Abu Dhabi Commercial Bank PJSC Reports Q1’20 Net Profit of Dh209 Million

Abu Dhabi Commercial Bank PJSC (“ADCB” or the “Bank”) today reported its financial results[1] for the first quarter of 2020 (“Q1’20”).

• Strong pre-provisioning operating performance, with an 8% increase in operating profit excluding integration costs driven by higher revenues and merger synergies. Net profit was lower on account of impairment charges on the corporate loan book related to NMC Health Group, Finablr and associated companies
• • Net interest and income from Islamic financing increased 6% year on year to AED 2.789 billion on account of improved cost of funds. Interest expense² improved 29% year on year to AED 1.606 billion. This reflects the resilience of the ADCB franchise despite the difficult environment due to Covid-19 and low oil prices in the latter part of Q1’20
  • Operating profit excluding integration costs increased 8% year on year to AED 2.293 billion, primarily driven by cost synergies and higher revenues
  • Operating expenses excluding integration costs decreased 7% year on year to AED 1.183 billion. Cost to income ratio excluding integration costs improved to 34.0% from 37.3% a year earlier, an improvement of 327 basis points (3.27%), supported by the Bank’s disciplined cost control and realisation of cost synergies
  • Excluding the AED 1.072 billion impairment charges related to NMC Health Group, Finablr and associated companies, impairment charges in Q1’20 were 11% lower quarter on quarter and 9% higher year on year. Impairment charges in Q1’20 totalled AED 1.882 billion
  • Q1’20 net profit at AED 209 million. The year on year decrease in net profit was primarily due to higher impairment charges, in particular AED 1.072 billion on NMC Health Group, Finablr and associated companies
• Robust balance sheet with continued increase in CASA deposits, comfortable liquidity and capital position
• • Distributed AED 2.644 billion in dividends to shareholders in Q1’20
  • Total shareholders’ equity at the end of the quarter stood at AED 49 billion
  • Net loans at AED 247 billion and customer deposits at AED 263 billion as at 31 March 2020
• • CASA deposits increased by AED 6 billion from year-end, a 6% increase quarter on quarter, to AED 108 billion as at 31 March 2020. CASA deposits improved to 41.1% of total customer deposits compared to 38.9% as at 31 December 2019
  • Total liquid assets at AED 108 billion as at 31 March 2020
  • Strong liquidity position, with loan to deposit ratio of 93.8% and liquidity coverage ratio (LCR) of 115.1%
  • Capital adequacy ratio (Basel III) of 14.13% and common equity tier 1 (CET1) ratio of 10.82%
  • NPL ratio of 4.7% and provision coverage ratio of 108.8% as at 31 March 2020. NPL ratio including net POCI (Purchase or originated credit impaired) assets of 6.1%
• Completed end-to-end integration in Q1’20 ahead of schedule and below budget. Upward revision of run rate synergy target to AED 1 billion from AED 840 million  
  • Full integration of UNB and Al Hilal Bank into ADCB was completed in an accelerated timeframe of 11 months, less than half the initial target
  • Run-rate synergy target revised to AED 1 billion from AED 840 million. The Bank has realised AED 185 million of synergies in Q1’20 and is on track to capture 75% of the revised target in 2020, with full target scheduled to be realised in 2021 as planned
  • Final integration milestone completed seamlessly on 2 April 2020, including the unification of banking systems and migration of former UNB accounts to the ADCB platform. This was achieved with 90% of teams working remotely, an experience that opens up potential new avenues for enhancing our business operating model in future
  • The Bank has completed the purchase price allocation (PPA) exercise related to the merger as planned
  • In response to the current economic situation, ADCB is targeting further cost reductions through procurement efficiencies, process optimisation and elimination of certain expenses
• Comprehensive measures undertaken to support stakeholders in response to global Covid-19 emergency
• • ADCB fully supports the pioneering role played by the Central Bank of the UAE in introducing necessary measures to preserve economic activity and boost financial resilience in the country. This was reflected in the vital and timely decision that the Central Bank took to introduce a “Targeted Economic Support Scheme” (TESS) of AED 256 billion to enable commercial banks to support customers through the Covid-19 pandemic, including temporary reductions in its cash reserve, liquidity and capital requirements
  • Aligned with TESS, ADCB is offering a comprehensive package of measures to alleviate the economic burden for customers, including deferment of loan instalments, reduced fees and charges, interest rate reductions and waivers, and rescheduling of working capital facilities for SMEs and corporates. ADCB has extended support to its customers in the amount of AED 8.3 billion under TESS based on the Central Bank allocation
  • Commitment to service excellence and continuity of operations. Select ADCB branches remain open, with majority of ATMs operational; enhanced digital capabilities and servicing
• • Support for employees, including a pledge that there will be no Covid 19-related redundancies in 2020
  • Zero disruption to vendor relationships and timely payment of invoices as per contractual terms
  • Community support, including AED 5 million committed to express gratitude and alleviate financial burden of 35,000 healthcare workers across UAE who bank with ADCB, and an AED 4 million partnership with the Ministry of Education to provide laptops to students for distance learning
• Extensive outreach programme as part of the UAE Central Bank’s National Loan Scheme
• • In March 2019, the Central Bank of UAE announced the “National Loans Scheme” (NLS) with an intent to reduce the debt burden of qualifying loans of UAE Nationals
  • The scheme is designed to assist UAE National customers with a debt burden exceeding 50% of income by applying a reduced interest rate capped at 3M Eibor
  • ADCB ran an extensive programme with borrowers from April 2019 to April 2020 resulting in significant interest rate relief related to approximately AED 4 billion worth of loans
  • The difference between the original contracted rate and the revised rate over the term of the loan is borne by the Bank and has benefited 2,670 Emirati customers

Commenting on the Bank’s performance, Ala’a Eraiqat, Group Chief Executive Officer and Board Member said:

“In the face of the unprecedented economic and social challenges presented by Covid-19, ADCB’s priority is to support customers, employees, business partners and communities above all other matters. The Bank is leveraging its financial strength and expertise to play its role to respond to the current global emergency, in line with the policies and initiatives of the Government and the Central Bank of the UAE.

