UAE Banking - GulfBase.com · 2013. 5. 26. · Global Research Sector - Banking May 26, 2013 UAE...

Global Research

Sector - Banking

May 26, 2013

UAE Banking Sector

UAE banking profits to consolidate with a meager growth in 2013

Pressure on NIMs and muted loans growth will slow down the top-line

UAE banks have lost their charm following recent price appreciation

Top pick: UNB

UAE banking profits to rise 6%YoY in 2013 The UAE banking sector (our coverage universe) is expected to see modest single digit bottom-line growth in 2013 and 2014. Net interest income will take a back seat this year, flat-lining on low volumes and significant pressure on NIMs. We see loans growth pinned at 6% for 2013 and NIMs shrinking in the vicinity of 14bps leading to a dampened 2%YoY rise in the net interest income. A strong thrust is expected from non-interest income though while provisions are seen to hold high though somewhat lower than 2012 levels – we foresee a 4%YoY decline while operating expenses are seen to grow an ordinary 5%YoY. Overall we see non-interest income becoming the chief bottom-line driver which is expected to grow 7%YoY.

NIMs will remain weak and lose ground on weakening EIBOR The UAE banking sector witnessed a steady compression of NIMs starting 2012 which has continued into 2013. While one reason is a weakening EIBOR, which has declined by around 100bps (quarterly average) over 9 quarters from 1Q11 to 1Q13, we believe that given absence of good lending opportunities in the market, stiff competition is setting in amongst banks. Albeit, that has been burdensome for the yield of earning assets, banks have warded off the effects to some extent through realignment of deposits towards a more favourable CASA mix – effectively bringing down their cost of funds. We understand that most banks under our coverage have already exhausted a great portion of their capacity to reduce cost of funds further through management of the deposit mix. We forecast a 14bps drop in NIMs in 2013 and flattish movement in 2014.

UAE banks have lost their charm following massive price appreciation The banking sector of UAE has witnessed a strong rally in the past 1 year, outshining all regional peers with the DFM & ADX banking indices jumping 61%YoY & 51%YoY resp. Both of the UAE banking indices are currently near their 3 year high. UAE banks under our coverage grew between 50 – 115%, with the strongest price appreciation witnessed by ENBD and the weakest by NBAD. UAE banking sector stands alone within the GCC in terms of P/BV re-rating with its P/BV rising from approx 1.0x to 1.4x. Moreover, an upside potential of around 49% which existed by the end of 2012 when compared to the GCC average has been reduced considerably to an unattractive 12%.

Recommendation: BUY UNB! We have increased the valuations of all banks under our coverage considerably given period roll-over, lower COE estimates and fundamental improvements in some cases. However, the recent price rally has either wiped out or significantly reduced any prospects of an upside potential. UNB stands out from as being the only buying opportunity available at current prices.

CMP Mkt. Cap P/E P/BV ROE Target Upside Rating

AED AED mn 2013e 2013e 2013e Price Potential

Abu Dhabi Commercial Bank 5.00 28,538 9.7 1.4 14.6% 5.21 4.1% HOLD

Emirates NBD 5.70 32,513 12.7 1.0 7.6% 5.32 -6.6% HOLD

First Gulf Bank 14.85 45,600 10.1 1.8 18.4% 15.34 3.3% HOLD

National Bank of Abu Dhabi 12.25 53,174 10.7 1.8 17.1% 11.99 -2.1% HOLD

Union National Bank 4.50 11,818 7.2 0.9 13.0% 5.23 16.2% BUY

Global Research - UAE Banking

CMP as of closing price on ADX/DFM on May 21, 2013

Source: Global Research

UA

E B

ankin

g

Faisal Hasan, CFA

Head of Research [email protected] Tel: (965) 2295 1270 Naveed Ahmed, CFA

Manager [email protected] Tel: (965) 2295 1280 Global Investment House www.globalinv.net

Global Research – UAE Banking Sector

May 2013 2

Valuation & Recommendation

Valuation methodology For arriving at the fair value of our banks, we have used a blend of two valuation methods:

1. Combination of Cash flow approach represented by the Dividend Discounting Model and Justified P/BV multiple approach

using an adaptation of the Gordon Growth Model.

2. Relative valuation using peer group P/BV multiple

Dividend Discount Model - DDM The DDM is based on a 4-year forecast of dividends as cash flows (2013-16). The terminal is calculated using the multiples approach. Long-term justified P/BV multiple is derived on the basis of an adaptation of the Gordon Growth Model. This method uses the sustainable return on average equity (ROAE), cost of equity (COE) and expected growth in earnings (g) to calculate the target P/BV of the bank using the formula:

P/BV = (ROE - g) / (COE - g)

The dividends for the forecasted period and the terminal value are then discounted back at the cost of equity to arrive at the total net present value (NPV) of the company. Cost of Equity is derived using the Buildup Method as the summation of the following: 1. US 10 Year Treasury Yield currently taken as 1.67% 2. US Risk Premium currently taken as 8.44% 3. UAE risk premium over US Risk Premium as 2% 4. Add/subtract bank specific premium or discount

Relative valuation using weighted P/BV multiple of the peer group In order to incorporate the impact of market forces into our valuation we have introduced the use of weighted P/BV multiple of a peer group as an indicator for price movement. We have selected two peer groups, one local and the other consisting of like-ROE GCC banks under our coverage. A weight of 80/20 has been applied to the local/GCC banks P/BV multiple. This weighted P/BV is then multiplied with the BV/share of the bank at the next year end, in our case the BV/share at December 31, 2013 to arrive at the fair value of the bank over a medium term investment horizon.

Blended Price The blended price is then calculated after applying weight of 80% to the value from DDM and 20% to the value from Relative valuation method.

AED ADCB ENBD FGB NBAD UNB

Rating HOLD HOLD HOLD HOLD BUY

Upside Potential/(Downside) 4.1% -6.6% 3.3% -2.1% 16.3%

Fair Value: 5.21 5.32 15.34 11.99 5.23

Fair Value - DDM (weight: 80%) 5.3 5.0 16.3 12.6 4.9

Fair Value - Relative Valuation (weight: 20%) 4.9 6.8 11.4 9.6 6.8

Current Price (May 21, 2013) 5.00 5.70 14.85 12.25 4.50

Valuations


Global Research - UAE Banking Sector

May 2013 3

AED mn ADCB ENBD FGB NBAD UNB

DDM

PV of dividends & Terminal 29,533 27,518 49,003 53,660 12,722

Yr 1 1,296 1,286 1,958 1,272 242

Yr 2 1,147 1,358 1,967 1,259 318

Yr 3 1,114 1,195 1,745 1,295 279

Yr 4 1,076 1,227 1,534 1,165 287

Terminal 24,900 22,452 41,799 48,668 11,596

Terminal Assumptions:

