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Abu Dhabi Commercial Bank
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Impairments drag profits below expectations
• Third quarter earnings of AED34.8 million saw a steep drop of 88.2% QoQ and 97.1% YoY due to the elevation of loan loss charges.
• Core operations remain stable with loan book being driven by retail and corporate mandates. However, we trim down our earnings estimates by 21.7% for FY09e on the back of higher provision charges.
• We maintain our “Hold” recommendation on the stock while slightly increasing the target price (TP) to AED2.50 from AED2.30.
ADCB's net income dropped to AED34.8 million, down 88.2% QoQ, 97.1% YoY and 84.9% below our estimate of AED230.7 million. Higher than expected loan loss impairment charges weighed heavily on the bank's profits, off-setting the strong core operations. This was primarily due to exposure to the Saad and Al Gosaibi groups amounting to AED2.2 billion, making up 1.88% of 9M09's loans. It is worth noting that the bank's balance sheet specific provisioning rose by 71% QoQ, accounting for the Saudi exposure as corresponding to the 3Q09 LLP charges excluding recoveries, with general provisioning remaining stable.
How far would the Saudi provisions continue?
Assuming that total LLP allowance for 2Q09 and 3Q09 for the Saudi exposure amount to AED1.14 billion, (as per the bank's disclosure of AED430 million and AED708 million), the bank charged provisions for about 50.9% of the total exposure. This leaves about AED1.0 billion needing provisioning over the next 5 quarters, until the end of 2010 as per CBUAE directives. Assuming equal charge offs of about AED200 million each quarter, we believe impairment allowances geared towards the Saudi conglomerates will end. This excludes any extra defaults arising for the retail, corporate or real estate book, which concerns us. As a result, we raised our FY09e and FY10 LLP charge estimates by 52.2% and 62.8% respectively, to AED1.6 billion and AED1.3 billion to also account for the bank's retail and SME, real estate and corporate defaults.
Non-performing to total loans (NPL ratio) rose by 33 bps QoQ to 4.2%. Excluding exposures, NPL ratio drops to 2.6%. In light of this, we raise our FY09e and FY10e NPL ratio to 4.5% and 3.0% respectively. Consequently, the bank's coverage ratio dropped to about 52% versus 105% in FY08, posing risk of higher I/S charge offs. However, we expect the ratio to rebound to 100% by 2010 due to balance sheet provision build up as well as the one-off NPL figure of the Saudi exposure. It is important to mention that during the quarter, the bank also charged AED102 million of investment impairments on its investment portfolio geared in CDOs and SIVs with a value of AED1.7 billion.
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