A change in Fitch's view of the willingness or ability of the UAE authorities to support ADIB would be negative for its IDRs and its Support Rating Floor.
However, Fitch notes recent supportive actions for the domestic banking sector including pre-emptive capital injections.
In addition, Fitch believes that support would be forthcoming from the Abu Dhabi government ('AA'/Stable/'F1+'), which has injected hybrid capital into the leading Abu Dhabi banks. Members of the Abu Dhabi ruling family hold a significant amount of ADIB's shares in a private capacity. Given the high level of ADIB's IDRs there is limited upside potential.
Rating drivers and sensetivities - VR
ADIB's VR is driven by its robust pre-impairment operating profit, sound balance sheet liquidity and its growing franchise in the UAE. The VR is constrained by ADIB's weak asset quality and exposure to problem financing.
Fitch has some concerns relating to ADIB's below average Fitch Core Capital relative to peers although Fitch recognises the improved regulatory Tier 1 capital ratio.
ADIB's asset quality continues to suffer from its exposure to legacy financing. Impaired financing/ gross financing remains elevated at 7.6% at end-9M12 but has come down from 8.7% at end-2011. Reserves for impaired financing improved to 80% at end-9M12 but the unreserved proportion of impaired loans/ common equity remained at 11.8%. Overall asset quality issues present some challenges for ADIB and exposure to a seasoning financing book may continue to present challenges in 2013, albeit manageable ones in Fitch's opinion.
ADIB increased its CBUAE regulatory Tier 1 ratio to 19.4% with a USD1bn Tier 1 hybrid issue in November 2012 which Fitch views as positive. Fitch assigned 50% equity credit to the issue resulting in a Fitch Eligible Capital ratio of 16.6% compared to 13.8% prior to the issue, assuming stable risk weighted assets. ADIB's Fitch Core Capital ratio of 10.7% at end-9M12 remains below domestic and regional peers but does not include the added Dhs3,672m cushion from the new hybrid Tier 1 issue or the existing Dhs2,000m hybrid Tier 1 capital injected by the Abu Dhabi Government, both of which provide some extra comfort.
ADIB's robust pre-impairment operating profit should provide sufficient capacity to absorb continuing impairment charges as well as moderate shocks from financing concentrations. Impairment charges continued to hurt profitability in 9M12 and consumed 39% of pre-impairment operating profit. ADIB's net income and margins compare well with peers. The bank's cost/ income ratio is likely to remain at its current level as ADIB continues to invest in its retail operations.
ADIB's liquidity is healthy and compares well with peers. ADIB's large stock of liquid assets provides the bank with sound liquidity.
ADIB is well funded by customer deposits and its financing/deposits ratio remains healthy at 89%. However the vast majority of customer deposits are short term which results in a large asset and liability maturity mismatch. ADIB increased its long-term funding in November 2010 and November 2011 through issuing two five-year sukuk totalling Dhs4.6bn which help its long-term mismatch somewhat.
A significant and sustained improvement in asset quality as well as maintaining its recently increased capital ratios could lead to an improvement in ADIB's VR although Fitch recognises the challenges in the UAEoperating environment and continuing asset quality problems. Pressure on ADIB's VR could come from a further deterioration in asset quality, profitability or a significant deterioration in capital ratios.
The rating actions are as follows:
Long-Term IDR affirmed at 'A+' with a Stable Outlook.
Short-Term IDR affirmed at 'F1'.
Viability Rating affirmed at 'bb'.
Support Rating affirmed at '1' .
Support Rating Floor affirmed at 'A+'.
ADIB Sukuk Company Ltd.
Trust certificate issuance programme affirmed at 'A+' / 'F1'.
Senior unsecured certificates affirmed at 'A+'.
(Ame Info.Com / 18 Nov 2012)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com