UAE Banking: Storm Signals in ADCB's 3Q2016 Financials

AA Has the Full Range of Flags, If Needed

As promised earlier, further thoughts on ADCB’s 3Q16 financial report plus an added bonus--a typical AA “get off my lawn” rant on financial reporting and regulatory environment.  The latter in a separate section at the end.

Introductory Comments

If you know your nautical flags, you will immediately see that the “storm signals” warning is at a modest level. In other words, I am not predicting an imminent serious crisis for ADCB.

The bank has reasonably robust stand-alone financials, though note the reporting  “lapses” discussed below. 

If by some low probability event, the bank were to develop life-threatening problems, it would almost certainly receive official support as it and other UAE banks have in the past, e.g., after the Great Financial Crisis of 2008.    The Abu Dhabi Government owns more than 60% of ADCB’s equity and has a special “incentive” to step up and has the resources to do so.  ADCB is a systemically important bank. Thus, the Central Bank is also likely to provide support.

If there is no imminent danger of collapse, why this analysis and why the use of the term “storm signals”? 

Free float is generally low in GCC equities (ADCB somewhere around 30%) and generally this free float is primarily in the hands of retail and not institutional investors, the latter presumed to be less susceptible to market panic.  Note I said “less susceptible” not “not susceptible”.  

In such “markets”, the price impact of investor actions—sales or purchases--is outsized relative to other markets.  A change in market sentiment and one’s return on ADCB stock could decline.  A large enough market decline and one might lose some of the initial investment, depending on one’s entry price. 

These characteristics increase risk.  If risk is higher, then the utility of a warning is greater.  

In addition as is the case here, when an issuer’s financials are deliberately opaque, the utility of a warning increases.   

“Storm signals” like the picture of the flag above provide warnings about potential problems. 

If there is a gale force typhoon in progress, one hopefully doesn’t need to see a flag to decide to keep one’s boat in port.  But if the storm is not yet fully apparent, a warning flag can prevent the sailing of boat, a change in its planned course, or alert the crew to be on the watch for the storm if they decide to leave port on the original course. 

Financial storm signals serve the same function for investors.  Warnings can be used to trigger action to prevent losses or in some cases to gain profit. 

One final note:  warnings about potential problems are not infallible.  Sometimes no storm appears. Sometimes the storm is much different from that predicted. 

Some Technical “Notes”

I used NBAD and FGB to provide some comparisons to ADCB’s financial reporting.  NBAD’s business is different from ADCB’s in many respects so I acknowledge there are limitations to that comparison.  

Abbreviations:   3Q16 = Third Quarter 2016.  FYE15 = Fiscal Year End 31 December 2015.

Financials: 

1. ADCB:  3Q16, 2Q16, 1Q16, FYE15  
2. FGB Annual Financial Reports Access Page,  FGB Quarterly Financial Reports Access Page
3. NBAD Financial Reports Access Page

Summary

During my review of ADCB’s 3Q16 financials I noticed two significant developments which occurred primarily in a single quarter—3Q16— and which may be signs of distress in the loan portfolio. 

1. Accrued Interest Receivable (AIR) jumped some 50% from FYE15 (31 December 2015) with more than 70% of the increase during 3Q16. 
2. Overdrafts increased some 84% from FYE15 with all the change occurring in 3Q16.    

My concerns were exacerbated by a major deficiency in ADCB’s financials – a failure to report renegotiated loans.  The absence of this rather critical piece of information prevents a deeper analysis of the bank’s condition and raises questions why it isn’t provided.      

Are these 2016 “developments” and the reporting deficiency signs of problems in the loan portfolio?  Does the failure to disclose renegotiated loans indicate that the bank is “actively managing” (AA euphemism of the post) non-performing loans (NPLs)?   That is, hiding problems?  Or are there other more “innocent” explanations?  