LT - ROE 18.1% 14.0% 22.0% 17.1% 14.5%

COE 13.1% 13.6% 13.1% 11.1% 14.1%

Perpetual growth rate (g) 3.0% 3.0% 3.0% 3.0% 3.0%

LT- P/BV Multiple (x) 1.49x 1.04x 1.88x 1.74x 1.03x

Relative Valuation: P/BV

Peer Group P/BV multiple (x) 1.4 1.4 1.4 1.4 1.4

BV/share - 2013 3.6 5.0 7.3 7.0 4.9


Valuations

AED mn Market Cap Equity Profit ROE P/BV P/E

2013e 2013e 2013e 2013e 2013e

Abu Dhabi Commercial Bank 28,538 20,085 2,850 14.6% 1.4 9.7

Emirates NBD 32,513 33,284 2,491 7.6% 1.0 12.7

First Gulf Bank 45,600 24,866 4,396 18.4% 1.8 10.1

National Bank of Abu Dhabi 53,174 29,788 4,880 17.1% 1.8 10.7

Union National Bank 11,818 13,143 1,636 13.0% 0.9 7.2

13.9% 1.4 10.6UAE Coverage

Peer Group



May 2013 4

Relative Valuation – Global GCC Banking Universe


NBK

KFH

CBK

RJHI

ANB

BSF

RIBL

SABB

SAMBA

SHB

NBAD

ENBD

FGB

UNB

ADCB

QNB

CBQ

Doha Bank

QIB

MARK

Bank Muscat

5%

10%

15%

20%

25%

0.5 1.0 1.5 2.0 2.5 3.0

20

13

e R

OE

2013e P/BV


May 2013 5

Sensitivity Analysis

1.5% 2.0% 3.0% 4.0% 4.5% 16.1% 17.1% 18.1% 19.1% 20.1%

11.1% 6.1 6.2 6.4 6.7 6.9 11.1% 5.5 5.8 6.1 6.4 6.7

12.1% 5.5 5.6 5.7 5.9 6.1 12.1% 5.1 5.3 5.6 5.9 6.1

13.1% 5.1 5.1 5.2 5.3 5.4 13.1% 4.7 5.0 5.2 5.4 5.7

14.1% 4.7 4.7 4.8 4.9 4.9 14.1% 4.5 4.7 4.9 5.1 5.3

15.1% 4.4 4.4 4.4 4.5 4.5 15.1% 4.2 4.4 4.6 4.8 5.0

1.5% 2.0% 3.0% 4.0% 4.5% 11.0% 12.0% 14.0% 14.0% 15.0%

11.6% 6.2 6.3 6.4 6.5 6.6 11.6% 5.2 5.6 6.4 6.4 6.7

12.6% 5.7 5.7 5.8 5.8 5.9 12.6% 4.8 5.1 5.8 5.8 6.1

13.6% 5.3 5.3 5.3 5.3 5.3 13.6% 4.4 4.7 5.3 5.3 5.6

14.6% 5.0 5.0 4.9 4.9 4.9 14.6% 4.2 4.4 4.9 4.9 5.2

15.6% 4.7 4.6 4.6 4.6 4.6 15.6% 3.9 4.2 4.6 4.6 4.9

1.5% 2.0% 3.0% 4.0% 4.5% 11.0% 12.0% 22.0% 14.0% 15.0%

11.1% 17.8 18.1 19.1 20.3 21.0 11.1% 10.5 11.3 19.1 12.8 13.6

12.1% 16.1 16.3 17.0 17.8 18.3 12.1% 9.6 10.3 17.0 11.6 12.3

13.1% 14.7 14.9 15.3 15.9 16.2 13.1% 8.9 9.5 15.3 10.6 11.2

14.1% 13.5 13.6 14.0 14.4 14.6 14.1% 8.3 8.8 14.0 9.8 10.4

15.1% 12.5 12.6 12.9 13.1 13.3 15.1% 7.8 8.3 12.9 9.2 9.6

1.5% 2.0% 3.0% 4.0% 4.5% 15.1% 16.1% 17.1% 18.1% 19.1%

9.1% 14.4 14.8 15.8 17.3 18.2 9.9% 12.4 13.2 14.0 14.7 15.5

10.1% 12.7 13.0 13.6 14.5 15.1 10.9% 10.9 11.6 12.2 12.9 13.6

11.1% 11.4 11.6 12.0 12.5 12.9 11.1% 10.7 11.3 12.0 12.6 13.3

12.1% 10.3 10.4 10.7 11.1 11.3 12.9% 8.8 9.3 9.8 10.3 10.8

13.1% 9.4 9.5 9.7 9.9 10.0 13.9% 8.1 8.5 9.0 9.4 9.9

#### 1.5% 2.0% 3.0% 4.0% 4.5% 12.5% 13.5% 14.5% 15.5% 16.5%

12.1% 6.2 6.2 6.3 6.4 6.5 12.1% 5.5 5.9 6.3 6.7 7.1

13.1% 5.6 5.7 5.7 5.8 5.8 13.1% 5.0 5.4 5.7 6.1 6.4

14.1% 5.2 5.2 5.2 5.2 5.2 14.1% 4.6 4.9 5.2 5.5 5.8

15.1% 4.8 4.8 4.8 4.8 4.8 15.1% 4.3 4.6 4.8 5.1 5.4

16.1% 4.5 4.5 4.5 4.5 4.4 16.1% 4.0 4.3 4.5 4.7 5.0


CO

E

CO

E

Terminal growth vs. COE ROE vs. COE

ADCBg ROE

g ROE

ENBDg ROE

CO

E

CO

E

FGBg ROE

CO

E

CO

E

NBAD

CO

E

CO

E

UNBg ROE

CO

E

CO

E


May 2013 6

A Look at Fundamentals… Consolidation phase of UAE banks to continue into 2014 The UAE banking sector (our coverage universe) is expected to see modest single digit bottom-line growth in 2013 and 2014. Net interest income will take a back seat this year, flat-lining on low volumes and significant pressure on NIMs. We see loans growth pinned at 6% for 2013 and NIMs shrinking in the vicinity of 14bps leading to a dampened 2%YoY rise in the net interest income.

Profitability Drivers in 2013e


A strong thrust is expected from non-interest income though, with fee income mimicking loans growth figures but more so from investment gains propelled by soaring equity markets and from other income as realized by most banks under our coverage in 1Q13 from unwinding of hedging strategies as they close positions taken on Tier II MoF deposits/debt in a move to repay the expensive liquidity instrument. Provisions are seen to hold high though somewhat lower than 2012 levels – we foresee a 4%YoY decline while operating expenses are seen to grow an ordinary 5%YoY. Overall we see non-interest income becoming the chief bottom-line driver which is expected to grow 7%YoY.

Profit Growth Expectations

2012 2013e 2014e 2015e 2016e

ADCB -10% 4% 8% 19% 22%

ENBD 1% -2% 23% 29% 28%

FGB 12% 6% 12% 19% 20%

NBAD 17% 13% -5% 17% 18%

UNB 6% 2% 12% 21% 13%

Source: Company Accounts, Global Research We do not see 2014 to be much different than 2013 except in terms of the composition & behavior of income drivers where the top-line is more likely to be the chief contributor on steady NIMs and slightly higher volumes while non-interest income may drop on rationalization of capital gains and one-offs booked in 2013 from hedges. We also anticipate a steeper drop in provisions in 2014 whereby NPL cycle will be nearing its end, pending restructurings will have seen closure and reversals in provisions wil l pick up. As a result we foresee better bottom-line movement in 2014 which we believe will be the launching pad for strong recovery in profits in later years.

473

669 588

416

92

877

-

200

400

600

800

1,000

1,200

NII Non-II Opex Prov. Tax & MI Profit

AE

Dm

n


May 2013 7

NIMs have weakened on easing EIBOR, competition amongst banks

The UAE banking sector witnessed a steady compression of NIMs starting 2012 which has continued into 2013. While one reason is a weakening EIBOR, which has declined by around 100bps (quarterly average) over 9 quarters from 1Q11 to 1Q13, we believe that given absence of good lending opportunities in the market, stiff competition is setting in amongst banks. Albeit that has been burdensome for the yield of earning assets, banks have warded off the effects to some extent through realignment of deposits towards a more favourable (read cheaper) CASA mix – effectively bringing down their cost of funds.

