Moody’s affirms ADIB’s A2 ratings

Agency upgrades BCA to ba1 from ba2

LONDON, April 20, (RTRS): Moody’s Investors Service has today affirmed Abu Dhabi Islamic Bank’s (ADIB) A2/Prime-1 longand short-term domestic and foreign currency issuer ratings. At the same time, Moody’s upgraded the bank’s standalone baseline credit assessment (BCA) to ba1 from ba2. The outlook on ADIB’s ratings remains negative, in line with the outlook of the sovereign rating of the Government of United Arab Emirates (UAE, Aa2, negative) where the bank primarily operates.

Ratings rationale Affirmation of issuer ratings Moody’s affirmation of ADIB’s A2/Prime-1 issuer ratings reflects Moody’s expectation of a very high probability of government support in case of need. This reflects the rating agency’s view on (1) ADIB’s strong relationship with the Abu Dhabi government; (2) the bank’s importance within the UAE banking system and (3) the UAE’s strong track record of supporting banks in times of stress. Moody’s assumption of systemic support results in a five-notch uplift of the bank’s issuer rating from its revised BCA of ba1.

Upgrade of BCA The upgrade of the BCA to ba1 from ba2 reflects Moody’s view that ADIB has developed a stronger funding structure supported by a granular, low cost and stable deposit base, which the rating agency expects will be resilient to the lowoil price environment and tightened liquidity in the UAE banking system. The upgrade also reflects Moody’s expectation that ADIB will sustain the improvements in asset quality and provision coverage despite slowing economic conditions in the UAE.

Improving funding structure Despite its fast loan growth in recent years (9 percent CAGR between 2012 and 2016), ADIB has strengthened its funding structure, with its loan-to-deposit ratio falling to 79 percent as of December 2016 from 89 percent in 2011. This compares well with the UAE banking system average of 91 percent, owing to a greater increase in granular retail deposits (CAGR of 13 percent over the same period). Supported by a solid Islamic banking franchise, ADIB sourced most of these deposit inflows from the bank’s growing retail customer portfolio, which represented around 60 percent of total deposits as of December 2016 against 51 percent as of December 2012.

In the current context of low oil prices and tightened liquidity, we expect such a granular deposit base to provide the bank with a resilient funding and liquidity profile, particularly as the bank projects a more moderate loan growth than in the last five years. This retail funding base also provides a low cost of funding (0.8 percent as of December 2016) when compared with UAE peers (1.2 percent on average) which will continue to benefit the stability of the bank’s net profit margin and operating income.

Improving asset quality profile With regard to the improvement in asset quality Moody’s notes that ADIB’s non-performing loan (NPL) ratio has fallen to 4.5 percent as of December 2016 from a peak of 11.5 percent as of December 2011, which now compares well with the UAE average of 4.9 percent.

ADIB has also restructured most of its pre-2013 non-performing real-estate and construction exposures to private banking customers and has focused its more recent asset growth on the retail segment which provides a higher level of collateralisation and lower delinquencies.

Whilst in 2016 the bank experienced some pressures in the small and medium (SME) corporates segment, exposure to this sector remains limited and is expected to shrink further.

Although the UAE economic environment is slowing, Moody’s expects that it will remain resilient over the next 18 months, with a non-oil real GDP growth expected at around 2.5 percent in 2017 and 2.7 percent 2018.

According to Moody’s this, combined with the projection of a slower and more selective asset growth for the bank in coming years, will support the sustainability of the asset quality improvements achieved in recent years.