Abu Dhabi Commercial Bank yesterday reported one of the largest quarterly losses by a local lender after provisions for bad loans more than doubled. The bank lost Dh1.2 billion (US$326.6 million) in the fourth quarter after setting aside Dh2.1bn for bad loans.
Abu Dhabi Commercial Bank (ADCB), the third largest in the UAE by assets, is the first major bank in the country to report fourth-quarter results and is widely expected to be one of the hardest hit by last year's corporate defaults in Saudi Arabia, bad loans in the property sector and exposure to the troubled Dubai World conglomerate. Its fourth-quarter provisions account for almost one third of all provisions by UAE banks in that period, according to Central Bank data.
"This has been a difficult year and net profitability has been impacted as a result of the current economic crisis and additional provisioning requirements," said Eissa al Suwaidi, the chairman of ADCB. The bank's results will cast a shadow over the sector and may set the tone for the forthcoming earnings season, analysts say. "We think it is highly likely that at least one other major UAE bank will report a full-year loss, while the smaller banks should be less impacted," said Robert Thursfield, the director of financial institutions at Fitch Ratings, based in Dubai.
The bank said it took Dh3.8bn in impairment provisions for the full year, which amounted to 3.1 per cent of its loan and investment book. The Dh1.2bn loss compares to a loss of Dh262m in the last quarter of 2008. ADCB's net loss for the full year reached Dh513m, compared with a net profit of Dh1.4bn in 2008. A key question for investors is how much of the provisions relate to the troubled Saad and Al Gosaibi conglomerates in Saudi Arabia, and whether any of those funds have been set aside for exposure to Dubai World.
"We took Dh1.3bn provisions out of our Dh2.2bn exposure to Saudi conglomerates," Alaa Eraiqat, the chief executive, told Dow Jones, adding that the bank may need to take further provisions on their Dh900m remaining exposure this year. The Saad Group and Ahmad Hamad Al Gosaibi and Brothers alone owe ADCB Dh2.2bn. But the bank, along with Emirates NBD, is also believed to be one of the largest UAE lenders to Dubai World, which is restructuring $22bn of debt. Analysts estimate ADCB's exposure to be as high as Dh9bn.
"Provisions would appear to be higher than the market was expecting, especially as they are unlikely to include charges against any Dubai World exposures," said Mr Thursfield. Deepak Tolani, an analyst at Al Mal Capital, said the bank's quarterly loss was the largest for any UAE bank since 2008. ADCB's results were far below analysts' expectations, the more optimistic of which had put the bank in profit for the period.
The bank, which showed a solid operational performance, said it set aside an overall Dh3.8bn in provisions last year. Of that, it took Dh3bn for bad loans, with the remainder accounting for financial investments. Provisions eat into a bank's profit. Throughout last year, non-performing loans have been working their way through the banking system. UAE banks are also facing higher funding costs and more corporate defaults are expected. UAE banks almost doubled their provisions last year to Dh43.4bn compared with 2008. However, many analysts expect the situation to deteriorate this year and next.
Until the debt woes at Dubai World materialised in late November, many had expected bad loan provisions to peak in the middle of this year, reaching 4 per cent when accounting for the Saudi conglomerates. "UAE banks are likely to record high provisions in the fourth quarter due to the mandatory 50 per cent coverage requirement on Saad and Al Gosaibi group exposures [by last December]," Credit Suisse said in a research report yesterday.
"We think there's even more downside risk to our estimates if the proposed change in non-performing loan classification norm from 180 days to 90 days on overdue accounts takes place in the fourth quarter." @Email:uharnischfeger@thenational.ae