Movement of NIMs

Source: Company Accounts, Bloomberg, Global Research

We understand that most banks under our coverage have already exhausted a great portion of their capacity to reduce cost of funds further through liability management. With a reduction in this cushion and with external forces weighing down on asset yields, NIMs of the banking sector are quite susceptible to erosion, going forward. Some respite will be gained from the replacement of Tier II MoF notes/deposits with cheaper Tier II debt raised in the local and international markets, but the effects will be minute and limited to 2013 when most of the retirement will take place. We forecast a 14bps drop in NIMs in 2013 and flattish movement in 2014. Moreover, as per our understanding the banks with the lowest cost of funds are most vulnerable to shrinkage in NIMs, which includes NBAD in particular; NIMs of NBAD and ENBD are also at greater risk due to their significant exposure to the government and GREs and lower exposure to retail, which essentially means lower asset yields and greater asset re-pricing risk.

All banks with the exception of FGB are compliant with general provisioning regulation All banks within our coverage, with the exception of FGB and UNB already meet the CBUAE’s regulation regarding collective provisions which needs to reach 1.5% of credit risk weighted assets (CRWA) by 2014. ENBD, the largest bank within UAE proactively over-provided for the same, with its ratio being twice of the requirement i.e. 3.0%. As per our calculations, assuming that our credit growth expectations are not exceeded, that composition of loans does not shift drastically towards real-estate or away from GREs and that ENBD does not opt for a reversal, the bank has enough collective provisions to last well beyond our forecast horizon. Even if ENBD does not take any additional collective provisions, we do not see its ratio going below 2.2% even 4 years down the road. NBAD and ADCB too have over-provided with their respective ratios at 1.6% and 1.9% by 1Q13 respectively while UNB has reached 1.4%, which is just about there. As for FGB, its latest ratio was calculated to be around 1.1%, still 40bps short of the target. The bank’s management looks to close this gap by the end of the current year, which means an addition of AED500 – 600mn to general provisions in the next 3 quarters i.e. AED150 – 200mn per quarter. Furthermore, as per our projections, FGB is likely to see the highest absolute rise in collective provisions over our forecast period as against its counterparts, owing to its sheer size, relatively higher loans growth expectations, current shortfall in ratio and simply because it has a larger exposure to real estate loans than the sector. NBAD is anticipated to be next in line, with addition of AED1.0bn over the next 4 years since we expect it to project the highest loans growth within the lot.

Deceleration in net NPL formation is on the cards Our discussions with respective banks has led us to believe that conditions on ground are turning for the better. While new NPL formation has been on a roller coaster ride quarterly, we believe that there has been a marked deceleration in the same. Almost

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Yield on Assets Cost of Funds NIMs EIBOR


May 2013 8

all big ticket defaults have either been restructured or are close to being restructured with some making it back to the performing loans category. Banks do not expect any new defaults coming in from large exposures while the restructuring of Dubai Holding Group, the last remaining relic of the most difficult time in UAE banking defaults, is reported to see closure in the next few weeks. Similarly banks do not expect their exposure to Al Jaber Group to deteriorate into the impaired category – in fact they see a resolution of the issue through a restructuring on very commercial terms which translates into zero or low provisions.

NPLs of UAE Banks (under coverage)

Source: Company Accounts, Global Research

Banks are also very likely to see heavy reversal in the years following, as restructured loans meet performance expectations, our bet is on year 2014; this bodes really well for the sector. Write-offs will continue to be recorded given the stringent policies UAE banks have adopted on retail loans, shedding off net NPL formation. As a result and despite our conservative stance on fresh NPL and provisioning requirements, we see at least a 9bps drop in the cost of risk in 2013 followed by another 17bps in 2014 which is expected to add significantly to the bottom-line.


May 2013 9

A Closer Look at Sectoral Valuations… UAE banks are still good but no longer cheap… - The banking sector of UAE has witnessed a strong rally in the past 1 year, outshining all regional GCC banking sectors. As

per data obtained from Bloomberg, the DFM Banking Index jumped 61%YoY. This was followed by the ADX Banking Index which grew a massive 51%YoY. Both of the UAE banking indices are currently near their 3 year high. The KSA Banking Index was the worst performer with a decline of 5%YoY.

GCC Banking Sector Indices (Rebased)

Source: Bloomberg - While the UAE market as a whole has shot up in the past 1 year with a growth of over 45%, the rally in the banking sector

has been stronger. Figures show that the ADX banking index out-performed the general index by 9%.

Abu Dhabi General Index vs Abu Dhabi Banking Index (Rebased)

Source: Bloomberg

- UAE banks under our coverage grew between 50 – 110%, with the strongest price appreciation witnessed by ENBD and the weakest by NBAD. This rally has either wiped or significantly reduced any prospects of an upside potential given that fundamental have not changed a lot. As against previous valuation reports, an upside potential that existed is no longer there.

80

90

100

110

120

130

140

150

160

170

May-1

2

Jun

-12

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan

-13

Fe

b-1

3

Mar-

13

Apr-

13

Dubai Qatar KSA Kuwait Oman Abu Dhabi

80

90

100

110

120

130

140

150

160

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13

Apr-

13

May-1

3

ADBF ADSMI


May 2013 10

UAE Banks Price 1-yr Run Up (Rebased)

Source: Bloomberg

- Relative valuation multiples of the UAE banking sector are either at their 3 year high or in short proximity to it signifying that

valuations have gone off the charts. The Abu Dhabi banking index is currently trading at 1.4x and the DFM banking index is at 0.94x the book value. The super cheap valuation story that existed 1 year ago does not hold true anymore.

ADX Banking Index Relative Valuation DFM Banking Index Relative Valuation

Source: Bloomberg Source: Bloomberg

- UAE banks are no longer the cheapest in the region. With the recent bull run, the UAE banking sector stands alone within

the GCC in terms of P/BV re-rating with its P/BV rising from approx 1.0x to 1.4x.

- Moreover, an upside potential of around 49% which existed by the end of 2012 when compared to the GCC average has been reduced considerably to an unattractive 12%.

80

100

120

140

160

180

200

220

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13

Apr-

13

May-1

3

ADCB ENBD NBAD UNB FGB

Growth 1yr ADCB: 63% ENBD: 107% FGB: 71% NBAD: 53% UNB: 62%

0.80x

0.90x

1.00x

1.10x

1.20x

1.30x

1.40x

1.50x

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

May-1

0

Jul-10

Sep

-10

Nov-1

0

Jan-1

1

Mar-

11

May-1

1

Jul-11

Sep

-11

Nov-1

1

Jan-1

2

Mar-

12

May-1

2

Jul-12

Sep

-12

Nov-1

2

Jan-1

3

Mar-

13

May-1

3

P/E P/B

0.40x

0.50x

0.60x

0.70x

0.80x

0.90x

1.00x

1.10x

7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

May-1

0

Jul-10

Sep

-10

Nov-1

0

Jan-1

1

Mar-

11

May-1

1

Jul-11

Sep

-11

Nov-1

1

Jan-1

2

Mar-

12

May-1

2

Jul-12

Sep

-12

Nov-1

2

Jan-1

3

Mar-

13

May-1

3

P/E P/B


May 2013 11

Shift in Relative Positioning from end-2012

Source: Bloomberg, Global Research

Note: Country = end-2012 closing price and BV, Country' = as of date, BV-2013e

Kuwait

Oman

Qatar

KSA

UAE

GCC

Kuwait'

Oman'

Qatar'

KSA'

UAE'

GCC'

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0.8 1.0 1.2 1.4 1.6 1.8 2.0

RO

E

P/BV

cc555

49% upside

12% upside


May 2013 12

Valuations for all banks raised significantly, but recommendation slashed on price jump

ADCB: We have kept unchanged our, net profit projections for 2013, eyeing a 4%YoY rise. Provision requirements are expected

to soften up but weakness in the top-line is very much likely as well. Continuation of low volumetric growth pressure on spreads is forecast to have its toll on the bank’s net interest income in 2013, shrinking it (albeit ever so slightly) for the first time in at least the last 5 years. Bottom-line is also expected to be augmented by non-recurring income as was seen in 1Q13. We see strong top-line and bottom-line growth in 2015 and onwards as interest rates recover, volumes resuscitate, NPL formation slows and provisioning declines. We have raised our fair value for the stock by 40% from AED3.71/share to AED5.21/share. At the closing

price of AED4.94 (May 21, 2013), the banking stock offers a limited upside of 5.4%. ADCB has rallied recently, growing a massive 63%YTD. Given this sizeable run up, we see diminished benefit in the stock. After keeping ADCB in our favourite stock list for over 3 years, we pass it down to HOLD from our previous recommendation of BUY.

