Abu Dhabi Commercial Bank (ADCB.AD)

Abu Dhabi Commercial Bank (ADCB.AD) Equity Research Q1 07 Results Update Current Price: AED 6.12* Country: United Arab Emirates Fair value Target: AED 6.50 Sector: Commercial Banking Recommendation: NEUTRAL Exchange: Abu Dhabi Securities Market *Price as of May 3rd 2007 Sector Coverage Team Mohamed El Nabarawy, CFA +9714 3199 756 melnabarawy@shuaacapital.com Munir Shahin +9714 3199 754 mshahin@shuaacapital.com Ryan Ayache +9714 3199 758 rayache@shuaacapital.com ADCB missed our expectations on 2006 net income by 9.5%, reporting AED 2.08 bn. The bank reported AED 456.7 mn in net income in Q1 07, down 24% from Q1 06. We have revised our forecasts for the full year 2007 net income downwards to AED 1.97 bn on the back of lower expectations for capital markets related income (IPO funding, brokerage and asset management), in addition to tighter interest spreads. Lending growth was strong in 2006 and we believe that going forward it will be capped by the bank s current tight liquidity position. Interest rates have tightened in 2006 and we expect them to tighten further in 2007. Higher interest on customer deposits in addition to the issuance of medium term notes which cost the bank around 5.4% will result in higher cost of funds going forward. We expect non interest income to fall by 33% in 2007 as AED 540 mn in IPO related income which was booked in 2006 is not expected to recur this year. We also expect other capital markets related income, from brokerage and asset management, to decline. In light of the revised forecasts, we have revised our target value for ADCB from AED 8.98 to AED 6.50 per share, which compares to a current price of AED 6.12 per share. We have also downgraded our investment recommendation from Buy to Neutral. Year Net profit BV EPS BVPS RoAE )%( P/E )x( P/BV )x( Dec-09E 2,607,030 13,951,250 0.65 3.49 20.0% 9.4 1.8 Dec-08E 2,298,698 12,141,971 0.57 3.04 20.2% 10.6 2.0 Dec-07E 1,968,416 10,629,428 0.49 2.66 19.6% 12.4 2.3 Dec-06 2,081,617 9,448,378 0.52 2.36 23.1% 11.8 2.6 52-week range (AED) 5.20-8.85 Number of shares (000 ) 4,000,000 Free Float (%) 22 Market cap (AED 000) 24,480,000 Market cap (USD 000) 6,666,485 Div. Yld. 2006 (%) 5.0 18 16 14 12 10 8 6 4 2 0 Jun-05 ADCB stock performance vs. SC UAE Index rebased Aug-05 Oct-05 ADCB (AED) Dec-05 Feb-06 Apr-06 Jun-06 SC UAE Index rebased Aug-06 Oct-06 Dec-06 Feb-07 Apr-07