There isn’t enough information to make a conclusive call.  On the one hand, it’s hard to build a case for a trend based on a single data point (3Q16 financials).  But the failure (which predates 2016) to disclose required information, the significant “divergence” from past financials, and the fact that these apparently occurred in a single quarter suggest that not everything is “right”.

We won’t get more financial information until FYE16 financials are released and more likely than not the same reporting or non-reporting standards will be used.  A lot can happen until then.

ADCB isn’t “going down” but its share price can.  That’s important for equity investors because by their nature share prices are more volatile than debt prices.  The limited free float and the composition of the investor base for ADCB stock exacerbate that natural characteristic for this stock.

Accrued Interest Receivable (AIR)

Problems in the loan portfolio often show up in increases in AIR before NPLs are formally acknowledged in the financials.  AIR on NPLs often turns out to be as substantial as the air we breathe.

ADCB’s AIR (included in Other Assets) was AED 1.6 billion at 3Q16, AED 1.2 billion at 2Q16, AED 1.3 billion at 1Q16, AED 1.1 billion at FYE15, and AED 1 billion at FYE14.

A couple of things jump out of those numbers.

1. The increase from FYE15 to 3Q16 was approximately 50%.  That’s larger than the 11% growth in loans. 
2. More than 70% the increase from FYE15 occurred in a single quarter--the third quarter. 

If ADCB is accruing interest on a time proportion basis, then it would seem that increase would be gradual unless loans ballooned between 2Q16 and 3Q16. 

That doesn’t appear to be the case. Net loan outstandings were AED 162 billion (3Q16), AED 155 billion (2Q16), AED 157 billion (1Q16) and AED 146 billion (FYE15).  An increase of only 11% since the beginning of the year.

If volume isn’t driving the increase, then it could be pricing.  A higher rate on newly extended loan(s) in 3Q16.  If we assume rates were higher just on the AED 7 billion increase in loans between 2Q16 and 3Q16, the rate would have to be around 23%.  That doesn’t seem likely.

It might also be an overall rate increase on the total portfolio or at least an increase on those loans that reprice quarterly. In such a case, it’s more likely that an increase of this sort would come from an increase in the base rate not an overall increase in credit margins. 

Assuming that were the case, an approximate 1% increase on the entire portfolio for three months would be required to boost AIR by AED 0.4 billion. Looking at FYE 15 Financials Note 44 “Interest Rate Risk, some 70% of ADCB’s loans are priced off base interest rates three months or less.  That would make the required base rate increase about 1.45%, assuming that the other 30% could not be repriced.   According to CBUAE data, EIBOR has not risen by that amount during this period. 

But we don’t have to look at external rates.  We can look at ADCB’s financials where an increase in the rate on loans would have to show up in gross interest revenue.  A back of the envelope analysis of quarterly interest revenue on loans to customers divided by the average of the total balance of customer loans and advances (computed using beginning and end of the period totals divided by two) shows an average 4.3% annualized yield on the loan portfolio for the three quarters of 2016 roughly consistent with full year 2015's annualized yield, though on an individual quarter basis the yield is declining:  4.44% (1Q16), 4.27% (2Q16) and 4.22% (3Q16).  2016 gross interest income on customer loans is roughly AED 1.9 billion a quarter which would put it AED 0.4 billion over 2015 but for the entire year.  However, if interest repayments are quarterly as argued above, AIR shouldn’t increase this much because clients should be paying roughly quarterly.   

A cursory inspection of other components of interest income doesn’t show any other asset types likely to be responsible for the increase –these are much more modest in amount and are fairly consistent across 2016 and comparable to the 2015 total performance (divided by four).   

So it seems an interest rate increase is unlikely for the AIR jump as well.

What are other explanations? 