ENBD: We do not expect ENBD’s top-line to show any vigor this year either; pressure on spreads and low volumetric growth will

see to that. We do see a slight resurgence in fee income but that will not be enough offset rationalization in forex gains and investment returns. Total income is therefore very likely to display stagnancy in 2013 or rather a slight dip, however this does not incorporate the returns coming in from the acquisition of BNP Paribas’ Egyptian operations. At this moment in time due to unavailability of data, it is difficult to assess the impact on ENBD’s books, our model will therefore need adjustment once the deal sees closure, possibly by the end of the current month. As per guidelines provided by ENBD, the acquisition is likely to add around 5% to the bottom-line. Setting that aside, we foresee slight drop in the bottom-line in 2013 coming in despite a drop in provisions expense. We have increased our target price on the banking stock considerably on reduced risk perception for Dubai especially since the government seems to be in a better position to meet its debt obligations. ENBD’s exposure to GREs and other prominent UAE family based businesses is still a concern, however that is no longer due to expectations of default but rather due to compliance to CBUAE regulations. Our new fair value stands at AED5.32/share offering an downside potential of 6.6%. Given the recent run up in ENBD’s prices, we are forced to slash our recommendation on the stock from BUY to HOLD.

Changes to Valuation

AED ADCB ENBD FGB NBAD UNB

Old Fair Value 3.71 3.42 12.81 9.02 4.49

New Fair Value 5.21 5.32 15.34 11.99 5.23

Change in Fair Value 40.3% 55.6% 19.7% 32.9% 16.4%

Old Recommendation BUY STRONG BUY STRONG BUY BUY STRONG BUY

New Recommendation HOLD HOLD HOLD HOLD BUY


FGB: In continuation of our expectation from the previous year, we see FGB’s spreads shrinking in 2013 as well. Albeit, since

starting March 2013, the bank has started saving 100 – 125bps by the repayment of AED4.5bn in MoF deposits which cost 5.0% in 2012 and would have cost 5.25% in 2013, the expected drop in the yield on assets is likely to be much greater as was witnessed in 1Q13. We nevertheless see a 4%YoY rise in the bank’s top-line in 2013 driven by volumes. We foresee the bank’s bottom-line being actively driven by increased revenues with little support coming in from an ease-off in provisioning. Our conservative stance leaves some room for upside in the bank’s earnings on lower than assumed provisions, which has the potential to affect our valuation positively. FGB still offers the highest ROE for 2013 and over the forecast period within our UAE banking universe. Despite a 24% rise in our valuation for the stock, we believe that the bank’s price currently incorporates all the positives it has to offer especially since the stock has seen a massive rally with the price rising 40% since our last call in 2012 and 24% since the beginning of this year. We have raised our fair value on the stock from AED12.81/share to AED15.34/share but slashed our recommendation to HOLD offering potential upside of just 3.3%.

NBAD: We see strong bottom-line for NBAD in 2013 despite muted top-line growth, driven by the non-recurring portion of non-

interest income. Given significant addition to net income from investment gains and from unwinding hedges, we have raised our bottom-line expectations for 2013 by 9%; this is on the back of a 21% rise in expectations related to non-interest income, reduced by a 15% rise in expectations for provisions. Net income is seen to record 13%YoY growth in 2013 to be followed by a short slump in profits in 2014, when investment gains reach normalized levels. Net interest income is forecast to inch up by just 3%YoY in 2013 due to min-single digit growth in volumes and further erosion in spreads. We foresee a trivial drop in provisions expense though we have raised our provision expense figures significantly from the previous forecast. Consequently, we have raised our fair value for the bank from AED9.02/share to AED11.99/share which translates into a rise of 33%. At the current market price, the stock offers a downside of 2.1%. We have therefore downgraded our recommendation on the stock to HOLD.

UNB: We have decreased our profit expectations for the bank over the forecast period due to our understanding that the bank

will need to take higher provisions that previously anticipated. Our conservative stance takes due cue from UNB’s expected exposure to some large groups for which it is likely to take provisions especially when at least one large exposure i.e. Dubai Holding is reported to be very close to being restructured. Anything news contrary to our assumption regarding UNB’s exposure to DH will warrant an upward revision in the bottom-line and likely in the fair value. For now, given a period roll-over and decline in our COE assumptions, we have raised our fair value of the stock by 16% from AED4.49/share to AED5.32/share. The stock is

still the cheapest one available in UAE despite a 60% plus price appreciation in the past one year, trading below its 2013e BV at 0.9x despite a decent 2013e ROE of 13%. UNB stands out from UAE banks under our coverage as being the only BUY available at current prices. The bank still offers an upside of 16.2%; we decrease our recommendation on UNB to BUY.


May 2013 13

UAE Conventional Banking Universe – Aggregate Forecast



May 2013 14

Comparative Charts


May 2013 15

Peer Group


Figures are for 2012


May 2013 16

Peer Group


Figures are for 2012, Capital Adequacy data as of 1Q13


May 2013 17

Forecast Comparison



May 2013 18

Company Profiles


Abu Dhabi Commercial Bank (ADCB)

May 2013 19

Market Data

Bloomberg Code: ADCB UH

Reuters Code: ADCB.AD

CMP (21 May 2013): AED5.00

O/S (mn) 5,595.6

Market Cap (AED mn): 27,978.0

Market Cap (USD mn): 7,617.2

P/E 2013e (x): 9.7

P/BV 2013e (x): 1.4

Price Performance 1-Yr

High (AED): 5.10

Low (AED): 2.88

Average Volume: (000) 2,804.2

1m 3m 12m

Absolute (%) 16.6 28.7 62.3

Relative (%) 4.7 11.6 20.5

Price Volume Performance

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

N

ov-1

2

De

c-1

2

Ja

n-1

3

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Ma

y-1

3

Volume ('000) ADCB (AED)

Naveed Ahmed, CFA Manager [email protected] Tel.: (965) 22951280

NIM erosion to underpin weak top-line

Loans growth to pick up but remain in mid single digits

Drop in provisions to be major contributor to net income

Recommendation slashed despite fair value upgrade

Bottom-line registers a rise of 4%YoY in 1Q13, surprises market ADCB posted an earnings surprise in 1Q13, exceeding Bloomberg’s mean consensus estimates by 5%. The surprise can be attributed to gains made by retiring hedges seemingly linked to the MoF Tier II subordinated loans. The bank reported a net profit of AED830mn in 1Q13 which exhibits a rise of 4%YoY. However adjusting for AED97mn in profits booked by the retirement of the hedges, the bank’s profitability drops by 9%YoY.

