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بنك أبوظبي التجاري
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3Q2009 Results: Honesty is Best But Little to Cheer
• ADCB Reported Dismal 3Q2009 Headline Net Income Down 88% Q-o-Q: ADCB reported headline net income of AED35 million, down 92% Y-o-Y, 88% Q-o-Q and 91% below our expectations. Attributable income, which excludes interest on the mandatory convertible bond but includes that on the Tier 1 debt, was largely the same. Comprehensive income was better, but only due to movements in the fair value of available for sale investments. The main sources of weakness were non-interest income, which was 30% below expectations and provisioning, which was 55% ahead of expectations.
• Interest Income as Expected: Deposit growth was weak, up 1% Q-o-Q against our slightly more positive forecasts, which were based on an expectation of growth momentum coming out of 2Q2009. However, for the moment it looks like deposit growth did not outlive an aggressive pricing push in 2Q2009. Meanwhile loan growth was broadly as expected, rising 2% Q-o-Q. Spreads were also unsurprising, slipping 20 basis points as the positive effect of NPL recovery diminished and the EIBOR-LIBOR spread reduced. Overall, total net interest income was down 3% Q-o-Q, but 1% ahead of our forecast.
• Non-Interest Income Hit by Impairments: After property and financial impairments in 2Q2009, we expected a sharp recovery in 3Q2009. Although recovering 83% Q-o-Q, non-interest income failed to meet our expectations. This was partly due to continued impairments, particularly of the CDS portfolio, which - at AED2.1 billion - is still only 32% below its peak nominal exposure. In addition, the structured finance portfolio remains significant at a fair value of AED397 million after including write-downs. Indices in both markets have been improving since July, so it is perhaps disappointing to see further impairments. Of more minor consequence has been a slight miss on fees and commissions which was likely impacted by weaker growth and lower trade letters.
• Provisioning Dominates Deductions: Cost control was good, down 3% Q-o-Q, with falling staff costs more significant than rising non-staff costs. However, of greater interest has been the 77% Q-o-Q increase in loan loss provisioning resulting in a provisioning margin of 60%, far higher than its competitors. In addition the NPL number, with Saad and Algosaibi’s help, has now jumped to 4.19%, excluding AED892 million of transfers and write-offs YTD. The coverage ratio has decreased to 52%, which is poor even allowing for the Saudi exposures.
• Reducing ST Recommendation to Neutral: we should be nearing the bottom for structured products and CDS exposures, although we have said that before. In addition, provisioning is dreadful, despite the low coverage ratio, implying many difficult quarters ahead. Finally, the possibility of a write down of associates lingers, given RHB’s discount to acquisition price. In the long term, we believe this is priced in, but must accept that we were too quick to move the stock onto a ST accumulate rating. We set a ST Neutral, LT Buy rating, and will assess our estimated LTFV shortly.
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