Analysis and Revised Forecasts Strong growth in funding to continue in 2007 Deposits to grow by a CAGR of 15.4% over forecast period ADCB s balance sheet grew by 40% in 2006, as the bank managed to outperform its peers in customer deposits growth, and issued AED 8.9 bn in medium term notes during the year. Customer deposits continued their strong growth, rising by 14% in Q1 2007. We are revising our forecasts for customer deposits and EMTNs upwards as we are forecasting AED 10 bn of EMTNs to be issued in 2007 and customer deposits to grow by 25%. We remain bullish on the bank s ability to grow its funding base on the back of : 1) High demand for GCC EMTNs by international institutions, 2) an expected population growth rate in the UAE of 6.1% in 2007, 3) solid economic fundamentals in the UAE with an expected nominal GDP growth rate of 13.7% in 2007, 4) and the close association with the Government of Abu Dhabi, which is a major shareholder in the bank. Tight liquidity position to cap lending growth Taking advantage of the strong funding growth, ADCB managed to grow its loans by 48% in 2006. The growth in lending was primarily focused towards corporate loans (to the financials and services sectors) as well as personal loans. Liquidity has tightened by 2006 end and is close to the Central Bank loans to stable funds ceiling of 100%. The aggressive lending growth also resulted in a lower capital adequacy ratio, from 18.8% in 2005 to 16.3% in 2006. We believe that the bank will have to manage lending growth to ensure that capital adequacy does not fall below 14%, which we believe is the management s target. Loans growth is therefore expected to fall behind deposits growth and liquidity is set to improve. Interest spreads to tighten further on the back of higher cost of funds Interest spreads have tightened in 2006 and we expect them to tighten further in 2007 on the back of rising cost of funds. The strong growth in sources of funds came at a higher funding cost for the bank, up from 2.7% in 2005 to 4.1% in 2006. The higher interest rates on customer deposits in addition to the issuance of medium term notes, which cost the bank around 5.4%, resulted in the overall rise on cost of funds. In addition, since the bank is experiencing tight liquidity, it will have to maintain competitive rates in order to attract funds, which it needs in order to grow its lending. The growth in net interest income will therefore be driven primarily by balance sheet growth. Non interest income to fall on decline of capital markets related income IPO related income expected to fall significantly IPO related income accounted for around 40% of ADCB s AED 1.32 bn non interest income in 2006. This is very high when compared to peers and we are expecting the bank to only book AED 40 mn in IPO related income this year, resulting in a total non interest income of AED 893 mn in 2007. Although we expect the issuance market to remain strong in the UAE, it is unlikely that UAE banks will book significant income on the back of leveraging IPO subscriptions. We also expect other capital markets related income, from brokerage and asset management, to decline. Hike in staff costs on the back of a performance program The rise in ADCB s staff costs by 41% in 2006 was the highest among peers. We attribute this to a performance program initiated by the bank resulting in a bonus payment of around AED 60 mn. As per management guidance, staff costs are expected to rise by around 20% in 2007. 2

Both loan quality and NPL coverage have improved in 2006. However, NPLs are not fully covered, indicating higher provision expense to take place in the coming years assuming the bank will be targeting a 100% NPL coverage ratio. 2007 Net income has been revised downwards to AED 1.97 bn Net profits to grow by a CAGR of 10.2% over forecast period ADCB missed our expectations on 2006 net income by 9.5%, reporting AED 2.08 bn, vs. our forecasted AED 2.30 bn. The bank reported AED 456.7 mn in net income in Q1 07, down 24% from Q1 06. We have revised our forecasts for the full year 2007 downwards to AED 1.97 bn. Our downward revision was driven by lower expectations for capital markets related income (IPO funding, brokerage and asset management), in addition to tighter interest spreads. We expect RoAE to fall from 23% in 2006 to 20% in 2007 and hover around 20% thereafter. Key figures - revised AED 000 2006 A 2007E new 2007E old Balance Sheet Assets 81,088,378 104,979,285 86,774,969 Loans 62,424,649 76,974,295 61,510,821 Deposits 43,396,851 54,981,640 48,055,329 Income Statement Net interest income 1,773,991 2,171,914 2,286,724 Non interest income 1,323,187 893,008 1,684,746 Net income 2,081,617 1,968,416 2,761,267 Ratios Interest spreads 2.62% 1.94% 1.89% RoAE 23.10% 19.60% 25.60% Valuation We downgrade our recommendation to Neutral After reducing our target value to AED 6.50 per share In light of the revised forecasts, we have downgraded our target value for ADCB downward from AED 8.98 to AED 6.50 per share, which compares to a current price of AED 6.12 per share. We have also downgraded our investment recommendation from Buy to Neutral. Value per share (AED) Weighting DECF 6.47 70% Relative valuation 6.59 30% Fair value 6.50

