Global Arab Network | Abu Dhabi Commercial Bank Placed On Negative CreditWatch On The Dubai World Exposure

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Abu Dhabi Commercial Bank Placed On Negative CreditWatch On The Dubai World Exposure

Global Arab Network - - Mohamed Tamer

Monday, 30 November 2009 15:17

Standard & Poor's Ratings Services said today that it has placed on CreditWatch with negative implications its 'A/A-1' long- and short-term counterparty credit ratings on Abu Dhabi Commercial Bank (ADCB).

The CreditWatch placement follows the Nov. 25, 2009, announcement by the government of Dubai of a restructuring of Dubai World (not rated), including a requested standstill on all financings to the company, including its subsidiary Nakheel (not rated).

"The rating action reflects uncertainty about how the standstill agreement would affect ADCB's large exposure to Dubai World," said Standard & Poor's credit analyst Emmanuel Volland.

"This comes at a time when the deteriorated economic environment, including the fall of real estate prices, has already started to weigh on the bank's financial profile," added Mr. Volland.

The banks' asset quality indicators have declined sharply over the past 12 months. The ratio of nonperforming loans to total loans stood at 4.2% on Sept. 30, 2009. Coverage by provisions appears low at 52.3% on the same date. Standard & Poor's expects asset quality to continue to deteriorate in the coming quarters. This trend could be exacerbated by the direct and indirect impact of a debt restructuring by Dubai World, which represents a major pillar of the Dubai economy. Standard & Poor's expects ADCB's asset quality indicators to worsen also because of the bank's exposures to Ahmad Hamad Al Gossaibi Brothers (Algosaibi) and Saad Group, which defaulted on their obligations earlier in 2009. The bank holds about $360 million in exposures to Saad Group and about $244 million to Algosaibi.

The bank's capitalization was boosted earlier this year by the issuance of AED4.0 billion of Tier 1 notes and the conversion of government deposits into Tier 2 capital. Adjusted total equity as a percentage of adjusted assets stood at 8.3% on Sept. 30, 2009. At the same time, the regulatory capital adequacy ratio increased almost 8 percentage points to 19.4%. However, Standard & Poor's views the current level of capitalization as barely adequate due to the bank's large single-name concentration risk and potential for marked asset quality deterioration.

ADCB is the third-largest commercial bank in the United Arab Emirates, with total assets of $43.2 billion on Sept. 30, 2009. The Abu Dhabi government has a 64.8% stake in ADCB through Abu Dhabi Investment Council (ADIC, not rated). The ratings on ADCB are higher than its stand-alone credit profile (SACP) and factor in Standard & Poor's expectation of some exceptional government support in case of need due to its high systemic importance and ownership structure. The long-term rating on ADCB is therefore two notches higher than its SACP.

Standard & Poor's plans to resolve the CreditWatch placement on ADCB after Standard & Poor's reviews the full details of the restructuring of Dubai World and Nakheel and weigh its impact on the bank. Standard & Poor's expects to complete the review within the next three months.

"We do not anticipate lowering the ratings on the bank by more than two notches, assuming that the government would extend significant support if needed," said Mr. Volland.

Global Arab Network

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