Financial Performance of Abu Dhabi Commercial Bank in UAE - Case Study Example

? FINANCIAL PERFORMANCE OF ABU DHABI COMMERCIAL BANK IN UAE Company Profile Abu Dhabi Commercial Bank was incorporated in the year 1985 as a public joint stock company in accordance with the UAE Federal Commercial Companies Law No. (8) of 1984 (as amended). The bank is a limited liability company and was incorporated in the United Arab Emirates (UAE). The operations of the bank have substantial local exposure and the bank conducts it through a network a network of 50 branches and four pay offices. Analyzing the group structure of the bank, Australia’s Macquarie Bank and Malaysia’s RHB Capital Berhad comes as the prominent names. In the financial year 2010, following its strategy of expansion, Abu Dhabi Commercial Bank acquired RBS’ UAE retail, wealth management and SME banking business. [Financial reports] Abu Dhabi Commercial Bank is currently the third largest bank in the UAE in terms of operations and second largest in the Emirates of Abu Dhabi in terms of total assets. The bank has a substantial customer base and holds around 12% market share by loans and 10% market share by deposits. The bank currently has approximately 500,000 retail customers and 33,000 wholesale customers in the UAE. [Presentations] Abu Dhabi Commercial Bank has divided its operations into four main domains as follows Personal Banking It offers individual customers financing and other facilities such as Education loans, Auto loans, Housing loans, Overdraft facilities and wealth management services. Business Banking It provides services such as SME Banking, Corporate Banking, Government Banking, Financial Institutions, Investment Banking and Transaction Banking. Meethaq Islamic Banking The bank also offers Shari’ah compliant financial solutions. The Islamic Banking business is regulated by the UAE Central Bank and supervised by an independent Fatwa and Shari’ah Supervisory Board. Stock market Abu Dhabi Commercial Bank Date of listing April 24, 1985 Date of incorporation January 7, 1985 Chairman Eissa Mohamed Ghanem Al Suwaidi CEO Alaa Mohamed Atta Khalil Eraiqat Government ownership 58.08% owned by the Abu Dhabi Government Total shares outstanding 5,595,597,381 Fundamental Analysis Abu Dhabi, the second largest city of UAE, is one of the emerging economies of the world. During the financial year 2009, amid the global economic crisis, the growth trend of Abu Dhabi took a downward plunge when the real GDP growth remained only 0.2% and its GDP per capita was 90,538 USD, which was still considered among the highest at the global level. With the implementation of prudent policies, the government of UAE has now able to restore its previous economic prosperity and it is portraying inclining trend once again. [Presentation] The banking sector in UAE can be regarded as the biggest beneficiary of the economic growth. This is due to the fact that the prevailing interest rate in the UAE economy is lower as compared to the other countries depicting similar economic trends. Central Bank of UAE is the regulatory authority which issues guidelines and pronouncement regulating the functioning of these banks. As of March 31, 2011, UAE economy had 23 local banks with 736 branches and 28 licensed foreign banks with 83 branches. The following graphical representation presents the growth in the banking sector in UAE over the years [presentation] Technical Analysis The share price of Abu Dhabi Commercial Bank remained fluctuated over the past few years. If we consider the financial year 2006, the share price of the bank depicts a rising trend. In the beginning of the financial year 2006, the share price of the bank was crossing 5.66, but by the end of the financial year 2006, the share price took a downward plunge and the December closing of the financial year recorded a share price of 4.16. Despite the declining trend in the previous year, Abu Dhabi Commercial Bank was able to restore its previous market capitalization and by the end of the financial year 2007, the share price represents an increase of 19%. Financial year 2008 and 2009 are still considered to be the worst ever for the global economy. The most severe effects of the global financial crisis were experienced by the banks and financial institution all across the globe. UAE, being considered one of the resilient and remarkable economies of the world, was also jolted. Amid the economic crisis, uncertainty prevailed in the capital and money markets and the share prices of the banks took a tumble. The share price of Abu Dhabi Commercial bank took a massive downward plunge from 4.95 per share to 1.53 as at December 31, 2008. UAE was able to recover from the financial turmoil in the most efficient and apt manner. Abu Dhabi commercial bank was also able to restore the confidence of its investors and through prudent risk management and effective policy making, the market capitalization of the bank also improved. At the end of the financial year 2009 the share price of Abu Dhabi Commercial Bank was 1.56 and by the end of the financial year 2010 it reached a stable 2.07. The earning’s pattern of the bank is linked with its share movement over the years. However during the financial year 2009, the earnings become negative as the company suffered a net loss during the year. Forecast