Net interest income inches up on effective liability management After posting a growth of 11%YoY in 2012 driven solely by improvement in spreads, the bank’s top-line seems to have lost steam. Volumetric growth remained anemic, much like the previous year (loans growth: +0.4%YoY, +1.0%YTD) therefore we can pin the improvement in the net interest margin on the 13bps rise in NIMs (over same quarter previous year). Improvement in NIMs can be attributed to effective liability management whereby the cost of funds shrunk faster than the yield on assets; the former on account of shift within the deposit mix towards more favourable (read cheaper) CASA accounts while the latter was driven by market forces, namely competition within banks for limited worthy lending opportunities and to some extent weakening benchmark rates.

Focus on CASA accounts pushes cost of funds lower In 2012 CASA deposits grew a massive 23%YoY, a noteworthy feat, and time deposits witnessed a 4%YoY shed-off, increasing the CASA mix to 30% from 24% in 2011. In 1Q13, the metamorphosis continued, with a 9%YTD rise in CASA deposits and a 10%YoY drop in time deposits increasing the CASA mix to 31.7%. Weak deposit growth was therefore on account of cheaper deposits replacing expensive time deposits. The outcome was a 25%YoY drop in interest expense, a 51bps drop in cost of funds over 1Q12.

Investment Indicators

2012 2013e 2014e 2015e 2016e

Net Profit Growth -9.6% 4.2% 8.3% 19.4% 22.1%

NII Growth 11.1% -1.3% 2.9% 10.3% 13.0%

Loan Growth -0.6% 6.0% 6.3% 10.0% 12.0%

Deposits Growth -0.6% 4.8% 6.3% 10.0% 12.0%

Adjusted EPS (AED) 0.49 0.51 0.55 0.66 0.80

Adjusted BVPS (AED) 3.4 3.6 3.8 4.2 4.7

ROE 15.3% 14.6% 14.8% 16.4% 18.2%

Dividend Yield 8.4% 5.1% 5.1% 5.6% 6.1%

P/E Ratio (x)* 6.1 9.7 9.0 7.5 6.1

P/BV Ratio (x)* 0.9 1.4 1.3 1.2 1.1

Source: Company Reports & Global Research

* Market price for 2013 and subsequent years as per closing prices on ADX on 21 May 2013

HOLD Target Price

AED 5.21


May 2013 20

Evolution of Spreads


Non-interest income jumps on retirement of hedges, fee income remains lethargic ADCB’s non-interest income jumped 24%YoY in 1Q13, driven by gains made by retiring hedges possibly linked to the Ministry of Finance subordinated loans that qualify for Tier II capital. Unwinding hedges amounting to AED4.0bn of a total AED6.6bn resulted in a gain of AED97mn which is not expected to be repeated in the upcoming quarters unless the bank returns the remaining AED2.6bn. On a pro-rata basis assuming a ceteris paribus scenario, another gain in the vicinity of AED60 – 65mn may be booked, if that transpires. ADCB’s fee income struck a weaker note, sliding by 14%YoY; continuation of similar performance in the next quarter would result in a fiercer YoY decline and with expectation of dismal volumetric growth we see fee income exhibiting weakness throughout the year.

NPLs were most likely from the consumer segment ADCB reported a 73bps addition to its NPL ratio during 2012, which signifies AED914mn in new NPL formation. Adjusting for write-offs amounting to AED809mn, the actual rise in NPLs was around AED1,723mn which is equivalent to a rise of 138bps in the NPL ratio. From this respect, new NPL formation seems to have increased by 75% from that seen in 2011 hinting that the NPL cycle is nowhere over. Entering 1Q13, asset deterioration seems to have come to a halt, with a trivial addition of AED125mn to impaired loans which kept the NPL ratio unchanged at 5.4%. We suspect this addition is from the consumer segment(which includes SMEs), basing our theory on the fact that bulk of the provisions taken during 2012 and all the provisions taken during 1Q13 were from the consumer segment.

Provisions up slightly… ADCB’s provisions were up by 12%YoY during 1Q13 which might seem disconcerting at first, however the fact that 1Q12 was a quarter with abnormally low provisions, alleviates some fears; provisions in 1Q12 were the lowest in the last 16 quarters from now and around 40% lower than the average quarterly provisions in 2012. From another angle, if we annualize the reported provisions of 1Q13 (assuming that average quarterly provisions will be in the same vicinity) to represent the full year figure, we would come up with a number which is 23% lower than the previous full year. NPL coverage ratio (including DW in provisions only) increased to 94.5% from 93% in 2012; excluding DW exposure on both sides, the NPL coverage stood at 84.5% exhibiting an increase from 82.2% in 2012. The bank remains over-provided in terms of its general provisions marking 1.94% of CRWA (1.76% in 2012) against the regulation of 1.5%; the excess amounts to over AED560mn, a one-shot reversal of which, though unlikely, has the potential to add notably to the bottom-line. The amount is very likely to be absorbed once the bank resuscitates its loan growth.

5.0% 4.9% 5.1% 5.0%

4.8%

5.2% 5.2% 5.0%

4.5%

2.7%

2.3%

1.8% 1.7% 2.0%

1.8% 1.8% 1.7% 1.5%

2.3%

2.6%

3.3% 3.3%

2.8%

3.3% 3.4% 3.3% 3.0%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Yield on Assets Cost of funds Spreads


May 2013 21

Income Statement

AED mn 1Q13 1Q12 YoY

Interest Income 1,795.7 1,912.6 -6.1%

Interest Expense 536.6 717.3 -25.2%

Net Interest Income 1,259.0 1,195.3 5.3%

Fees & Commission Income 214.9 246.8 -12.9%

Foreign Exchange Gains 44.5 39.0 14.1%

Gains from investments 76.0 69.9 8.7%

Other Income 149.7 68.3 119.2%

Non Interest Income 485.1 424.0 14.4%

Operating Expenses 517.4 505.7 2.3%

Provisions 329.8 286.7 15.0%

Operating Profit 896.9 826.9 8.5%

Taxation & Minority Interest 67.4 29.9 125.5%

Net Profit attributable to the parent 829.5 797.0 4.1%

Source: Company Accounts

Profit expectations for 2013 unchanged… We have kept unchanged our, net profit projections for 2013, eyeing a 4%YoY rise. Provision requirements are expected to soften up but weakness in the top-line is very much likely as well. Continuation of low volumetric growth pressure on spreads is forecast to have its toll on the bank’s net interest income in 2013, shrinking it (albeit ever so slightly) for the first time in a t least the last 5 years. Bottom-line is also expected to be augmented by non-recurring income as was seen in 1Q13. We see strong top-line and bottom-line growth in 2015 and onwards as interest rates recover, volumes resuscitate, NPL formation slows and provisioning declines. We have raised our fair value for the stock by 40% from AED3.71/share to AED5.21/share. At the closing price of AED4.94(May

21, 2013), the banking stock offers a limited upside of 4.1%. ADCB has rallied recently, growing a massive 63%YTD. Given this sizeable run up, we see diminished benefit in the stock. After keeping ADCB in our favourite stock list for over 3 years, we pass it down to HOLD from our previous recommendation of BUY.

