In a month that saw a flood of Sukuk issuances, Abu Dhabi Commercial Bank (ADCB)’s US$500 million sale at the end of November went almost unnoticed. However, the bank received more than US$1.4 billion-worth of orders for its issuance, from investors across Asia, Europe and the Middle East, pricing the five-year papers at 4.07%.
As one of the largest banks in the UAE and supported by the government of Abu Dhabi, the positive response to ADCB’s Sukuk does not come as a surprise, even as it sold its papers amid “very volatile and challenging market conditions”, as the bank itself acknowledged in a statement.
However, with some of the proceeds from the transaction to be used for the acquisition of real estate assets; and the bank just this year growing its property management segment, could ADCB be treading the fine line between Shariah compliance and over-exposure to real estate?
Despite this potential concern, what is notable about ADCB’s Sukuk issuance is that it could signal the strengthening of this conventional bank’s Islamic banking business.
Growing presence
While not a new segment for the bank, having been introduced in 2008, ADCB’s Islamic banking arm has grown in importance this year. In July, it unveiled a new look for the business, launching a suite of products mirroring and complementing its conventional services. Where its Shariah compliant services were previously offered under the Meethaq brand, its wider range of products are now provided via ADCB Islamic Banking.
Ala’a Eraiqat, CEO of ADCB, said that ADCB Islamic Banking aims to be seen as the Shariah compliant product provider of choice, noting that: “Islamic banking is one of the fastest-growing segments in the banking world and goes beyond just financial considerations. ADCB has raised the bar in this sector by offering a full suite of Islamic banking Shariah compliant services, in line with the products and services on offer in conventional banking.”
Money talks
In the third quarter ended the 30th September this year, ADCB reported a year-on-year growth of over 1,000% in net income from Islamic financing to AED36.32 million (US$9.89 million). Although still only contributing around 2.7% to the bank’s total net interest and Islamic financing income for the three months to the 30th September this year and 5.92% to its bottom line during the period, growth from ADCB Islamic Banking has far outpaced its conventional business. For the third quarter ended the 30th September this year, ADCB’s net interest income grew 48.74% from a year earlier to AED1.3 billion (US$353.97 million).
ADCB’s Islamic financing portfolio has also grown at a faster pace than its conventional loan portfolio between the 31st December last year and the 30th September 2011, adding AED840 million (US$228.72 million) to the books compared to the growth of AED370 million (US$100.75 million) recorded in its conventional loans.
In addition, while contributing to a smaller portion of its Islamic portfolio, ADCB’s financing to corporates grew 37.96% from the 31st December 2010 to the 30th September 2011, against the 23.04% growth recorded in its Islamic retail financing, displaying the bank’s growing significance in the Shariah compliant corporate financing space.
Diversify or die?
While ADCB’s Islamic banking business has clearly helped it to diversify its income streams, a potential concern is whether the bank is diversifying enough and if its Shariah compliant forays may be being put to use in an insufficiently efficient manner.
According to a report from Moody’s, the proceeds of ADCB’s recently issued Sukuk will be used to acquire ownership interest in a portfolio comprising mainly of real estate Ijarah assets, non-real estate Ijarah assets, Salam assets and other Shariah compliant assets.
While the Sukuk investment portfolio itself is diversified, the question is whether ADCB should be increasing its exposure to real estate, given the lessons of the 2008 financial crisis and with the bank already beginning to run property management separately as one of its four operating segments, effective the 1st April this year. According to the notes to its financial statements, the property management segment comprises real estate management and engineering service operations of its subsidiaries Abu Dhabi Commercial Properties, Abu Dhabi Commercial Engineering Services, ADCB Real Estate Fund operations and rental income.
A further possible concern is the propensity for Islamic banks in the UAE to invest heavily in real estate as they seek Shariah compliant transactions, leaving their balance sheets vulnerable to market conditions. With ADCB’s Islamic banking and property management activities growing in tandem, the bank may need to be cautious of over-exposing itself to the UAE’s still-fragile real estate market.
Despite these possible pitfalls, ADCB has clearly geared itself up to become a more visible player in the Islamic banking market. As growth of its core conventional business lags behind that of its Islamic division, the launch of ADCB Islamic Banking appears set to help the bank diversify and expand its bottom line. However, it will have to be wary of limiting its coverage of UAE real estate in an effort to achieve Shariah compliance. — EB