ADCB was the first bank in the UAE to roll out a comprehensive programme of relief measures for customers, which include deferment of loan instalments, fee reductions and waivers, rescheduling of working capital facilities and temporary interest rate reductions for businesses. Over 32,000 customers have received deferrals under the TESS scheme to date. The Bank has also invested a total of AED 9 million to support distance learning for students and to express gratitude to frontline healthcare professionals.

I would like to thank ADCB’s highly committed employees, many of whom are working remotely, at our call centres and operations processing centres as well as frontline employees providing service across a temporarily reduced branch network to ensure that banking services remain uninterrupted. The Bank has made a pledge to its employees that there will be no redundancies in 2020 on account of Covid-19.

We expect many of the learnings and experiences from these times to endure. The Bank has seen a significant increase in transactions through ADCB’s online and mobile banking channels, which is likely to be sustained. Meanwhile, to enhance future financial performance, we will extend the digitally-led working practices deployed during Covid-19 across our operating model to optimise productivity and further reduce our cost base.

ADCB’s underlying business remained robust in the first quarter, with the Bank reporting an 8% increase in operating profit excluding integration costs, underpinned by improved cost of funds and greater merger-related efficiencies. This positive performance was a significant achievement given the challenging economic landscape.

However, net profit was lower at AED 209 million on account of higher impairment allowances. The higher expected credit losses were related to the current macro-economic challenges as well as to NMC Health Group, Finablr and associated companies, after the healthcare group revealed suspected fraudulent activity and previously undisclosed liabilities of over US$ 4 billion. We believe that the impairment allowances for this exceptional case are adequate based on currently available information. We are also taking various additional cost and efficiency measures to partially offset the impact of these provisions.

ADCB has proven time and again that the Bank remains steadfast in adversity. A decade ago, the Bank emerged from the global economic crisis fitter and stronger, with the organisation focused on implementing best practice governance. Through the merger with UNB and Al Hilal Bank and the successful integration completed on 2 April, ADCB proved it is capable of managing risk, systems and people through complexity to build a more powerful banking group.

Now, as the global community comes together to overcome the Covid-19 pandemic, ADCB is fully equipped and determined to support our stakeholders through the current environment.

Proactive approach to NMC Health Group issue

It is important to note that provisions related to NMC Health Group, Finablr and associated companies are taken in accordance with international accounting standards and do not equate to a write-off of this amount. ADCB will pursue all possible avenues and legal routes to recover these funds and to uncover how the fraud was conducted.

We have already taken decisive and proactive steps to protect the interests of the Bank and its stakeholders.

Our swift actions resulted in the appointment of administrators by the UK High Court to ensure continuation of uninterrupted healthcare services and recover any missing assets and funds. ADCB is working towards a positive financial resolution, engaging with the court-appointed joint administrators through a leading role on the committee of core creditors.

The joint administrators are also tasked with implementing robust governance at NMC Health Group and conducting a forensic review of accounts and a transparent investigation into suspected previous irregular financial activities.

Additionally, ADCB has initiated criminal legal proceedings with the Attorney General in Abu Dhabi against a number of individuals in relation to NMC Health Group.”

Deepak Khullar, Group Chief Financial Officer, commented on the results:

“Following the merger and successful integration with UNB and Al Hilal Bank, ADCB is demonstrating its preparedness and resilience in the face of unprecedented global health and economic challenges.

The Bank benefits from a diversified funding mix and stable low-cost CASA deposits accounting for 41% of total customer deposits of AED 263 billion. ADCB maintains robust capital and liquidity positions that are comfortably above regulatory requirements, with a capital adequacy ratio of 14.13%, a CET-1 ratio of 10.82% and liquidity coverage ratio of 115.1% as at 31 March 2020.

The operating environment in the latter part of the first quarter became increasingly challenging as the Covid-19 pandemic impacted the global economy, including the UAE. The aviation, logistics, leisure, retail, F&B and hospitality sectors are particularly affected and the reverberations on consumer sentiment and our customers’ businesses are likely to continue for an extended period.

Due to the current uncertainty regarding the duration and severity of the Covid-19 pandemic, and the timing of the recovery, we cannot predict at this stage the financial impact for the rest of the year and we will continue to be prudent with regard to provisioning.

Against this difficult backdrop, ADCB has significantly increased its run-rate synergy target to AED 1 billion from AED 840 million and is building further on the efficiency gains made over the last year. With operating expenses excluding integration costs decreasing 7% year on year, our cost to income ratio has improved to 34.0%, compared to 37.3% a year earlier. In addition, ADCB will be aggressively pursuing cost rationalisation initiatives across various spend categories.

The positive operating performance in the first quarter was the result of a successful integration process that was completed in only 11 months, less than half the initial target and surpassing regional benchmarks. As a fully unified and resilient banking group, ADCB benefits from a robust balance sheet, scale, efficiency and durable business model to weather the current turbulence in the global economy.”