1. A “catch-up” accrual – correcting a mistake(s) made earlier in 2016.  Would have been a whale of a mistake, though as we know “whales” are not that uncommon even in the Thames.  
2. A write back of previously “uncollectable” interest.  Both 1 and 2 should appear in the financials.  I didn’t see anything to indicate this. 
3. A failure by a borrower or borrowers to make an interest payment.  As noted above, Note 44 states that more than 70% of the bank’s loans were priced off interest rates three months or less at FYE15.  This probably hasn’t changed much in 2016, though we won’t know until FYE16 financials are released and then we’ll only have end of period information. Standard banking convention would be that interest is due at each repricing.  So it is possible (but not conclusively proven) that non-payment could explain a spike in the AIR.  If you’re wondering, details like those in Note 44 are not mandatory for interim financials.

Overdrafts

Increases in overdrafts are often a sign of problems. 

[AA side comment:  Another reason for looking here is historical not necessarily analytical.  Those who know their UAE banking history know that the UAE banking system floundered on “perpetual” overdrafts with capitalization of interest (to add insult to injury). ADCB was formed from the wreckage of Emirates Commercial, Federal Commercial, and Khalij Commercial Banks back some 30 or so years ago.]

At 3Q16 OD’s stood at AED 8.3 billion compared to AED 4.5 billion (FYE15) and AED 3.7 billion (FYE14), roughly an 84% increase since FYE15 and 124% since FYE14.  Note that even with the increase ODs are roughly 5% of the loan portfolio, not a large amount unless you compare them to total equity at 30 September 2016.  In that case the figure is 28%. 

OD’s increased rather dramatically in 3Q.  ODs were AED 8.3 billion (3Q16), AED 4.5 billion (2Q16), and AED 5.0 billion (1Q16).  Like AIR, the increase was concentrated in 3Q16.  Unlike AIR, the entire increase took place in the third quarter.   

By contrast NBAD’s comparative figures are AED 10 billion (3Q16), AED 12 billion (FYE15), and AED 14 billion (FYE14).   A 17% decrease since FYE15 and 29% since FYE14.   

FGB doesn’t provide this information, probably based on “materiality” compared to the aggregate amount of the loan portfolio.  ODs at both NBAD and ADCB were about 5% of total loans well under the traditional 10% materiality standard.  A similar level is likely at FGB.

So why is AA making a “federal” case (pun intended) on this issue? 

ODs are one of the trickier forms of credit for banks to manage. 

When extending loans with a defined drawdown period and defined repayments (triggered off the end of that drawdown period and specified by date and amount), banks perform a detailed analysis or should. Monitoring of the status of the loan has well defined milestones in the form of amount and date certain contractual repayments. 

Overdrafts don’t have the same clearly defined signposts as these other loans do.  Typically, the test for non-performance of an OD is an absence of adequate turnover (drawdown and repayment transactions) which has led to a persistent level of debt.  This test is based on the concept that ODs are revolving facilities that should track the borrower’s business/cashflow cycle, increasing when expenditures exceed cash collections and then reversing as collections exceed expenditures. 

This test makes monitoring more difficult and allows more discretion in the timing of classifying a loan as non-performing.  What is an adequate “turnover” of transactions in the account?  What time period should be used to determine that a persistent level of debt has been reached? Does a slowdown in economic activity justify new norms and how should these be calibrated?  Beyond conceptual issues like these, there is also the practical matter of conducting effective monitoring, keeping one’s eye on the ball.

Non-Disclosure of Renegotiated Loans

ADCB does NOT disclose data on renegotiated loans.

AA understands that IFRS #7 (I believe paras 36 and 44, though I am not a hafiz of IFRS) require that this information be disclosed.  Both FGB and NBAD disclose this information. NBAD takes the prize for disclosure.  Let’s hope the merged entity follows NBAD reporting standards. 

NBAD’s FYE 2015 Annual Report Note 4a provides aggregate totals and a reconciliation of the movement in renegotiated loans.  As per that information, during 2015 NBAD’s renegotiated loans doubled to AED 2.6 billion.

By contrast ADCB has a “bland”  “philosophical rumination” defining renegotiated loans but no numbers.  Not really of much analytic utility.  

But it could be worse, here’s a quote from ENBD’s 2015 Annual Report.

