Citigroup has given Abu Dhabi Commercial Bank a “high risk” rating, together with a “hold” recommendation and a price target of Dh7.90.
ADCB has been the UAE bank hardest hit by the ongoing United States sub-prime crisis. It suffered sub-prime losses of Dh490 million in the fourth quarter of 2007 and its overall structured credit exposure totals Dh1.8 billion, according to a Citi report. Sub-prime has directly impacted Dh953m of this, with ADCB making a provision of Dh494m against its structured credit exposure. “We remain concerned the bank may be required to further write-down its securities portfolio,” Citi said.
“While the write-downs only make a small dent in the bank’s earnings, we fear that uncertainty concerning the outlook for further write-downs will dampen the demand for shares.”
ADCB shares have endured a volatile 12 months, trading in a 46 per cent range, with the company falling by a fifth since early July. It closed down 0.85 per cent at Dh6.23 yesterday. The report also highlighted the relative poor quality of ADCB’s securities portfolio, with almost half of this rated “BBB” or below.
“The bank’s reliance on wholesale funding [the 2006 loan to deposit ratio was 146 per cent] is a threat following the credit market crisis, which represents downside risk to our net interest income forecasts,” the Citi report said. It claimed ADCB is the only UAE bank it covers that has invested in CDOs or collateralised debt obligations.
“The potential for larger-than-expected write-downs creates a risk to our earnings estimates,” the report said.
Citi also warns the UAE’ stubbornly high inflation may cause its economy to overheat. It added: “Inflation has raised the cost of doing business [escalating office rental rates and rising staff costs], and has translated into a higher overall cost of living, making the UAE a less attractive destination for expatriates workers.”
On a more upbeat note, Citi said ADCB’s fees and commissions earnings may exceed forecasts, while its joint venture with Australia’s Macquarie Bank should increase sales of third party retail products.
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