DUBAI // HC securities has dropped its target price on Abu Dhabi Commercial Bank's (ADCB) shares after the bank set aside Dh2 billion (US$544 million) in provisions to cover its non-performing loans in the fourth quarter of last year. The brokerage and investment banking firm dragged the price for ADCB 22 per cent lower, from Dh2.50 to Dh1.94 yesterday. But HC does see potential for improvement in ADCB's shares and maintains its "hold" recommendation on the bank.
ADCB's 2.5 times increase in provisions was much higher than analysts had expected. Most of this amount was put aside to cover the bank's exposure to two Saudi conglomerates, Ahmad Hamad Al Gosaibi and Brothers and Saad Group, while 44 per cent had been booked to cover bad debts in the domestic market. "This has pushed non-performing loans to a four-year high of 5.2 per cent, above our estimate of 4.6 per cent," HC wrote in a note to investors yesterday.
Coverage of bad debts has reached 67.8 per cent and will increase to 74 per cent this year, as analysts at HC Securities expect ADCB to set aside an additional Dh2.8bn in provisions. These provisions, however, do not include ADCB's exposure to Dubai World, as those loans are still being serviced. Dubai World is negotiating with more than 90 local and international lenders to restructure $26bn of debt.
HC said even if ADCB took a 40 per cent haircut from its exposure to Dubai World, the bank would have a Tier 1 capital adequacy ratio of 10.5 per cent, still above the regulatory requirement of 8 per cent. "We support management's prudent decision to sacrifice 2009 earnings," the HC note read. "This proves the bank is altering its aggressive investment strategy from having vast exposure to international markets to being conservative and focusing on domestic operations." ADCB shares closed 1.2 per cent higher yesterday.