Loans with renegotiated terms are loans, the repayment plan of which have been revised as part of ongoing customer relationship to align with the changed cash flows of the borrower with no other concessions by way of reduction in the amount or interest, but in some instances with improved security. These loans are treated as standard loans and continue to be reported as normal loans.

ADCB almost certainly has renegotiated loans.  See the Fitch quote below. 

The bank also has a concentrated portfolio with large individual and aggregate exposures to government related enterprises (GREs) and “private” companies connected to the shaykhly but hopefully not shaky elite.  By some estimates (see Fitch report linked to below) the latter is twice the GRE related exposure.  Ample “opportunities” for problem loans.   

Failure to disclose renegotiated loan data--amounts and other IFRS required information--indicate to AA  that the bank thinks it needs to hide this information.  Why?  Presumably not because it has so few but rather because it has so many.  IFRS-required disclosures would enable a reader to determine when renegotiation took place –giving an indication of whether NPL problems were increasing or decreasing.  That is precisely one of the reasons that IFRS #7 imposes this requirement.

What could be another reason for not reporting this information?

Renegotiating loans typically gives the borrower less onerous terms – lower interest rates, a revised repayment schedule, a longer average life of the loan.  In some cases payments can be reprofiled to push substantial amounts of principal payments well into the future – “ballooning” as one banker I know calls it. 

Take an extreme example: a loan maturity is extended from 5 to 20 years with 80% of principal due during the last three years.  For the first 17 years of the renegotiated loan period, maintaining a “performing” status is much easier than if the loan were extended for a shorter tenor with equal semi-annual principal installments.    

If a bank takes pre-emptive action (before a loan has missed a payment) it can avoid declaring the loan non-performing, thus, “hiding” NPLs and making the bank’s loan portfolio look more robust than it actually is.   If it doesn’t report renegotiated loan data, pre-emptive NPL management might not be noticed by the market.

However, there is no evidence in ADCB’s financials of a massive increase in loan maturity as per Note 45 “Liquidity Risk” in FYE15 financials.  The relative percentages in less than one year and the other two maturity “buckets” for 2015 are almost spot on with 2014. 

But the bank’s reporting is also opaque here as well.  

ADCB uses a maximum maturity “bucket” of “over three years”.  FGB and NBAD use maximum maturity “buckets” of periods of “over five years”.    ADCB therefore has more room to maneuver. If a loan with a three year maturity were extended two years, this would not show up in the Maturity Risk note at ADCB.  It would at FGB or NBAD.    

Dramatically lengthening maturities is one but not the only way to avoid NPL status.  One could back end principal payments (making later repayments higher than nearer repayments) with much shorter extensions of maturity.  If a bank were pro-actively managing problem loans to prevent the appearance of NPLs and did not disclose renegotiations, it could use future renegotiations to manage the problem on a rolling basis. 

But we can’t tell from ADCB’s financials what , if anything, might be going on.

With no evidence in the financials, let’s turn to a quote from Fitch’s August 2016 ratings report (which by the way confirmed an A+ rating for the bank).  Boldface courtesy of AA.

ADCB does not disclose the volume of renegotiated loans, but Fitch understands that it has done a lot of corporate loan renegotiations since the crisis and has reclassified most of these exposures back to performing over this time as they demonstrated normal performance.  ADCB renegotiated some of its 20 largest exposures during 2015.  Fitch understands that these loans would be overdue if they had not been renegotiated.

We don’t know for certain if ADCB is pre-emptively renegotiating troubled loans to avoid having to declare them non-performing, but that’s clearly one way to read the Fitch quote.  Non-disclosure of renegotiated loan information certainly provides cover for such activities, if they are occurring.  AA can’t think of a single “benign” reason why ADCB would withhold this information. One final comment on the Fitch quote: if the terms of the renegotiated loan are generous enough, the bar for “normal performance” may be set low indeed.