about the Future Performance The following figure shows the share price movement of Abu Dhabi Commercial Bank in the past month [Bloomberg] Considering the above share price movement, it can be forecasted that the share price of the bank is expected to show fluctuation. If it is assumed that the share price of the bank follows the same pattern of movement for the coming week, the following figure represents the projected share movement for one week. The following table presents certain financial estimates pertaining to the future operations of Abu Dhabi Commercial Bank Year EPS Dividend per share EBIT ROE 2013 0.5 0.16 4,198.50 13.91 2012 0.38 0.11 4,038.00 12.04 2011 0.3 0.06 3,703.50 10.48 [Financial Estimates] As evident from the above mentioned data, the future outlook of Abu Dhabi Commercial Bank appears strengthen and stabilized. Financial Analysis (Long term investment) Ratio analysis is a very accurate and reliable tool when it comes to analyzing the financial outlook of a bank. The primary reason to conduct a ratio analysis is to quantify the results of the operations of a bank and compare them with that of the prior year(s) in order to assess different aspects of the financial feasibility. The ratios can be divided into various categories such as profitability, gearing and liquidity, each focusing on a different area of the financial outlook of the bank and highlighting its performance. These analyses form an integral part of the financial statement analysis, especially from the investors point of view, who always strive to invest in companies having strengthen and stabilizing financial ratios and representing an upward trend. It is of great significance that the ratios must be benchmarked against a standard in order for them to possess a meaning. Keeping that into account, the comparison is usually conducted between companies portraying same business and financial risks, between industries and between different time periods of the same company. Ratios 2010 2009 Increase / (decrease) - % Short term solvency ratios   Current ratio 0.527 0.567 -7.14% Cash ratio 0.046 0.039 16.27% NWC to total asset ratio 0.341 0.284 20.22% Long term solvency ratios   Total debt ratio 0.890 0.881 1.06% Debt/equity ratio 8.108 7.392 9.68% Equity multiplier 9.108 8.392 8.53% Profitability ratios   Profit margin 0.745 0.699 6.67% Return on assets 0.002 -0.003 168.46% Return on equity 0.020 -0.027 174.29% The liquidity ratio measures the company’s ability to pay its short term liabilities. The ratio illustrates that how quickly a company can convert its assets into cash and cash equivalent in order to pay off its short term liabilities [Jim Mueller]. The most commonly used liquidity ratio, the current ratio, which is calculated by comparing the current assets and current liabilities. The strengthened the current ratio the more ability the company has to pay its debts and short term obligations over the next 12 months. The current ratio of the bank has decreased by 7.14% during the current financial year. The current assets of the bank have increased by 13% during the current financial year it was offset by a further increase of 22% in the current liabilities. Cash ratio analyses the liquidity of the bank more precisely. The ratio is calculated by dividing the cash and cash equivalent with the total current liabilities. The higher the cash ratio the quicker the company would be able to pay off its current liabilities. In addition, the banks are also required to maintain liquidity reserve in compliance with the requirement issued by the central bank. Considering the financial statement of Abu Dhabi Commercial bank for the year ended December 31, 2011, the cash ratio has increased by 16.27% which is primarily due to the fact that the yearend balance of cash and cash equivalent has increased by a remarkable 42% during the current financial year. The increase in the ratio can also be analyzed by considering the fact that the bank balances with the central bank has increased by 25% during the current year which could be due to the amendment in the statutory liquidity requirement requiring the bank to maintain more cash deposit with the central banks. The Working Capital to Total Assets ratio is an authentic tool to measures a company's ability to cover its short term financial obligations (Total Current Liabilities) by comparing its Total Current Assets to its Total Assets. An inclining trend shows a positive sign and portrays that the company’s liquidity is improving over time [Financial Glossary]. From a bank’s perspective, the working capital requirement is primarily determined through the difference between the deposit balance and the loans and advances balance. The ratio has improved by 20.22% during the current financial year as its asset base has increased by an impressive 11% during the period The gearing ratios and indicate the level of risk taken by a company as a result of its capital structure [gearing ratio]. These ratios are a great source of determining the level of financial risk to which the company is exposed and thus helps in reducing it to the optimum The debt ratio represents characteristics which is the opposite to that of the equity ratio. Debt ratio, which calculated by comparing the total liabilities to total assets, is a primary tool in