Financials ADCB Balance Sheet (AED 000) Year to December 2006 2007E 2008E 2009E 2010E 2011E Cash & Central Bank 1,898,457 2,427,273 2,992,528 3,373,089 4,153,008 4,091,631 Fixed Income Investments 3,700,744 5,498,164 6,428,896 7,226,880 7,988,058 8,889,045 Equity Investments 77,630 89,275 102,666 118,066 135,775 156,142 Due from Banks 10,065,209 16,494,492 19,286,688 21,680,639 23,964,174 26,667,134 Net Loans 62,424,649 76,974,295 90,004,542 101,176,316 107,838,785 115,557,583 Fixed assets 512,024 604,188 694,817 778,195 840,450 882,473 Other assets 2,409,665 2,891,598 3,325,338 3,724,378 4,022,328 4,223,445 Total assets 81,088,378 104,979,285 122,835,474 138,077,563 148,942,580 160,467,452 Customer deposits 43,396,851 54,981,640 64,288,958 72,268,797 79,880,581 88,890,448 Due to banks 7,970,187 10,097,828 11,807,194 13,272,756 14,670,723 16,325,459 Long term loans 16,610,194 25,610,194 30,454,194 34,032,194 33,359,194 31,623,194 Other liabilities 2,386,968 2,745,013 3,156,765 3,472,442 3,715,513 3,901,288 Total liabilities 70,364,200 93,434,675 109,707,111 123,046,190 131,626,011 140,740,389 Minority Interest 65,800 127,816 200,237 282,372 376,535 483,022 Share capital 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 Reserves 4,058,157 4,254,999 4,484,868 4,745,571 5,044,450 5,382,447 Retained earnings 1,342,892 2,327,100 3,609,773 5,158,349 6,772,293 7,989,082 Cumulative Change in Fair Value 47,329 47,329 47,329 47,329 47,329 47,329 Total shareholders equity 9,448,378 10,629,428 12,141,971 13,951,250 15,864,072 17,418,858 Proposed dividends 1,210,000 787,366 786,155 797,751 1,075,962 1,825,183 Total liabilities and equity 81,088,378 104,979,285 122,835,474 138,077,563 148,942,580 160,467,452 ADCB Income Statement (AED 000) Year to December 2006 2007E 2008E 2009E 2010E 2011E Interest income 4,127,608 5,559,491 6,785,016 7,768,441 8,524,288 9,178,028 Interest expense -2,353,617-3,387,577-4,238,925-4,861,324-5,295,787-5,610,018 Net interest income 1,773,991 2,171,914 2,546,091 2,907,117 3,228,500 3,568,011 Net fee and commission income 1,129,246 755,095 868,359 955,195 1,050,715 1,134,772 Net gains from FX transactions 181,472 90,736 95,273 100,036 105,038 110,290 Dividends income 3,785 4,542 5,223 5,746 6,320 6,952 Investment gain -28,224 3,882 4,464 5,133 5,903 6,789 Other income 36,908 38,753 40,691 42,726 44,862 47,105 Total non-interest income 1,323,187 893,008 1,014,010 1,108,836 1,212,839 1,305,908 Total income from operations 3,097,178 3,064,922 3,560,102 4,015,953 4,441,339 4,873,919 Staff and general expenses -440,218-528,262-607,501-668,251-715,028-765,080 Total provision charge -193,470-140,173-175,458-209,833-157,298-98,370 Depreciation -41,064-50,082-58,284-66,091-72,626-77,304 Other expenses -272,597-313,487-344,835-379,319-409,664-442,437 Total non-interest expenses -947,349-1,032,004-1,186,078-1,323,494-1,354,616-1,383,192 Profit before tax 2,149,829 2,032,919 2,374,023 2,692,459 3,086,723 3,490,727 Taxes -2,630-2,487-2,904-3,294-3,776-4,270 Minority Interest -65,582-62,016-72,421-82,135-94,163-106,487 Net profit 2,081,617 1,968,416 2,298,698 2,607,030 2,988,784 3,379,969