AA was also troubled by ADCB’s new external auditor signing off on the financials as being in compliance with IFRS.   As AA understands it, IFRS compliance is all or nothing.  One can’t be partially compliant.

Troubled as well by the CBUAE’s apparent acquiescence.  That being said, though there is both historic precedent elsewhere in the GCC, what wags refer to as IRS (Investcorp Reporting Standards), and closer to home and time, CBUAE “Dubai Inc” renegotiated loan treatment rules.   

Another Warning But This Time About Something That Definitely Will Happen

Accounting and Regulatory “Rant”

Cashflow Statements: 

Accrued but uncollected interest is not a “use of funds” that “increases” Other Assets as seems to be common reporting practice for ADCB, FGB, and NBAD.  Until interest is paid by the borrower, it is uncollected revenue and not cash. 

There are two consequences. 

1. Since it wasn't collected, it is properly a deduction from net income on the cashflow statement. 
2. Since it isn't cash, it can't be used to fund an increase in Other Assets. 

If one insists on treating AIR as a “use” of funds, then the statement issuer and its auditor have the duty to disclose the components of Other Assets so that financial statement users can determine what is happening with collection of AIR.  Financial statement users should not have to wait for annual reports to get this information.

Investors/Creditors: 

When issuers shy away from disclosure, it’s usually because they have or think they have something to hide. 

1. Lack of disclosure limits an investor’s ability to monitor and thus protect its investment. 
2. More importantly it offers an important insight into the business ethics of an issuer. 

Should you invest with an issuer that withholds basic information from you? And may be withholding that information so it can “manage” its financials?  

Standard financial theory holds that when risk is higher, investors should demand a higher risk premium.  But a key wrinkle to the successful implementation of this theory is that realized returns are often much lower than earlier anticipated or promised returns.  A problem more acute with equity than debt because with equity there are no contractual “promises” and equity prices are more volatile.  

Abu Dhabi Commercial Bank 3Q2016 Results: A Tale of Two Newspapers

Where Would We Be Without Ambition?

On 23 October Abu Dhabi Commercial Bank issued its interim unaudited financial statements. 

1. Net profit for the first nine months of the year was AED 3.2 billion versus AED 3.7 billion for the comparable period last year (a decline of 14%). 
2. Net profit for 3Q16 was AED 1.0 billion versus AED 1.2 billion for 3Q16 (a decline of roughly 17%). 
3. The major factor impacting net income was impairment provisions which increased from AED 391 million in the first nine months of 2015  to AED 1.083 for the first nine months of 2016 (an increase of 77% percent) and from AED 66 million in 3Q15 to AED 380 million for 3Q16 (an increase of 475%).

How did UAE’s two flagship English language newspapers cover this story?

The National’s 23 October headline was ADCB Net Profit Falls 17% in Third Quarter

Abu Dhabi Commercial Bank said its third-quarter profit slid by 17 per cent as provisions for bad loans jumped almost six-fold.

Net profit declined to Dh1 billion in the three months to the end of September versus Dh1.2bn in the same period last year, the bank said. Impairment allowances shot up to Dh380 million from Dh66m in the third quarter last year

Two days later Dubai’s Gulf News took a slightly more optimistic view:  ADCB Reports Dh999m in Q3 Profits Figure brings profit for first nine months to Dh3.14 billion.

Abu Dhabi: Abu Dhabi Commercial Bank (ADCB) continued to register growth in net loans and customer deposits in the first nine months of this year despite increased challenges in the banking industry.

“The bank delivered strong financial results for the nine month period of 2016, reporting a net profit Dh3.153 billion and an industry leading return on equity of 16 per cent.   

While the challenging operating environment and the turbulent markets have impacted the industry, our underlying performance and fundamentals remain strong and we continue to grow our businesses. Our balance sheet remains resilient and registered a healthy growth in net loans and customer deposits year to date, 10 per cent and 7 per cent respectively,” said Alaa Eraiqat, ADCB’s group chief executive officer.