Variance of 2012 results from expectations and revision of estimates

2012 2013e 2014e 2015e

Net Interest/Financing Income -1% 0% -3% -3%

Total Non-Interest/Financing Income -4% -2% -14% -15%

Total Operating Income -2% 0% -6% -6%

Provisions expense -11% -1% 14% 10%

Operating Expenses -1% -4% -12% -14%

Net Profit 1% 1% -10% -7%

Gross Loans & Financings -1% -1% -1% -2%

Total Assets 1% 3% 2% 2%

Deposits from Customers -1% -1% -1% -1%



May 2013 22

ADCB in Charts



May 2013 23



May 2013 24

Financial Statements(AED mn) 2010 2011 2012 2013e 2014e 2015e 2016e

Interest/Financing Income 7,376 7,716 7,824 7,399 7,636 8,577 9,918

Interest Expense/Payment to Depositors (3,694) (3,028) (2,616) (2,258) (2,345) (2,739) (3,319)

Net Interest/Financing Income 3,682 4,688 5,207 5,141 5,291 5,838 6,599

Fee & Commission Income 956 898 940 874 918 964 1,012

Investment Income (121) 24 71 91 117 124 134

Other Income 818 618 377 554 426 467 513

Total Non-Interest/Financing Income 1,654 1,540 1,388 1,520 1,460 1,555 1,659

Total Operating Income 5,336 6,228 6,595 6,661 6,751 7,393 8,257

Provisions expense (3,287) (2,398) (1,710) (1,595) (1,374) (1,160) (967)

Operating Expenses (1,649) (2,063) (2,069) (2,131) (2,199) (2,431) (2,645)

Profit Before Taxation 400 1,767 2,816 2,935 3,178 3,803 4,645

Sale of associate (net) - 1,314 - - - - -

Taxation & Minority Interest (19) (55) (80) (85) (92) (117) (143)

Net Profit Attributable to Parent 381 3,026 2,736 2,850 3,086 3,685 4,501

Cash Balances 5,888 6,630 9,338 10,138 10,143 11,687 13,662

Deposits with Banks & FIs 18,398 20,840 16,517 15,031 15,632 15,944 14,350

Investment Securities 8,263 15,068 19,355 21,305 22,355 23,472 26,892

Gross Loans & Financings 129,068 130,467 129,659 137,406 145,994 160,593 179,864

Loan Loss Reserve (6,296) (5,712) (6,464) (8,038) (9,392) (10,532) (11,479)

Net Loans & Financings 122,772 124,755 123,195 129,367 136,602 150,061 168,385

Investment in Associates 5,358 82 - - - - -

Investment Properties 289 397 529 744 788 862 959

Net Fixed Assets 1,070 965 850 778 808 841 887

Other Assets 16,233 14,990 11,011 11,121 11,233 11,345 11,458

Total Assets 178,271 183,726 180,796 188,484 197,560 214,213 236,594

Deposits from Banks & FIs 4,842 3,138 8,968 9,417 9,605 9,797 9,993

Deposits from Customers 106,134 109,887 109,217 114,505 121,661 133,827 149,887

Other Borrowings 33,926 35,897 30,140 30,919 29,484 29,771 30,928

Other Liabilities 17,796 17,844 13,162 13,042 14,674 16,671 18,932

Paid-up Capital 4,810 5,596 5,596 5,596 5,596 5,596 5,596

Retained Earnings 1,524 2,589 3,138 3,782 4,613 5,970 8,552

Other Reserves 9,231 8,768 10,137 10,707 11,324 11,876 11,876

Shareholders' Equity 15,565 16,953 18,871 20,085 21,533 23,441 26,023

Minority Interest 9 6 438 517 603 705 830

Total Equity & Liability 178,271 183,726 180,796 188,484 197,560 214,213 236,594

Return on Average Assets 0.2% 1.7% 1.5% 1.5% 1.6% 1.8% 2.0%

Return on Average Equity 2.5% 18.6% 15.3% 14.6% 14.8% 16.4% 18.2%

Fee Income Yield 0.8% 0.7% 0.7% 0.7% 0.6% 0.6% 0.6%

Recurring Income/Operating Income 86.9% 89.7% 93.2% 90.3% 92.0% 92.0% 92.2%

Interest Earning/Financing Assets Yield 5.1% 5.0% 4.9% 4.5% 4.4% 4.7% 4.9%

Cost of Funds 2.7% 2.1% 1.8% 1.5% 1.5% 1.7% 1.9%

Net Spread 2.4% 2.8% 3.1% 3.0% 2.9% 3.0% 3.0%

Cost to Income Ratio 30.9% 33.1% 31.4% 32.0% 32.6% 32.9% 32.0%

Net Loans to Customer Deposits 115.7% 113.5% 112.8% 113.0% 112.3% 112.1% 112.3%

Non Performing Loans 14,278.2 6,025.3 6,938.9 7,694.7 8,175.6 8,672.0 8,993.2

Loan Loss Reserve 6,296.4 5,711.9 6,463.7 8,038.4 9,392.0 10,531.9 11,479.1

NPLs to Gross Loans 11.1% 4.6% 5.4% 5.6% 5.6% 5.4% 5.0%

NPL Coverage 44.1% 94.8% 93.2% 104.5% 114.9% 121.4% 127.6%

Provisions/Total Income 61.6% 38.5% 25.9% 23.9% 20.3% 15.7% 11.7%

Cost of Risk (bps) 228.8 160.5 130.0 117.9 95.5 74.4 55.6

Equity to Gross Loans 12.1% 13.0% 14.6% 14.6% 14.7% 14.6% 14.5%

Equity to Total Assets 8.7% 9.2% 10.4% 10.7% 10.9% 10.9% 11.0%

Dividend Payout Ratio 0.0% 37.0% 51.1% 49.0% 45.3% 41.7% 37.3%

Adjusted EPS (AED) 0.1 0.5 0.5 0.5 0.6 0.7 0.8

Adjusted BVPS (AED) 2.8 3.0 3.4 3.6 3.8 4.2 4.7

Market Price (AED) * 2.1 2.8 3.0 4.9 4.9 4.9 4.9

Dividend Yield 0.0% 7.2% 8.4% 5.1% 5.1% 5.6% 6.1%

P/E Ratio (x) 26.1 5.1 6.1 9.7 9.0 7.5 6.1

P/BV Ratio (x) 0.6 0.9 0.9 1.4 1.3 1.2 1.1


* Market price for 2013 and subsequent years as per closing prices on ADX on May 21, 2013

Inc

om

e S

tate

me

nt

Ba

lan

ce

Sh

ee

tR

ati

o A

na

lys

is


Emirates NBD (ENBD)

May 2013 25

Market Data

Bloomberg Code: Emirates UH

Reuters Code: ENBD.DU

CMP (21 May 2013): AED5.70

O/S (mn) 5,557.8



P/E 2013e (x): 12.7

P/BV 2013e (x): 1.0


High (AED): 5.85

Low (AED): 2.62

Average Volume: (000) 580.9

1m 3m 12m

Absolute (%) 30.5 51.1 108.7

Relative (%) 12.8 29.5 52.5


2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

N

ov-1

2

De

c-1

2

Ja

n-1

3

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Ma

y-1

3

Volume ('000) EMIRATES (AED)

Lower investment gains likely to drag down profits in 2013

Spectacular growth prospects starting 2014

Fastest growing banking stock, more than doubled in 1 year

Bank offers downside currently, recommendation downgraded

Profit growth derived from reduced provisions, investment gains ENBD reported a net profit of AED837mn for 1Q13, projecting a growth of 31%YoY. Results beat Bloomberg mean consensus estimates by a whopping 22% with the surprise emanating from lower provisions. The bank’s top-line exhibited poor performance during the quarter and bottom-line growth was driven by lower provisions.

NIMs weigh in on the top-line, NII drops 2%YoY ENBD’s top-line contracted by 2%YoY during the quarter after dropping 5%YoY in 2012. The bank’s NIMs contracted by 33bps against 1Q12 while interest earning assets were up by just 5.4%YoY, leading to the eventual contraction. Driven by market forces, ENBD’s yield on assets continued to decline led by weakening loan spreads; as per our calculations, yield on assets shrunk by 66bps YoY and by 17bps over 4Q12. The bank had managed to reduce its cost of funds considerably by optimizing its deposit mix further though aggressive collation of inexpensive CASA deposits; deposits grew 7%YoY in 1Q13 while CASA growth as recorded at 19%. CASA deposits now form 46% of the total deposit mix as against 43% in 2012 and 41% in 2011, pushing the cost of funds down by 41bps YoY and 9bps over 4Q12. We believe that ENBD may have very well utilized its capacity to reduce its CoF further and is increasingly susceptible to decline in the yield on assets.

