Fitch Ratings has affirmed Abu Dhabi Commercial Bank PJSC's (ADCB) Long-Term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook, its Short-Term IDR at 'F1' and Viability Rating (VR) at 'bb+'.

Key Rating Drivers

Abu Dhabi Commercial Bank PJSC's (ADCB) Issuer Default Ratings (IDRs) reflect potential support from both the United Arab Emirates (AA-/Stable) and Abu Dhabi (AA/Stable) authorities. This reflects the authorities' strong ability to provide, and record of, support for the banking system if needed.

ADCB's Viability Rating (VR) balances its strong domestic franchise and funding and liquidity against weaker-than-peers' asset quality. The 'bb+' VR is below the implied VR of 'bbb-' due to the following adjustment reason: Risk Profile.

Favourable Environment: Operating conditions are solid for UAE banks in 2023. Fitch expects sector credit growth to remain modest at about 5% in 2023 due to weak credit demand, tighter underwriting standards and higher interest rates, but the latter may result in stronger profitability, particularly for banks with high shares of current and savings accounts.

Large Abu Dhabi Bank: ADCB is the third-largest bank in the UAE, with a broad domestic franchise, including market shares of about 15% of sector loans and deposits, and strong relations with the Abu Dhabi government.

Limited Large Loans' Amortisation: ADCB's largest loans have had fairly slow amortisation in recent years. This creates seasoning risks, meaning that loan-quality problems may not have yet fully crystalised. We therefore consider the quality of ADCB's largest exposures to be weaker than at higher-rated peers.

Moderate Impaired Loans: ADCB's impaired loans ratio (including Stage 3 and purchased or originated credit impaired loans) fell to 5.1% at end-2Q23 (end-2022: 5.6%). However, loans at fair value, which Fitch views as risky, and Stage 2 loans comprised a further 1.1% and 5.8%, respectively. We expect impaired loans ratio to remain above 5% in the medium term.

Profitability Ratios Improving: ADCB's operating profit-to-risk-weighted assets ratio improved to 2.1% in 1H23 (2022: 1.9%). We expect performance to remain reasonable in 2H23-2024 as ADCB's net interest margin (annualised 2.6% in 1H23) continues to benefit from higher interest rates, supported by a high share of low-cost current and savings accounts. We expect the loan impairment charges to remain stable at about 1%. ADCB posted a reasonable 13.7% (annualised) return on equity in 1H23 and Fitch forecasts similar results in the annual accounts.

Core Capital Only Adequate: At end-2Q23, ADCB's common equity Tier 1 ratio was 13.4% (end-2022: 13.0%). However, capitalisation should be viewed in the context of high concentration and asset-quality risks. We expect the common equity Tier 1 ratio to remain stable in 2023 due to only moderate loan growth.

Strong Funding and Liquidity: At end-2Q23, low-cost current and savings accounts made up a high 47% of ADCB's deposit funding. Funding stability is also strengthened by large government and public-sector deposits and diversified wholesale funding. At end-2Q23, ADCB's liquidity position was strong, as expressed by a fairly low 90% ratio of gross loans to deposits.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

ADCB's GSR and IDRs are sensitive to a change in the ability or propensity of the UAE and Abu Dhabi authorities to provide support.

ADCB's VR is primarily sensitive to our assessment of the bank's risk profile and asset quality. A material deterioration in ADCB's asset-quality ratios or increase in credit concentrations could lead to a downgrade of the VR.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

A positive rating action on ADCB's GSR and IDRs is unlikely given the Stable Outlooks on the UAE and Abu Dhabi and the existing high levels of these ratings.

ADCB's VR could be upgraded in case of a strengthening in its risk profile and loan quality and would require an improvement in the quality of the bank's non-impaired loans and a record of amortisation of ADCB's large exposures.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

The ratings of the bank's unsecured debt (programmes and notes), including that issued by ADCB's special-purpose vehicles ADCB Finance (Cayman) Limited and AHB Sukuk Company Ltd, are in line with the bank's Long- and Short-Term IDRs, reflecting Fitch's view that the likelihood of default of these obligations is the same as the likelihood of default of the bank. The xgs ratings of debt issues are in line with the xgs ratings of the bank.

ADCB's Short-Term IDR of 'F1' is the lower of the two options corresponding to a 'A+' Long-Term IDR as described in our rating criteria because a significant proportion of its funding is related to the government, and stress on ADCB would be likely to come when the sovereign itself is experiencing some form of stress.

ADCB's Long-Term IDR (xgs) is driven by its VR. Its Short-Term IDR (xgs) is driven by its Long-Term IDR (xgs).

The xgs ratings of ADCB's senior unsecured debt are driven by ADCB's Long- and Short-Term IDRs (xgs).

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Any downgrade of the bank's IDRs would lead to a corresponding change in the bank's debt ratings and the debt ratings of its special-purpose vehicles.

ADCB's Long-Term IDRs (xgs) would mirror changes to its VR. ADCB's Short-Term IDR (xgs) is sensitive to changes in Long-Term IDR (xgs).

The xgs ratings of ADCB's senior unsecured debt are sensitive to ADCB's Long- and Short-Term IDRs (xgs).

VR ADJUSTMENTS

The operating environment score of 'bbb' has been assigned below the 'aa' category implied score for the UAE due the following adjustment reasons: size and structure of economy (negative), financial market development (negative), regulatory and legal framework (negative).

The capitalisation & leverage score of 'bb+' has been assigned below the 'bbb' category implied score due to the following adjustment reason: risk profile and business model (negative).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

ADCB's IDRs are linked to the UAE and Abu Dhabi sovereign ratings.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2023 Electronic News Publishing, source ENP Newswire