont.)

Total market risk

--

--

--

11,720,620

--

Insurance risk

Total insurance risk

--

--

--

0

--

Operational risk

Total operational risk

--

0

--

14,117,621

--

(AED 000s)

Basel II RWA

Standard & Poor's % of Standard & Poor's

RWA

RWA

Diversification adjustments RWA before diversification

Total adjustments to RWA RWA after diversification

--

--

163,155,606

100

--

--

46,528,457

29

--

--

209,684,062

129

(AED 000s)

Tier 1 capital

Tier 1 ratio (%)

Total adjusted Standard & Poor's RAC

capital

ratio (%)

Capital ratio

Capital ratio before adjustments

Capital ratio after adjustments?

26,033,509

17.0

24,062,381

14.7

26,033,509

17.0

24,062,381

11.5

*Exposure at default. ?Securitization exposure includes the securitization tranches deducted from capital in the regulatory framework. ?Exposure and Standard & Poor's risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions. ?Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital.AED--United Arab Emirates Dirham. Sources: Company data as of Dec. 31, 2014, Standard & Poor's.

Risk position: ADCB's asset quality metrics have improved over the past few years We assess ADCB's risk position as "adequate," which reflects its low level of nonperforming loans (NPLs), and strong loan loss coverage. The bank had a NPL ratio of 3.0% on June 30, 2015, down from its peak of 5.8% in 2010. The bank's absolute level of NPLs has declined by about 39% since 2010, largely on the back of certain key recoveries. Similar to other banks in the country, ADCB benefited from the positive impact of the recovery in real estate and equity prices on its lending collateral positions, and the cash flow positions of certain borrowers. We now expect the credit cycle in the UAE to begin to gradually deteriorate on the back of lower oil prices and slower economic growth (see "UAE Banks Are Well-Positioned To Face A Tougher 2015," published Feb. 15, 2014, on RatingsDirect).

We expect the ratio of NPLs to gross loans for UAE banks to gradually increase, albeit remaining manageable, and we also expect ADCB's NPLs to gradually increase to above 4% over the next two years. However, the bank's loan loss coverage ratio stood at 142% on June 30, 2015, which should allow the bank to absorb mild credit shocks without having a meaningful effect on its earnings.

ADCB's reported loan loss coverage is well above 100%. However, because the bank has certain large restructured or renegotiated lending exposures, such as the restructured lending exposure to Dubai World, we believe that ADCB will continue to adopt a conservative provisioning policy and maintain high levels of coverage.

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Table 5 Abu Dhabi Commercial Bank Risk Position

--Year ended Dec. 31--

(%) Growth in customer loans Total diversification adjustment / S&P RWA before diversification Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans Net charge-offs/average customer loans Gross nonperforming assets/customer loans + other real estate owned Loan loss reserves/gross nonperforming assets

2015* 3.4

N.M. 9.4 0.4 0.5 3.0

141.7

2014 6.4

28.5 10.2

0.5 0.3 3.1 147.0

2013 6.8

18.3 9.7 1.0 0.5 4.1

120.4

2012 (0.6) 17.2

9.6 1.3 0.5 5.4 93.2

2011 1.1

22.1 10.7

1.8 1.7 4.6 94.8

*Data as of June 30. N.M.--Not meaningful.

Funding and liquidity: Well-established retail branch network and "adequate" liquidity We consider ADCB's funding "average." This reflects the bank's stable base of core customer deposits provided by its well-established retail branch network. Its privileged relationship with the Abu Dhabi authorities also means that it has large deposits from the government and related public entities. As a result of management's efforts, the bank has decelerated its lending since 2008 and focused on liability management. ADCB was able to improve its ratio of net loans to deposits to 112% by year-end 2014, from a peak of 135% in 2009. Although the bank's loan-to-deposit ratio still looks to us on the high side, we note that because of its access to long-term funding and strong capital, its stable funding ratio stood at a healthy 108% at year-end 2014. We expect the bank to continue have healthy access to long-term funding.

The bank operates with "adequate" liquidity, in our view. For instance, as of June 30, 2015, about 15% of its balance sheet is in cash and balances with banks, and an additional 11% is invested in securities. These securities are largely in the form of fixed-income instruments issued by regional governments and GREs, which the bank could use as collateral for funding through repurchase agreements.

Table 6 Abu Dhabi Commercial Bank Funding And Liquidity

--Year ended Dec. 31--

(%) Core deposits/funding base Customer loans (net)/customer deposits Long-term funding ratio Stable funding ratio Short-term wholesale funding/funding base Broad liquid assets/short-term wholesale funding (x) Net broad liquid assets/short-term customer deposits Short-term wholesale funding/total wholesale funding Narrow liquid assets/3-month wholesale funding (x) *Data as of June 30.

2015* 76.0

110.7 91.1

108.4 10.3 2.4 19.2 39.1 6.4

2014 75.5 111.5 90.2 108.1 11.3

2.2 18.1 42.3

3.1

2013 77.0 114.1 89.1 104.1 12.4

1.7 11.9 48.2

3.0

2012 75.4 112.8 89.4 106.5 12.0

2.0 16.6 43.9

4.1

2011 75.0 114.3 92.2 105.2

8.7 2.7 19.9 31.2 4.4

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External support: Three notches of government support The long-term rating on ADCB includes three notches of uplift to reflect our view of the bank as a GRE with a "high" likelihood of timely and sufficient extraordinary support from the government of Abu Dhabi if needed.

In accordance with our criteria for rating GREs, our view of the "high" likelihood of extraordinary government support is based on our assessment of ADCB's:

? "Very strong" link with the government of Abu Dhabi, because of its control and majority ownership by Abu Dhabi, and the latter's record of extraordinary support to ADCB. The Abu Dhabi government holds a 58.1% stake in ADCB through Abu Dhabi Investment Council and therefore has a significant interest and business relationship with the bank. The majority of the bank's directors are appointed by the Abu Dhabi government. In 2009, the government injected UAE dirham (AED) 4 billion (about $1.1 billion) in Tier I capital to the bank during a period of market stress.

? "Important" role for the Abu Dhabi government. ADCB is the second-largest bank in Abu Dhabi and has a strong deposit and loan market share in Abu Dhabi's banking market. The bank also provides funds to certain Abu Dhabi-based GREs and sectors important in the overall business activities in Abu Dhabi.

Related Criteria And Research

Related Criteria ? Bank Rating Methodology And Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015 ? Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015 ? Group Rating Methodology, Nov. 19, 2013 ? Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012 ? Banks: Rating Methodology And Assumptions, Nov. 9, 2011 ? Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 ? Bank Capital Methodology And Assumptions, Dec. 6, 2010

Related Research ? Banking Industry Country Risk Assessment: United Arab Emirates, May 5, 2015 ? UAE Banks Are Well-Positioned To Face A Tougher 2015, Feb. 15, 2015 ? Credit FAQ: How The UAE's Lending Caps Affect Domestic Banks, Government Entities, And The Capital Markets,

Jan. 13, 2014 ? How The United Arab Emirates' Caps On Mortgage Loans Will Affect Banks And Property Developers, Nov. 18,

2013

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