In a statement, the CEO reiterated his confidence in the long-term growth of the UAE’s economy, stressing the bank’s strong fundamentals and outlook of delivering value to shareholders.

In the first nine months of this year, the bank’s assets grew 12 per cent to Dh255 billion, while net loans and advances to customers increased 10 per cent to Dh162 billion compared to December 31, 2015.”

Technical notes: 

1. AA’s calculations are based on net change not simply a division of this year’s results divided by last year’s. 
2. Gulf News appears to be using net income attributable to controlling equity holders in the bank not total net income.

What a difference a point of view makes. 

One comes away with two very different conclusions from reading these two articles.

1. Everything sounds just fine from the account in Gulf News. 
2. The National the “hometown” newspaper of ADCB with perhaps more at stake to  paint a rosy picture does not.  In AA’s view it presents a more accurate picture by providing comparatives to prior periods and discussing negatives as well as positives.

Another post to follow soon with comments on things to watch in ADCB's financials. 

Here's a link to the earlier promised post.

Abu Dhabi Islamic Bank - A Tale of Two Press Releases

Let's look at two press releases on ADIB's 2009 financial performance.  One reflects well on the professionalism of the institution.  The other frankly does not.  

Let's start with the offending press release.

First, at WAM the headline reads "ADIB Reports An Operating Profit of AED 1,527 mn for the 2009 Financial Year."

This approach illustrates another of Abu Arqala's 8 Simple Rules of Financial Analysis.  When the earnings headline doesn't mention net income, you know there's an earnings problem.  And a corollary:  the further down in the press release the net income line is buried the more serious the problem.  There were a couple of egregious examples of this in Bahrain a while back, despite a very clear statement in the Central Bank of Bahrain's Rulebook Module PD about burying bad information.

In the second paragraph, after being regaled with the year's numerous achievements we get the bad news:

After a year of multiple achievements, including: increasing total customer numbers by 27.2% to 342,097; the opening of the 50th branch in the UAE; an increase of 25.1% in total assets to AED 64.1 billion; the strengthening in both capital adequacy (to 16.96% under Basel II) and liquidity ratios (financing to deposits ratio improved to 83.9%); and a top three year-on-year improvement in customer service ratings, the Bank has taken a preemptive decision to set aside a year's earnings to enhance its total provisions and secure future growth.

You'll notice that the provisions aren't described as being necessary to cover duff loans and investments that the bank has made.  They are actually a pre-emptive decision to "enhance total provisions and secure future growth".  Right.

Equally amusing is the later statement "while the growth in customer financing comes on the back of a robust credit process that ensured the booking of quality assets."  If the credit process is so robust, why then is there a need for provisions of this magnitude?  Or are these the sins of the past? 

In regard to credit quality asset growth of  25% during the year is touted as though this were some great accomplishment.  It is really not that hard to make loans to people.  The trick is of course collecting the loans you've made.  That raises a second of AA's 8 Simple Rules of Financial Analysis.  When a bank has explosive growth in assets, look for a spike in bad loans to follow in the next 18 to 24 months.

If things are just fine, I suppose there is also an intriguing question why the Federal Government and the Emirate of Abu Dhabi had to put in additional capital in the form of Tier 2 instruments.  If I'm not mistaken the amounts are not trivial:   AED4.2 billion compared to shareholders' equity of AED5.9 billion as of 30 September 2009.

The press release then goes on to recount a variety of peripheral and not particularly important issues related to 2009's financial performance.  It seems in the hope that the bad news will be buried in so much prose that the reader will miss it or forget it by the time he finishes.

A couple of comments:

1. Provisions generally are the result of past mistakes and/or to be fair as well bad luck.  There's no real banker who's never made a bad loan unless it's someone who works in administration. That being said, precisely how booking a provision leads to further growth isn't clear.  In fact, when a bank has to take a provision this size, it might be a good occasion for it to consider whether a bit more moderation in growth (booking assets) is advisable.
2. Does whoever wrote this press release actually believe that this sort of announcement isn't perfectly transparent?  And doesn't elicit a snicker or two from just about everyone who reads it?  And leave the impression of less than kalaam sharif? 