determining the influence the company is under as a result of obtaining finances from sources other than equity. A lower ratio represents that the company is utilizing its equity in order to finance its operations and thus curtailing the financial risk. It can be observed that the debt ratio of the bank has marginally increased by 0.94% during the current financial year. In order to determine the financial leverage of the company, debt equity ratio is considered to be the most important financial ratio. Financial leverage can be defined as the use of borrowed money in order to finance the operations. It is commonly observed that the banks finance a major portion of their operations through deposits and not through raising equity. The debt equity ratio of the bank has increased by 9.68% during the current financial year which can be corroborated by the fact the bank’s total liabilities have increased by 12% during the current financial year. The bank’s short term borrowing and derivative financial instrument have increased by 27% and 25% respectively which depict the fact that the bank is borrowing more in order to further increase its operations in the UAE financial market. Another measure of the bank’s leverage is its equity multiplier. The ratio is calculated by dividing the total asset of the bank with its total shareholder’s equity. The higher the equity multiplier, the more it indicates that the bank is relying on the borrowed funds in order to execute its operations. The increased borrowing of the bank is also shown in the equity multiplier ratio of the bank which has increased by 8.53% during the current financial year. Profitability ratios identify how efficiently and effectively a company is utilizing its resources and how successful it has been in generating a desired rate of return for its shareholders and investors. For banks, the net profit margin is calculated by dividing the profit available for distribution (net profit after tax) with the markup income generated on loans and advances. The profit margin for Abu Dhabi Commercial Bank has increased by 6.67% which shows that the bank made new disbursement of loans and advances during the current financial year. The inclining trend can also be justified from the fact that the markup and non-markup of the expense of the company did not increase with the same rate as the markup income. This shows that the bank was able to curtail its expenses following a prudent policy of resource allocation. Return on asset represents how lucrative a company is performing in comparison with the total asset base employed by it. The ratio is calculated by dividing the total income with the total assets of the bank. The return on asset ratio has shown remarkable improvement. In the prior year, financial year 2009, Abu Dhabi Commercial bank incurred a net loss which was primarily due to the impairment allowance on account of doubtful loans and advances. But through sensible risk management, the bank was able to reduce the impact in the current financial year and thus was able to provide its share holders with a higher return. Return on equity (ROE) is, according to the analyst, is considered to be the most significant ratio in order to evaluate a company’s performance from an investor’s point of view. ROE measures a company’s ability to earn a return on ordinary shareholder’s equity employed by the company. Following the same trend as ROA, the ROE of Abu Dhabi Commercial Bank has also shown noteworthy improvement.    Conclusion UAE is one of the stabilized economies of the world. Keeping in consideration its economic potential, the government is now focusing more and more on towards regulating its financial market in order to safeguard its banking industry from any severe repercussions in the event of financial turmoil and uncertainty. Commercial banks in particular, make a significant portion of the financial industry in UAE. Abu Dhabi Commercial Bank is regarded as one of the renowned banks of the country offering a premium banking experience to its customers. The bank was able to withstand the repercussions of the economic crisis and able to operate in a better and more efficient manner. Considering the short term investment analysis of the company, the share price of the bank is expected to rise in the future as well as its earnings, ROE and dividend per share. These factors are liable to attract prospective investors. Considering the financial analysis for long term investment purposes, the company is portraying stabilized and strengthen financial outlook as both its liquidity and profitability appears to be increasing. Thus it could be conclude that Abu Dhabi Commercial Bank is operating effectively in the UAE and is an attractive venture for earning decent return on investment. References Financial Reports. Abu Dhabi Commercial Bank. Viewed 28th June 2011 Presentations. Abu Dhabi Commercial Bank. Viewed 28th June 2011 Bloomberg. Abu Dhabi Commercial Bank. Viewed 28th June 2011 Financial Estimated. Abu Dhabi Commercial. Viewed 28th June 2011 Jim Mueller. Understanding financial Liquidity. Viewed 27th June 2011 < http://www.investopedia.com/articles/basics/07/liquidity.asp#axzz1QmH3X0Uk> Gearing ratio. Bloomsbury information limited. Viewed 27th June 2011 < http://www.qfinance.com/dictionary/gearing-ratios> Read More