ADCB -Key Ratios %, (unless otherwise stated) Year to December 2006 2007E 2008E 2009E 2010E 2011E CAGR Growth Equity 9.8 12.5 14.2 14.9 13.7 9.8 13.0 Assets 41.1 29.5 17.0 12.4 7.9 7.7 14.6 Loans 48.1 23.3 16.9 12.4 6.6 7.2 13.1 Deposits 27.9 26.7 16.9 12.4 10.5 11.3 15.4 Net interest income 29.2 22.4 17.2 14.2 11.1 10.5 15.0 Operating income 16.9-1.0 16.2 12.8 10.6 9.7 9.5 Net profit 8.9-5.4 16.8 13.4 14.6 13.1 10.2 Capital Adequacy Capital base/rwa 16.3 14.4 13.7 13.8 14.3 14.5 Asset Quality NPL / Gross Loans 1.8 1.7 1.7 1.6 1.6 1.5 LLP / NPL 88.4 85.0 85.0 90.0 95.0 100.0 Margins & profitability Interest Spread 2.1 1.9 1.9 1.9 1.9 1.9 Net interest Margin 2.7 2.4 2.3 2.3 2.3 2.4 Net Profit Margin 38.2 30.5 29.5 29.4 30.7 32.2 RoAE 23.1 19.6 20.2 20.0 20.0 20.3 RoAA 3.0 2.1 2.0 2.0 2.1 2.2 Efficiency Cost/income 30.6 33.7 33.3 33.0 30.5 28.4 Liquidity Loans / Interest Earning Assets 80.3 76.1 76.1 76.1 75.4 74.7 Loans / Deposits 143.8 140.0 140.0 140.0 135.0 130.0

Research Head of Research Walid Shihabi +9714 3199 750 wshihabi@shuaacapital.com Strategy and Economics Walid Shihabi +9714 3199 750 wshihabi@shuaacapital.com Ahmad Shahin +9714 3199 742 ashahin@shuaacapital.com Ryan Ayache +9714 3199 758 rayache@shuaacapital.com Commercial Banks and other Financial Services Mohamed El Nabarawy, CFA +9714 3199 756 melnabarawy@shuaacapital.com Munir Shahin +9714 3199 754 mshahin@shuaacapital.com Ryan Ayache +9714 3199 758 rayache@shuaacapital.com Data Ahmad Shahin +9714 3199 742 ashahin@shuaacapital.com Heavy Industries and Utilities Mohamed El Nabarawy, CFA +9714 3199 756 melnabarawy@shuaacapital.com Munir Shahin +9714 3199 754 mshahin@shuaacapital.com Telecommunications, Media and Technology Marc Hammoud +9714 3199 753 mhammoud@shuaacapital.com Transportation and Logistics Kareem Murad +9714 3199 757 kmurad@shuaacapital.com Real Estate, Construction and Construction Materials Roy Cherry +9714 3199 767 rcherry@shuaacapital.com Lara Hourani +9714 3199 687 lhourani@shuaacapital.com Layout & Design Jovan Ruseski +9714 3199 759 jruseski@shuaacapital.com Head of Sales Jamil Barrage +9714 3199 718 jbarrage@shuaacapital.com Regional Sales Mohamad Bleik +9714 3199 773 mbleik@shuaacapital.com Elias Bakhazi +9714 3199 732 ebakhazi@shuaacapital.com Faisal Rajeh +9714 3199 794 frajeh@shuaacapital.com Tala Al-Sahsah +9714 3199 768 talsahsah@shuaacapital.com Yazen Abu Gulal +9714 3199 683 yabugulal@shuaacapital.com International Sales Nadine Haddad +9714 3199 733 nhaddad@shuaacapital.com Saad Tayara +9714 3199 765 stayara@shuaacapital.com Equity Advisory Fares Mechelany +9714 3199 745 fmechelany@shuaacapital.com Brokerage Diya Al Sarraj +9714 3199 740 dsarraj@shuaacapital.com Nadeem Outry +9714 3199 744 noutry@shuaacapital.com

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