Bank ratings cut on loan concerns

RATINGS CUT: Abu Dhabi Commercial Bank's rating has been cut amid concerns over its loans book. (ITP Images)

Deutsche Bank has cut its ratings on Abu Dhabi Commercial Bank (ADCB) and First Gulf Bank (FGB) to hold from buy on concerns that the number of non performing loans (NPLs) at the banks will rise this year.

Deutsche said some 41 percent of ADCB’s loan book is made up of potentially troublesome assets, including exposure to real estate, construction and share financing. “These will be tested during the economic slowdown of 2009 and could present NPLs for the bank,” analyst Zahed Chowdhury said.

Funding is expected to become a key challenge for the bank, which has a higher loan-to-deposit ratio (142 percent) than many of its peers.

At FGB, loans have grown by an average of 80 percent per year over the last 3 years.

Combined with a slowing economy, this is likely to raise the number of NPLs this year, Chowdhury said.

Deutsche is forecasting economic growth in the UAE to slow to 1.6 percent in 2009 from 6.4 percent last year.

“FGB's ambition to build a real estate element to its business carries the risk of backfiring as the economy slows and property values fall. We estimate [that] a 20 percent fall in recorded value of its property assets [will] hit 2009 net income by 39 percent,” Chowdhury said.

FGB has 4.5 percent of its equity investment in hedge fund assets that carry the risk of weighing on profitability this year, he added.

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