Turning to the press release at the ADX, this is much more professional and deals with the provisioning issue in its headline:  "To Provide A Solid Base for Future Growth, Abu Dhabi Islamic Bank Sets Aside A Year's Earnings As Provisions".   

There the hard news is dealt with up front.  Some of my same quibbles would apply to the sugar coating of the need for the provisions, but at least the thorny issue is raised.   

BTW  provisions are now 4.2% of gross financings up from 1.69% the previous year.  Simply put, bankers don't take provisions for fun.  Taking provisions is one of the hardest things for a banker to do because it directly impacts his or her career and bonus.  Also it is very hard to get unneeded provisions past competent, diligent auditors particularly given the current constraints under IFRS for recognition of impairments.

So we're left with a question.  Did WAM take ADIB's reasonable press release and cut and paste to create what we saw above?  I'm guessing this is the case.  If so, then ADIB and others would be well advised to have a word with WAM to avoid "Gulf News journalism standards" in the future.

Abu Dhabi Commercial Bank AED 9 Billion (US$2.45 Billion) Exposure to Dubai World

Alaa Eraikat, CEO of ADCB, has disclosed that the bank has about AED 9 billion (US$2.45 billion) in exposure to Dubai World "about half of which are supported by collateral and income streams from infrastructure and other projects".

As of yet, ADCB has not taken any provisions on Dubai World because the loans are still performing.

He also noted:  “This is what I tell you makes a big difference [and explains] why we feel comfortable here [with our Dubai World exposure] rather than the lending to Saad and Gosaibi.”  Wise words indeed.

And that of the AED2.1 billion (US$572 million) in 4Q09 provisions, roughly one half were for Saad and AlGosaibi leaving about AED900 million (US$245 million) of exposure to these two companies still on the books.

The bank also provided AED700 million (US$190.7 million) against its AED 1billion (US$    million) of "foreign investments in special investment vehicles and credit default swaps in the US".  Mr. Eraikat said that the remaining AED300 million might also "potentially turn toxic".

Two comments:

1. At 30 September 2009, ADCB had roughly AED20.1 billion in equity.  It's exposure to Dubai World is roughly 45% of equity.  That seems a rather high percentage. 
2. Ambition unaccompanied by intellect is a recipe for disaster.

Moody's Downgrades Abu Dhabi Commercial Bank

Here's a news item with some quotes from Moody's press release on the downgrade.   And another here.

You can register for "free" to read the original press release at www.moodys.com.  

After the downgrade, ADCB's ratings are still respectably within "investment grade".

UAE Market Volatility Continues

Contrary to reports this week that everything was just fine in local stock markets, there's been a reversal today.

Frankly, there's nothing surprising about this. 

Until there is more clarity on the restructuring and some progress has been made with creditors, market volatility should remain high.  Especially since this market and other GCC markets are largely dominated by retail trade.  

Abu Dhabi Commercial Bank US$2+ Billion Exposure to Dubai World

Reuters quotes an unnamed senior executive at ADCB:  "In the UAE, a senior executive at Abu Dhabi Commercial Bank told Reuters the bank had about $2.18bn to $2.45bn of exposure to Dubai World and related entities".

Strangely, this item was tucked away in one which described the US$77 million in exposure by Omani banks.

Ouch!  Painful but not fatal. 

At 30 September 2009 ADCB had some AED20.1 billion (US$5.5 billion) in capital.  It is also 65% owned by the Emirate of Abu Dhabi (which in case you don't know is the one with the money).    Message:  Abu Dhabi won't let ADCB fail.

Nothing on the ADX this morning from ADCB.  It would seem that having made this disclosure to the news media, ADCB would be following up with a public announcement.  Perhaps, this will occur before the ADX opens tomorrow?

