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Abu Dhabi Commercial Bank Limited - Case Study Example

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The paper "Abu Dhabi Commercial Bank Limited" is a great example of a case study on finance and accounting. Abu Dhabi commercial bank, simply known as ADCB is one of the largest banks in the United Arab Emirates in terms of market capitalization and shareholder funds…
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Extract of sample "Abu Dhabi Commercial Bank Limited"

ABU DHABI COMMERCIAL BANK LIMITED Name Institution ABU DHABI COMMERCIAL BANK LIMITED Abu Dhabi commercial bank, simply known as ADCB is one of the largest banks in United Arab Emirates in terms of market capitalization and shareholder funds. The bank was established in 1985 through a merger of Emirates commercial bank, the federal commercial bank and the Khaleej commercial bank. The Abu Dhabi government owns sixty-five percent of the shares of the company through its investment arm, the Abu Dhabi Investment Authority (Bllomberg, 2011). The Abu Dhabi commercial bank is a public shareholding company under limited liability. The bank is listed in the Abu Dhabi stock exchange as a public joint stock company. The bank provides the following services; Islamic banking, merchant banking services, stock brokerage, commercial and investment banking, as well as fund management activities (Bloomberg, 2011). ADCB has 49 branches across United Arab Emirates and 2 branches in India. The bank operates through three divisions. They are business banking, personal banking and meetahq Islamic banking. The personal banking segment of the bank offers accounts credit and debit services, loans and wealth management services among other services. The business banking segment of the bank offers the following services, small and medium enterprises banking, corporate banking, investment banking and treasury banking. The meetahq-banking segment offers sharia law compliant banking. The company shares are listed in the Abu Dhabi stock exchange as ordinary shares. The bank was listed in the Abu Dhabi stock exchange in June 2001 (Zughaini & Kabbani, 2011). The Performance of the Abu Dhabi commercial bank. Abu Dhabi commercial bank has enjoyed tremendous success in the Abu Dhabi stock market since its inception. The bank stock prices have been increasing on a rate of fifty percent on average annually. The bank’s market capitalization has reached 8,417,500,000 United Arab Emirates dirhams and the total shares have grown to reach 4,180,000,000 shares in the year 2011. The bank has also continued tom enjoy increased profits through the years. For example, the company reported a profit of 0.8 billon AED dirham’s in 2004 and 1.36 billion United Arab Emirates dirhams in the year 2009 (Zughaini & Kabbani,2011). However, the company experienced a slump in profits due to the global financial crisis in 2008. The bank registered a loss of 142 million United Arab Emirates dirhams in the year 2008. The bank also experienced substantial losses in its investments due to its huge investments in the troubled Dubai world company, a Dubai conglomerate affected severely by the global financial crisis (Bloomberg, 2011). The Abu Dhabi commercial bank earnings per share have also been increasing considerably through the years. For example, the earnings per share were 6.4 percent in the year 2004. However, the earnings per share have decreased considerably from 6.4 percent in the year 2004 to 0.28 earnings per share in the year 2009. The reasons for the fall of the rate of earnings per share are the effects of the global financial crisis (Bloomberg, 2011). The bank has also enjoyed good returns over interest through the years. For example, the returns over interest were 16.1 percent in the year 2004, twenty seven percent in the year 2007 and twenty one percent in the year 2009. The Abu Dhabi commercial bank is also one of the banks in the United Arab Emirates that withered the effects of the global financial crisis rapidly to return to profitability one year after posting losses in the year 2008 (Zughaini & Kabbani,2011). The shares of the Abu Dhabi commercial bank started rallying soon after the bank reported a 531 million United Arab Emirates Dirham’s loss in the second quarter of the year in 2008 and a potential loss of 6.6 billon dirhams worth of investment through Dubai world. The openness of the Abu Dhabi commercial bank about the extent of its bad loans and its investment portfolios boasted the confidence of investors in the company. This openness made the companies shares to rise, despite the effects of the global financial crisis (Wigglesworth, 2010). The companies share prices in the Abu Dhabi commercial bank soared by a rate of 43 percent in late 2010 compared with a merge 9 percent gain of the Abu Dhabi stock exchange in the same time (Zughaini & Kabbani, 2011). The rise in the stock prices of the Abu Dhabi commercial bank was attributed to the company’s openness about the performance of its bad loans and the performance of its investments portfolios. The companies share prices rose immediately it announced a 531 million Dirham’s net loss in