Fee income shows weakness, investment income comes in high ENBD’s non-interest income exhibited lack-luster movement during the quarter (down 3%YoY) despite an exorbitant rise in its fee & commission income, up 28%YoY. The bank had an active quarter in terms of loan syndication and DCM transactions, pushing fees earned from this segment to grow by 30%YoY. Moreover, brokerage and asset management fee was also up by 12%YoY. While fee income fared pretty well, non-interest income was bogged down by lower forex gains and investment income. On a cheerful note, the quality of earnings of the bank has improved over the previous year.


2012 2013e 2014e 2015e 2016e

Net Profit Growth 0.9% -2.5% 23.4% 28.7% 28.0%

NII Growth -4.8% 2.0% 4.4% 7.7% 9.5%

Loan Growth 8.9% 7.0% 7.5% 8.4% 7.6%

Deposits Growth 10.7% 7.0% 7.5% 5.5% 6.7%

Adjusted EPS (AED) 0.46 0.45 0.55 0.71 0.91


ROE 8.1% 7.6% 9.0% 11.1% 13.2%

Dividend Yield 8.8% 4.4% 5.3% 5.3% 6.1%

P/E Ratio (x)* 6.2 12.7 10.3 8.0 6.3

P/BV Ratio (x)* 0.5 1.0 0.9 0.9 0.8


* Market price for 2013 and subsequent years as per closing prices on DFM on May 21, 2013


HOLD Target Price

AED 5.32


May 2013 26

NPL ratio well below guidance provided… ENBD’s NPL ratio which stood at 14.2% in 2012, portraying an increase of 56bps, showed slight signs of improvement in 1Q13. The 10bps decline is one of 2 such consecutive movements seen since the high of 14.4% touched in 3Q12 and is well below the guidance of 15 – 16% provided by the bank earlier in 2012 and which ENBD has kept unchanged since then. As per the figures provided, there were around AED200mn in fresh NPLs, however, as per details given in the analyst conference, actual rise in NPLs amounted to AED1.0bn, reduced significantly by reclassification of impaired loans into the performing category. NPL formation on the same scale and without any other loan quality upgrades could add another 90bps to 120bps to the NPL ratio, pushing it into the guidance range. NPLs came from the core corporate segment while the remaining segments remained unchanged or exhibited improvement. The bank managed to increase its NPL coverage by 200bps to 51.4% over 4Q12 after adding 600bps in 2012 – a strong movement towards the guidance of 55 – 60% by the end of 2013; we believe that the bank is likely to achieve 52 - 54% by 2013. Moreover, the bank expects its NPL ratio to reach 15 – 16% in 2013 but we do not see the ratio exceeding 90 – 100bps.

Provisions & income erosion at different NPL ratios and coverage

AEDmn

NPL Ratio 14.6% 14.8% 14.9% 15.2% 15.4%

Coverage: 50.3% 1,955 2,209 2,336 2,717 2,972

Coverage: 52.3% 2,693 2,957 3,089 3,485 3,750

Coverage: 54.3% 3,430 3,705 3,842 4,253 4,528

Coverage: 56.3% 4,168 4,452 4,594 5,021 5,306

Coverage: 58.3% 4,905 5,200 5,347 5,789 6,084

Total Income Erosion

Coverage: 50.3% 19% 22% 23% 27% 29%

Coverage: 52.3% 26% 29% 30% 34% 37%

Coverage: 54.3% 34% 36% 38% 42% 44%

Coverage: 56.3% 41% 44% 45% 49% 52%

Coverage: 58.3% 48% 51% 52% 57% 60%

Source: Company Reports & Global Research Provisions during the quarter dropped by 19%YoY and was the main factor behind deviation from expectations. The largest addition to provisions was from the corporate segment followed by Islamic banking and were all specific in nature. ENBD continued to over provide for its general provisions which now stands at 3.0% of CRWA against 2.8% in 2012, 2.5% in 2011 and against the requirement of just 1.5%. This is an extra AED1.9bn, the reversal of which, though unlikely, has the potential to add another 63% to the bottom-line for 2013.

Income Statement


Interest Income 2,619.4 2,754.2 -4.9%


Net Interest Income 1,748.2 1,776.6 -1.6%

Fees & Commission Income 511.1 398.5 28.3%

Foreign Exchange Gains 209.2 264.7 -21.0%

Gains from investments 125.8 145.8 -13.7%

Other Income 61.9 124.8 -50.4%

Non Interest Income 907.9 933.7 -2.8%

Operating Expenses 924.8 962.7 -3.9%

Provisions 888.0 1,100.8 -19.3%

Operating Profit 843.4 646.8 30.4%


Net Profit attributable to the parent 836.8 641.1 30.5%


Valuation update – Downgraded to HOLD on recent price run up We do not expect ENBD’s top-line to show any vigor this year either; pressure on spreads and low volumetric growth will see to that. We do see a slight resurgence in fee income but that will not be enough offset rationalization in forex gains and investment returns. Total income is therefore very likely to display stagnancy in 2013 or rather a slight dip, however this does not incorporate


May 2013 27

the returns coming in from the acquisition of BNP Paribas’ Egyptian operations. At this moment in time due to unavailability of data, it is difficult to assess the impact on ENBD’s books, our model will therefore need adjustment once the deal sees closure, possibly by the end of the current month. As per guidelines provided by ENBD, the acquisition is likely to add around 5% to the bottom-line. Setting that aside, we foresee slight drop in the bottom-line in 2013 coming in despite a drop in provisions expense.


2012

2013e

2014e

2015e

Net Interest/Financing Income 1% 8% 4% 2%

Total Non-Interest/Financing Income -2% -9% -10% -10%

Total Operating Income 0% 2% -1% -2%

Provisions expense -4% 0% 20% 62%

Operating Expenses 1% 7% 8% 6%

Net Profit 8% -1% -24% -31%

Gross Loans & Financings 3% 3% 1% -1%

Total Assets 2% 2% 0% -4%

Deposits from Customers -1% -1% -3% -7%


We have increased our target price on the banking stock considerably on reduced risk perception for Dubai especially since the government seems to be in a better position to meet its debt obligations. ENBD’s exposure to GREs and other prominent UAE family based businesses is still a concern, however that is no longer due to expectations of default but rather due to compliance to CBUAE regulations. Our new fair value stands at AED5.32/share offering an downside potential of 6.6%. Given the recent run up in ENBD’s prices, we are forced to slash our recommendation on the stock from BUY to HOLD.