UK Bank Exposure to Dubai Inc

The Financial Times today carried a story that UK banks held US$5 billion or so out of the US$40 billion or so at Dubai World.   That gives them the dubious distinction of being the largest foreign creditor group.

US$ 2 billion at Royal Bank of Scotland, and US$ 1 billion a piece at HSBC, Lloyds, and Standard Chartered.  The article also identifies BNP Paribas, Societe Generale, and Calyon as large creditors.

The article goes on to say that their exposure is focused on the "still functioning" parts of Dubai World e.g.,  Jebel Ali Free Zone and Dubai Ports World.

Thus, of the Dubai World debt which the government has to date announced will be rescheduled, their exposures are a more modest US$700 million (RBS) and US$350 million for Stan Chart.

Some thoughts:

1. It would be natural for big foreign banks to lend to what they perceived to be major companies.
2. It is usually the tenderfoots in the market as opposed to the grizzled veterans who are most likely to see Bigfoot or its financial equivalent the "implicit guarantee".   As I noted earlier the implicit guarantee is not worth the paper it isn't written on.
3. That being said some of the grizzled veterans in the market sometimes make mistakes.  It looks like the market and S&P are pretty much convinced that Abu Dhabi Commercial Bank, Emirates NBD have massive exposures.   Local banks especially those owned by governments often step up to lend government entities, especially when in cases like Emirates NBD the same government owns both the lender and the borrower.
   

Abu Dhabi Banks' Exposure to Dubai

As per Maktoob:  "Abu Dhabi Commercial Bank has at least 8-9 billion dirhams ($2.2-$2.5 billion) exposure to Dubai World and related entities, forcing the bank to book more provisions, a senior executive of the bank said. First Gulf Bank has at least 5 billion dirhams ($1.4 billion)".  Followers of Middle Eastern finances will recall that to date among UAE banks who have declared their exposures, ADCB is the largest lender to Saad/AlGosaibi with some US$609 million equivalent.

At 3Q09, ADCB had some AED20 billion in equity.  At that date FGB had AED22 billion.  Both banks should be able to withstand the shock.  The Abu Dhabi Government is not going to let these banks fail - particularly given their connection to the government.  One is 65% or so owned by the Emirate of Abu Dhabi.  The other has a "major" ownership stake by the sons of Sheikh Zayed (deceased father of the current Amir).

Other Abu Dhabi banks are likely to have significant exposures to Dubai.

Perversely, these large exposures may be good news for Dubai as one would expect these banks to take a softer line in any restructuring because of the government connection.

ADCB to Disclose Executive Salaries?

There's a report in The National (Abu Dhabi) that Abu Dhabi Commerical Bank ("ADCB") is in the early stages of considering to:

1. disclose the remuneration of key executives in its financials
   
2. submit executive remuneration policies to a shareholder vote
   

It should be noted that neither step has been finally approved.

If ADCB implements the compensation disclosure, it will be the first regional bank to do so. 

With respect to compensation policies, there already are some limited requirements for shareholder approval- at least in Bahrain - of stock option plans.  It sounds as though ADCB's plan is broader.

By way of comparison, in the USA, shareholders vote on generic descriptions of plans rather than on individual compensation for members of senior management.  And usually the approval is at a very high level of principles.

The topic of disclosure of senior management salaries was raised  in 2004 or 2005  by the Central Bank of Bahrain as part of extensive enhancements it proposed to make to its corporate governance regulations.   Most of which were finally accepted in the revised regulation.  Only one point was fiercely resisted by local banks - disclosure of individual key officers' salaries.

I once asked the CE of a bank there why there had been this opposition. 

His response was:  This isn't New York.   In New York, a senior officer of Citibank would be unknown to 99% of the people of the city.  And  fewer would know what that officer made even if they knew who he was.  Here it would be completely different, not only would everyone know who I am but also what I make.  That could be a big problem for me.  Not just security.  But having people ask for money.