Moody’s downgrades Abu Dhabi Commercial Bank

Moody's Investors Service downgraded the long-term deposit ratings of Abu Dhabi Commercial Bank PJSC (ADCB) to A1 from Aa3 and its bank financial strength rating (BFSR) to D+ from C-. The bank's senior unsecured debt rating was also downgraded to A1 from Aa3 and the subordinated debt rating to A2 from A1. The debt rating downgrades also apply to ADCB Finance (Cayman) Limited, the second issuer under the bank's Global Medium-Term Note programme, which is directly and unconditionally guaranteed by ADCB. The outlook on all ratings is negative.
These downgrades conclude the review initiated on December 15, prompted by Moody's concern with regard to the resilience of ADCB's ratings to the potential continued deterioration in Dubai's operating environment, including the bank's exposure to the ongoing restructuring of Dubai World companies' debt. ADCB's asset quality, which had been weakening since the beginning of 2008 given its sub-prime exposures, continued to deteriorate in 2009, given in particular its high loan concentrations to defaulting Saudi corporates, and is now further challenged in light of Dubai World's pending restructuring.
ADCB has received a series of capital injections since April 2008 which, in Moody's view, have boosted the bank's capital levels and had significantly helped prevent it suffering any earlier BFSR downgrades.
Moody's recognises that the ability and willingness of ADCB's parent Abu Dhabi Investment Council to support the bank and its plans for further growth remains strong. However, its standalone financial strength has weakened as a result of the rising pace of loan delinquencies and impairments of investments. In addition, Moody's expects the already weakening operating environment in Dubai and Dubai World's recent restructuring request to continue to weigh on the bank's loan quality and likely profitability in the foreseeable future. Moody's stress-testing exercise suggests that ADCB, given current assumptions and expectations, has an adequate capital cushion to weather potential losses. Nonetheless, its profitability is likely to continue to suffer from rising impairments and funding costs and lower loan growth.
Moody's also views ADCB's liquidity management as becoming a challenge given the concentrations in its deposit book and its generally higher dependence on external market funding sources than its UAE peers. In the absence of any further implicit support, i.e. from government-related deposits, the bank's access to market funding is seen as particularly sensitive to developments related to the Dubai World group restructurings.
Going forward, the rating agency expects the bank to face rising liquidity pressures, which could mean lower growth potential unless higher levels of deposits are generated.