the second quarter of the year 2008. The losses made by the bank in 2008 in profits and in its investments were not expected in the market at that time (Zughaini & Kabbani, 2011). The policy of the Abu Dhabi commercial bank of coming clean about its nature of loans and investments boasted investor confidence and made the company not to suffer significant losses in its share prices despite registering losses at the height of the global economic crisis (Wigglesworth, 2010). The Abu Dhabi commercial bank has continued to perform well past the global economic crisis. The net profit of the first half of the year 2011 was 1.91 billion AED compared to a loss of 308.7 million United Arab dirham’s in the same period, in 2010. The capitalization of the company also increased to 5.5 billion dirhams through issuing 785 597,381, shares in the Abu Dhabi stock exchange in 2011 (Bloomberg, 2011). The profits of the Abu Dhabi commercial bank in the first quarter of the year 2011 rose to 0.57 billion diharms, which was an increase of 163.3 percent. Over the last couple of years, the average rate of rise in the shares of the company has been between 3.32 percent and 2.01 percent per annum. Abu Dhabi commercial bank profits and share prices were also boasted in 2010 by the sale of its 15 percent stake in Malaysia RHB capital in a deal worth 1.91 billon us dollars (Reuters, 2011). The percentage of the company’s loan portfolios also fell by 5 percent to 123 billon United Arab Emirates dirhams in the year 2011. The banks deposits remained flat at 106.35 billion dollars in the same period (Zughaini & Kabbani, 2011). The operating income of the Abu Dhabi commercial bank has also increased to 1.42 billion United Arab Emirates dirhams, in 2011 compared to 1.2 billion United Arab Emirates dirhams last year. The share prices of the Abu Dhabi Commercial Bank have continued to increase on a rate of fifty percent rate to date. However, the values of the shares have reduced from 2700 in November this year to 2741 in September of this year (Bloomberg, 2011). The main factors that may affect the price of the performance of the shares in the stock market in the future are the new banking rules introduced by the Abu Dhabi central bank and the worsening global outlook of the economy. The rules cap personal loans allocation to 20 times the amount of savings and a repayment period of 48 months. The rules also limit the installments of loans to 50 percent of a person’s gross salary. These rules have made the bank predict the revenue in the retail banking section to reduce by 10 to 15 percent (Arabian Publishing, 2011). The slow recovery of the global economy economies against the effects of the global economic crisis may negatively affect the shares prices of the bank in the future. Chart showing the performance of Abu Dhabi commercial bank share prices from November to September 2011. Retrieved from Bloomberg (2011)> http://www.sharewadi.com/uae-company-details.php?company_ticker=ADCB Market analysis Mean stock price The average price per share is calculated through the determination of the cost of acquiring shares and the number of shares purchased. This average per share price is very important because it determines the break-even point of a share or the point at which an investor neither makes a loss nor a profit from the shares (Helfert, 2001). The means shares prices of the Abu Dhabi commercial bank were 2.78 United Arab Emirates dirhams in the year 2011 up from 1.75 Dirham’s in the year 2009 (Bloomberg, 2011). This shows that the value of the shares of Abu Dhabi commercial bank have been increasing through these years. The rise of the average share prices means that the break-even point of the shares has also increased through the years. A rise in the average means prices of shares indicates a healthy outlook of the Abu Dhabi commercial banks financial future and this trend is projected to increase in the future. Variance The market share variance is the real market share percentage minus the projected market share percentage multiplied by the market size in units multiplied by the weighted average contribution margin (Helfert, 2001). The market share variance of Abu Dhabi commercial bank stands at 0.72 percent (Zughaini & Kabbani, 2011). The market share variance of Abu Dhabi commercial bank has been increasing through the years because of the good performance record of Abu Dhabi commercial bank. Correlation coefficient. Correlation coefficient is a gauge of how varied factors influence share prices. A correlation coefficient of one between two factors means that the two factors are closely correlated. A correlation coefficient of one means, if one of the factors grows, then the other factor increases by the same margin. A change in one of the factors results in an equal change, in the other variable. A zero correlation coefficient means that the two factors are not related and have no influence on one another. A negative correlation coefficient means that the two variables are inversely related and a decrease in one factor results in an increase in the other. It is therefore, possible to determine the relationship between two variables if they are correlated (Helfert, 2001). The share prices of Abu Dhabi commercial bank display zero correlation to some factors. For example, the share prices rose by 43 percent after the company announced a loss of 578 million in 2010 and a potential loss of six billion via the banks investments in the troubled Dubai world (Zughaini & Kabbani, 2011). This shows that the company share prices have a negative correlation with the profits of the company. The profits of the company have no effect on the share prices of the company. The share prices of the company have an inverse correlation with the outlook of the financial markets because the share prices of the bank have continued rising despite the gloomy economic outlook of the world economy. Coefficient of determination Coefficient of determination is a statistical method that explains how the variability of a factor can be explained by the relationship to other factors. This coefficient of determination is used in the analysis of trends. The coefficient of determination is a measure of how well a model predicts future outcomes. Coefficient of determination is determined through the formula r2 = { ( 1 / N ) * Σ [ (xi - x) * (yi - y) ] / (σx * σy ) } . The coefficient of determination is regarded as a square of the correlation coefficient and is an ideal measure of predicting the future outcomes of the events (Helfert, 2001), For example. There is no correlation between the share prices of a company and the profitability of the Abu Dhabi commercial bank. This means that the correlation of determination being the square of correlation of coefficient is also equal to zero. The correlation of determination is a valid statistical method of establishing the relationship between the two variables. Probability tests The current price of the shares of the Abu Dhabi commercial bank is 2.78 United Arab Emirates dirhams. The average share prices of the Abu Dhabi bank limited has been rising 50 percent every year since 2000 except in 2008 when they did not increase. The probability of share prices not rising by a single margin is 1 /11. Then the probability that the share prices will raise by 15 percent is 10 / 11 multiplied by 15 percent, which equal s 13.63 percent. The probability that the share prices will fall by 25 percent is 1/11 times 25 percent, which equals 2.27 percent. Forecast of the performance of the Abu Dhabi commercial bank in the Abu Dhabi stock exchange. The share prices of the Abu Dhabi will continue rising for the next few years as per the projections’. The bank revenues will continue to increase in the next future. The new rules introduced by the Abu Dhabi central bank on retail banking will lead to a slight decrease in the projected revenues s by a rate of 15 percent and 10 percent for the next years. These rules may affect the share prices of the bank beginning 2012. References Arabian publishing (2011). Retail loan curbs will pinch in 2012 says ADCB. Retrieved from http://www.arabianbusiness.com/retail-loan-curbs-will-pinch-in-2012-says-adcb-423150.html. Bloomberg (2011). Abu Dhabi commercial bank (ADCB: Abu Dhabi) .Retrieved from http://www.sharewadi.com/uae-company-details.php?company_ticker=ADCB. Helfert E. (2001). Financial analysis tools and techniques: a guide for managers London: McGraw hill international. Reuters (2011). ADCB Q2 Net Profit Boosted By RHB Stake Sale. Retrieved From http://www.arabianbusiness.com/adcb-q2-net-profit-boosted-by-rhb-stake-sale-413816.html. Sharewadi (2011). ADCB: Abu Dhabi commercial bank .Retrieved from http://www.sharewadi.com/uae-company-details.php?company_ticker=ADCB. Shariff A. (2011). UAE Retail Bank Revenue to Drop 10 to 15 Percent on Rules .Retrieved from http://Www.Bloomberg.Com/News/2011-10-02/Adcb-Says-real-impact-of-retail-loan-rules-will-be-felt-in-2012.html. Wigglesworth R (2010) .ADCB Rewarded For Transparency. Retrieved From http://gulfnews.com/business/banking/adcb-rewarded-for-transparency-1.723494. Zughaini K. & Kabbani B. (2011). ADCB: Abu Dhabi Commercial Bank .Retrieved from http://www.gulfbase.com/site/interface/CompanyProfileSummary.aspx?c=183. APPENDIX Abu Dhabi commercial bank financial data courtesy of (Zughaini & Kabbani, 2011) ADCB reports * annualized Date Profit AED EPS AED EPS* AED Price AED PE* PBV ROE* ROS ADCB 2008 FY 04 Feb 2009 1.36bn 0.28 0.28 1.40 5.0 0.4 8.5%   ADCB 2008 Q4 04 Feb 2009 -142m -0.03 -0.12 1.40   0.4 -3.6%   ADCB 2008 Q3 21 Oct 2008 420m 0.09 0.35 3.33 9.5 1.4 14.2% 27.7% ADCB 2008 Q2 17 Jul 2008 0.62bn 0.13 0.52 5.05 9.8 2.0 21.0% 48.4% ADCB 2008 Q1 23 Apr 2008 460m 0.11 0.46 7.18 15.6 2.5 15.8% 33.9% ADCB 2007 FY 04 Feb 2008 1.99bn 0.50 0.50 6.88 13.8 2.4 17.6% 33.2% ADCB 2007 Q4 04 Feb 2008 475m 0.12 0.48 6.88 14.5 2.4 16.8% 29.7% ADCB 2007 Q3 17 Oct 2007 0.57bn 0.14 0.57 7.07 12.5 2.6 21.0% 34.7% ADCB 2007 Q2 17 Jul 2007 489m 0.12 0.49 7.27 14.9 2.8 18.8% 34.2% ADCB 2007 Q1 16 Apr 2007 470m 0.12 0.47 6.02 12.8 2.4 19.0% 35.5% ADCB 2006 FY 22 Jan 2007 2.15bn 0.54 0.54 6.00 11.2 2.3 20.1% 52.0% ADCB 2005 FY 25 Jan 2006 1.91bn 0.48 0.48 10.45 21.9 4.9 22.2% 78.1% ADCB 2004 FY 26 Jan 2005 0.80bn 6.40 6.40 161.20 25.2 4.1 16.1% 61.1% Read More
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