The worst is over for Abu Dhabi Islamic: GIH

Abu Dhabi Islamic Bank (ADIB) posted a net profit of AED851.3 million in 2008, reporting a profitability growth of 11% YoY in the bank’s bottom-line. The bank’s earnings growth, though considerably over-shadowed by the 35% YoY growth in 2007 or the herculean 2004 – 2008 CAGR of over 62%, still signifies the resilience of the bank’s bottom-line in troubled times.
Albeit, the bank exhibited a tremendous growth in the top-line, erosion in net profits emanated from severe provisioning against non-performing loans and impairments in investments.
We believe that profitability growth will remain relatively the same in 2009 (at 10%YoY) before the net profit embarks on an even healthier trajectory with a CAGR of 18.3% for the 2008 – 2012 period.
The continuance of bottom-line growth is expected to be driven by a confluence of factors including sustainable though slower movement in net commission income (NCI) easily offsetting the expected 18% YoY decline in non-fund income.
Net earnings will remain under pressure in 2009 owing to continuation of high provisions against loans complemented with slight impairments in investments.
Higher profit growth is anticipated to kick in beyond 2009 as investment income improves and provisioning requirements ease off while the NCI follows a due sustainable course.
Investment Summary
Asset quality maintenance will pose the biggest challenge to the bank which is already hovering at a very low coverage ratio. Even keeping the NPLs [non-performing loans] ratio maintained at around current levels and just providing enough to reach a 100% coverage in four yearly strides, will siphon-off a significant portion of the income.
Exposure of investments to the stock market and the RE market may pose a threat the bottom line, however with the bank’s focus on the Abu Dhabi markets does offer a certain cushion given the better performance exhibited by them.
Albeit, the era of super-normal growth is a bygone and will remain a bygone, ADIB may still witness a very healthy growth going forward. The 4-year CAGR of 42% in assets that we have witnessed till 2008, may drop down to the early double-digits; for ADIB we see a 4-yr CAGR of 16% for the forecast period. That combined with range-bound spreads, is expected to keep net commission income (NCI) growth in check.
Attributable to the sheer magnitude and persistence of provisions, a modest growth in the net commission income and low capital gains on investments, we forecast a modest growth in the bottom-line of the bank in 2009 to the extent of 10% YoY. Better top-line performance supplemented with lower provisions is expected to provide the profitability with the necessary thrust in 2010 and onwards.
We expect a modest growth of 15% YoY in the NCI in 2009, which is anticipated to maintain an average rise of 13% over the forecast period. Non-commission income generating from fees and commission income and capital gains from investments is expected to lay low over the forecast period given the prevalent and expected market conditions.
(Excerpts from a research report by Global Investment House released in May 2009)
(This story appeared in The Malaysian Reserve on May 25, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)