Group CFO’s Message

ADCB has undergone a significant transformation in the past 12 months following the merger with UNB, and the subsequent acquisition of Al Hilal Bank. The changes have propelled the Bank to a stronger position, enhancing our scale and reach.

The results featured in this letter are based on the full-year pro forma financial statements for the combined entity, following the merger between ADCB and UNB, and the subsequent acquisition of Al Hilal Bank, both on 1 May 20191. The enlarged ADCB Group is more resilient and well-equipped for sustainable growth. We are better able to navigate ongoing economic headwinds and adapt to the changing regulatory environment.

In a fragmented banking sector, dominated by a few large players, our size and scale mean we are well-positioned to capitalise on more opportunities to drive growth in a competitive market. Following the merger, our market share has grown significantly. We are now the third-largest bank by market capitalisation, the third-largest by assets in the UAE, and the third-largest retail lender in the country. With Al Hilal Bank, we have also become the fourth-largest Islamic banking franchise.

REALISING SYNERGIES

Our results in 2019, particularly those in Q4, were a demonstration of how the merger and integration process rapidly paved the way for greater efficiencies and a sustainable reduction to our cost base.

While pro forma net profit of AED 5.244 billion was down on last year, we continued to deliver a double-digit return on average tangible equity of 11.2%. Pro forma net profit excluding integration-related costs was 9% lower at AED 5.590 billion as improvements in operating expenses and higher non-interest income were offset by higher cost of funds and impairment charges.

The Bank is quickly moving to realise synergies, and our commitment to a rapid and effective integration process has already delivered significant savings. We saved AED 350 million in cost synergies as a result of the merger and boosted shareholder value through an upward revision to our target in October 2019.

We achieved this through greater manpower efficiency and productivity enhancements, optimising the branch and ATM networks, and realising economies of scale from IT integration. One-off integration costs totalled AED 346 million at year-end, in line with the planned integration expenditure of AED 980 million.

We are on track to meet our run-rate synergy target of AED 840 million annually — up 37% on the preliminary assessment of AED 615 million.

AED

350 mn

Realised synergies in 2019

AED

840 mn

Run-rate Synergy target per annum by the end of 2021

Fourth quarter cost-to-income ratio (excluding integration-related costs) showed an improvement of 440 basis points at 35.1%, compared to 39.5% a year earlier — supported by robust post-merger synergies. These synergies and greater efficiencies also resulted in a 2% year-on-year reduction in pro forma operating expenses to AED 1.285 billion in Q4; excluding one-off integration-related costs, we saw an improvement of 9%.

Q4 pro forma operating profit before impairment allowances also increased significantly, up 6% year-on-year to AED 2.008 billion; excluding integration-related costs, the figure rose by 10%.

Meanwhile, full year pro forma non-interest income increased by 3% on last year to AED 2.760 billion. This was largely due to a narrower revaluation loss through income statement on investment properties in the last quarter.

1 The pro forma financial information consists of the unaudited pro forma condensed consolidated statement of financial position of ADCB, UNB and AHB (together referred to as "the Group") as at December 31, 2019, as if the merger had taken place as at January 1, 2018, and its unaudited pro forma condensed consolidated income statement for the year ended December 31, 2019, and notes to the unaudited pro forma financial information.
The purpose of the pro forma financial information is to show the material effects that the merger of ADCB and UNB with subsequent acquisition of AHB would have had on the historical consolidated statement of financial position if the Group had already existed in the structure created by the combination as at January 1, 2018 and on the historical consolidated income statement for the year ended December 31, 2019.

STRONG BALANCE SHEET

Our balance sheet remains resilient and the Bank maintains a strong liquidity profile and capital position.

Our total assets reached AED 405 billion in 2019. Net loans to customers were at AED 250 billion. In line with our UAE-centric strategy, 94% of our loan portfolio was within the country and remained well-diversified across both business segments and economic sectors.

Total customer deposits stood at AED 262 billion, falling by 8% as a result of the Bank’s decision to exit more expensive time deposits to focus on growing low-cost current and savings account (CASA) deposits.

In 2019 our CASA crossed the AED 100 billion mark for the first time in the Bank’s history, to a total of AED 102 billion. This was a significant achievement and represented an increase of AED 7 billion year-on-year. CASA deposits comprised 39% of total customer deposits, compared to 33% a year ago.

AED

250 bn

Net loans

AED

262 bn

Customer deposits

39%

CASA Contribution to total customer deposits

The Bank’s loan-to-deposit ratio remained healthy at 95.4%, and our liquidity coverage ratio of 127.3% was well above the minimum of 100% set by the UAE Central Bank. In the interbank markets, ADCB continued to be a net lender of AED 10 billion in 2019.

Non-performing loans declined to AED 8.491 billion and net purchase or originated credit impaired (POCI) assets (loans only) were AED 3.710 billion at year end. Our non-performing loan ratio (NPL) fell to 3.16%, while NPL ratio including net POCI assets stood at 4.53%. As at 31 December 2019, cost of risk was 0.80%, compared to 0.74% a year earlier.

CAPITAL STRENGTH

As a Domestic Systemically Important Bank (DSIB) in the UAE, we continue to be well-placed to meet regulatory requirements and have a robust Basel III capital adequacy ratio of 16.9%, with a common equity Tier 1 (CET1) ratio of 13.5%.

Our credit ratings are solid. International ratings agencies Fitch and Standard & Poor’s reaffirmed our credit ratings following the merger at A+ and A respectively — a reflection of ADCB’s strong fundamentals.

FAST-PACED INTEGRATION

The pace of our merger and integration set new records, well ahead of previous industry precedents.

We made significant progress in aligning our governance framework, organisational structure, customer experience, systems and culture. Immediately after the legal completion of the transaction in May, we implemented an end-state organisational structure, establishing a leaner franchise. Also, within one month of legal completion of the transaction, we harmonised credit policies to ensure best practice across the Group, and fully integrated the treasury functions, with centralised management of liquidity and funding.

The full integration of Al Hilal Bank into the ADCB Group was completed in the third quarter, which included the migration of the corporate and SME portfolios to the ADCB platform.

In October 2019, we combined and optimised the entire ADCB and UNB branch and ATM networks, and rolled out the ADCB brand across all physical and digital channels. This major milestone was achieved in a highly ambitious timeframe of five months.

While integration work continues at a rapid pace to deliver key milestones on schedule, the Group remains focused on protecting and growing its businesses through an unwavering commitment to excellent customer service.

2020 VISION

We are now midway through the final phase of integration. IT systems and infrastructure will be fully integrated in the second quarter of 2020 and all former UNB customers will have had their accounts migrated to the ADCB platform.

In 2019, the pace of our transformation was powerful and we are committed to continuing the momentum we built.

We will capitalise on the synergies and operating efficiencies that the merger has delivered to ensure greater value for shareholders.

I would like to extend my thanks to our employees for all their hard work and dedication throughout the year. The Bank is future-ready, better placed than ever to rise to tomorrow’s challenges, and grasp the opportunities we are seeing in a rapidly transforming UAE economy.

Deepak Khullar
Group Chief Financial Officer