By now you've probably seen the press articles on ADCB's 1H10 results and perhaps as well it's press release and the financials themselves. The loss was due to the Bank taking an AED1.035 billion provision for its AED6.6 exposure to Dubai World.
Here are some points that caught my eye.
First, the Financials.
- Customer Deposits have grown from AED86.3 billion at 31 December 2009 to AED96.8 billion at 30 June 2010. AED90.1 billion at 31 March 2010. Unfortunately, there's no note for Customer Deposits so it's not possible to see where the increase primarily came from - government, corporate or retail clients. Anyone out there with any information, please post. As well, if anyone knows, if ADCB is paying above market for funds.
- Note 2: Bank Deposits - While there is a non trivial AED1.0 billion decrease, the major story here is the shift. Deposits with banks in the UAE is now 44% versus 33% at 31 December 2009. A greater proportion of AED deposits? Helping provide FX funding in the local market. BTW you'll note that balances with the UAE Central Bank increased by AED700 million roughly the decline in interbanks.
- Note11: Interest receivable has increased roughly AED230 million (of which AED147 million was in 1Q10) to AED837 million - some 37.8% over Fiscal Year End 2009's AED607 million. Looking at Note 14, you'll notice that Interest Payable actually declined 4.0% to AED952 million from AED992 million at FYE09. Unclear if this is timing differences. Longer interest periods on loans than the deposits funding them. Or a sign of some distress. Something to keep an eye on.
- Loan to Deposits Ratio. Yes, the ratio has come down from 135% to 123%. You'll note it was 151% (! ?) in March 2009. That's the right trend. But, sorry to be impolite but a loan to deposits ratio over 100% is not sound banking practice. In fact it should be lower.
- "We have taken a more disciplined approach to pricing risk and have significantly enhanced our capabilities in risk management and strengthened controls across the business. As a result of the current economic environment, both corporate and consumer segments continue to experience high levels of stress and therefore we have had to take significant impairments in the first half of 2010.” And would seem to have some more miles to go. To be fair it does take time to turn around a big ship. And changing a corporate culture perhaps even longer.
- Dubai World Provision - I had understood that the Central Bank of the UAE had asked banks to refrain from provisioning until the restructuring was finalized and they had a chance to study the implications. Is ADCB pulling a Citibank here? If you know your banking history (and who doesn't devote lots of time to that interesting topic?), that question will remind you of the action taken by Citibank to provision for duff sovereign loans in the 1980's. In effect setting a "standard" for other US banks all of whom (including Citi) had heretofore been pretending that those loans - particularly those to Latin borrowers - were "as good as gold". Is ADCB getting out in front of the pack so that when other lenders do take the provisions, that Quarter ADCB will be able to report a profit amid a sea of red ink at its competitors? Or does it have more major pain of its own to take and is trying to spread it out in more manageable chunks?
- Non Performing Loans: Increased some AED491 million and the NPL ratio (NPLs to Total Loans) from 5.2% at FYE 09 to 5.4% at 1H10. That looks good until one notices that the Total Loan portfolio has increased from AED116.6 to AED118.8 billion. Hopefully, we can assume that none of that AED2.2 billion increase has gone bad yet. Using total loans at FYE09, the NPL ratio is 5.8%. That I think is fairer measure.
- Provision Coverage: ADCB's press release notes that its Provisions to NPLs ratio is 76.7% as of 1H10 versus 67.8% as of FYE09. That looks good until one notices that the AED1.035 billion provision for Dubai World in included in the Provision total but none of the DW exposure as NPLs. The latter presumably because DW is not past due on payment. If we strip the DW provision out, ADCB's Provision Coverage is 61.3% a decrease from FYE09. It's hard to understand the logic behind ADCB's calculation unless of course it considers the DW exposure "as good as gold".
- Collateral: AED2.8 billion at 1H10 versus AED5.5 billion at FYE09. No explanation for the 50.9% decline. Valuation changes? Realisation of collateral to repay loans? Clients repaid and collateral was returned to them? All bits of information that would help assess the credit health of ADCB. The note does mention that much of the collateral for NPLs is real property. Is that the hint to the reason - further mark downs of property?
As indicated above, some trends to watch on the credit front, though the Bank's main shareholder has supported ADCB from its birth to today whenever it needed funds. And has the resources to do so again.