May 2013 28

ENBD in Charts



May 2013 29



May 2013 30





Fee & Commission Income 1,839 1,837 1,731 1,818 1,909 2,099 2,267

Investment Income 55 (250) 469 279 308 323 322

Other Income 368 1,107 1,210 1,073 1,133 1,214 1,283



Provisions expense (3,550) (5,654) (4,004) (3,855) (3,547) (3,168) (2,709)


Profit Before Taxation 2,360 697 2,569 2,515 3,098 3,985 5,097

Sale of subsidiary - 1,813 - - - - -

Taxation & Minority Interest (21) 22 (15) (23) (25) (29) (32)

Net Profit Attributable to Parent 2,340 2,531 2,554 2,491 3,073 3,956 5,065

Cash Balances 37,683 21,526 30,772 32,192 33,893 36,180 39,082






Investment in Associates 1,412 2,041 2,080 2,288 2,517 2,769 3,046

Investment Properties 1,907 1,131 1,139 1,275 1,428 1,600 1,792

Net Fixed Assets 2,337 2,577 2,469 2,712 2,992 3,314 3,684

Other Assets 16,970 17,874 20,710 19,068 19,902 20,816 21,883

Total Assets 286,216 284,613 308,296 323,514 343,798 361,160 383,647





Paid-up Capital 5,558 5,558 5,558 5,558 5,558 5,558 5,558


Other Reserves 17,398 17,789 18,389 18,461 18,461 18,461 18,461






Fee Income Yield 0.9% 0.9% 0.8% 0.7% 0.7% 0.7% 0.7%



Cost of Funds 2.4% 1.8% 1.5% 1.5% 1.5% 1.6% 1.7%

Net Spread 2.8% 3.0% 2.7% 2.6% 2.6% 2.6% 2.7%




Loan Loss Reserve 8,322.1 12,897.0 16,595.2 20,330.4 23,759.3 26,789.6 29,349.9

NPLs to Gross Loans 9.9% 13.8% 14.3% 14.9% 14.9% 14.4% 13.8%

NPL Coverage 40.7% 43.4% 49.4% 54.3% 59.0% 63.4% 67.3%

Provisions/Total Income 39.2% 56.8% 38.8% 37.7% 33.1% 27.4% 21.6%

Cost of Risk (bps) 137.0 224.6 171.5 154.9 132.7 108.9 85.4

Equity to Gross Loans 14.4% 14.3% 13.7% 13.2% 12.8% 12.5% 12.6%

Equity to Total Assets 10.4% 10.9% 10.5% 10.3% 10.1% 10.2% 10.4%

Dividend Payout Ratio 47.5% 43.9% 54.4% 55.8% 54.3% 42.1% 38.4%

Adjusted EPS (AED) 0.4 0.5 0.5 0.4 0.6 0.7 0.9

Adjusted BVPS (AED) 5.3 5.6 5.8 6.0 6.2 6.6 7.2

Market Price (AED) * 2.8 2.9 2.9 5.7 5.7 5.7 5.7

Dividend Yield 7.2% 6.8% 8.8% 4.4% 5.3% 5.3% 6.1%

P/E Ratio (x) 6.6 6.5 6.2 12.7 10.3 8.0 6.3

P/BV Ratio (x) 0.5 0.5 0.5 1.0 0.9 0.9 0.8


* Market price for 2013 and subsequent years as per closing prices on DFM on May 21, 2013

Inc

om

e S

tate

me

nt

Ba

lan

ce

Sh

ee

tR

ati

o A

na

lys

is


First Gulf Bank (FGB)

May 2013 31

Market Data

Bloomberg Code: FGB UH

Reuters Code: FGB.AD

CMP (21 May 2013): AED 14.85

O/S (mn) 3,000.0



P/E 2013e (x): 10.1

P/BV 2013e (x): 1.8


High (AED): 15.40

Low (AED): 7.79

Average Volume: (000) 1,044.7

1m 3m 12m

Absolute (%) -1.3 12.9 70.7

Relative (%) -13.2 -4.2 28.0


6

7

8

9

10

11

12

13

14

15

16

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

N

ov-1

2

De

c-1

2

Ja

n-1

3

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Ma

y-1

3

Volume ('000) FGB (AED)

2013 seen as a slow year for the bank

Provisions seen to drop but not as sharply as previously perceived

Bank plans to meet general provisions guidelines in current year

Fair value raised but positives priced in, recommendation slashed

Profit rose 12%YoY in 1Q13, meets expectations FGB posted net profit of AED1,046mn for 1Q13, portraying a rise of 12%YoY. The results were largely in line with Bloomberg mean consensus estimates. Net income was driven by a 33%YoY jump in non-interest income and augmented by a decent top-line growth.

Net interest income records modest growth but losing momentum FGB’s net interest income grew by a decent 6%YoY during 1Q13. Driven by market conditions, the bank’s top-line seems to be decelerating with a compression in interest spreads, down 14bps over 1Q12. Top-line was therefore propelled by the 13%YoY growth in loans. The bank’s yield on assets which was fairly constant for the last 8 quarters fell by a massive 39bps over 1Q12 and 43bps over 4Q12. The bank managed to squeeze its cost of funds by another 26bps over 1Q12 but the change over 4Q12 was just 9bps, hinting that the cushion available to reduce the cost further was becoming increasingly small. Any further decline in the yield on assets is therefore very likely to translate into compression in the bank’s spreads.

Non-interest income jumps 33%YoY on fees growth and capital gains The bank’s total income jumped 12%YoY with strong support from non-interest income which was up by 33%YoY on an across-the-board improvement. Fee & commission income came in strong with a 13%YoY growth, driven possibly by healthy loans growth. While forex income was also high, major impact came from investment gains made in the AFS portfolio and through derivative income as against a loss in the same quarter of the previous year. While FGB may still bank on its investment portfolio to churn in some income given the surge in capital markets, at least in one more quarter there is a high possibility of rationalization of income from this segment in the latter half of the current year.


2012 2013e 2014e 2015e 2016e

Net Profit Growth 12.1% 5.8% 12.5% 18.7% 19.9%

NII Growth 8.7% 3.9% 9.3% 13.7% 13.7%

Loan Growth 9.3% 11.3% 11.1% 13.1% 16.0%

Deposits Growth 15.3% 10.2% 10.0% 12.0% 15.0%

Adjusted EPS (AED) 1.4 1.5 1.6 2.0 2.3


ROE 18.9% 18.4% 19.0% 20.4% 21.6%

Dividend Yield 7.2% 4.7% 5.4% 5.4% 5.4%

P/E Ratio (x)* 8.4 10.1 9.0 7.6 6.3

P/BV Ratio (x)* 1.5 1.8 1.6 1.5 1.3

Source: Company Reports & Global Research * Market price for 2013 and subsequent years as per closing prices on ADX on May 21, 2013


HOLD Target Price

AED 15.34


May 2013 32

NPL ratio drops on high write-offs FGB still has the lowest NPL ratio within our UAE banking universe, standing at 3.2% in 1Q13, down by 10bps from 4Q12. As we recall, NPLs dropped by 9%YoY or AED396mn in 2012, which translated into a 67bps improvement in the NPL ratio coming about due to high write-offs; the same was true for 2011. We suspect that the current drop in NPLs (down 2%YoY) is also on account of write-offs, however we cannot turn our face from the notion that NPL growth seems to be slowing down.

General provisions add considerably to provisions expense FGB saw a slight movement in its general provisions in 1Q13 with an addition of AED83mn during the quarter; this is nevertheless an acceleration from the roughly AED100mn taken by the bank in full year 2012. The bank’s general provisions/CRWA ratio remained unmoved at around 1.1% against the requirement of 1.5% (to be met by end-2014). If the bank chooses to attain the said requirement by the end of the current year, we could see an addition AED500 – 600mn in general provisions in the next 3 quarters i.e. AED150 – 200mn per quarter.

Income Statement


Interest Income 1,895.7 1,853.0 2.3%


Net Interest Income 1,374.7 1,296.5 6.0%

Fees & Commission Income 350.3 309.4 13.2%

Foreign Exchange Gains 27.6 16.3 69.1%

Gains from investments 63.0 29.3 114.6%

Other Income 59.4 21.4 178.0%

Non Interest Income 500.2 376.4 32.9%

Operating Expenses 386.2 324.1 19.2%

Provisions 433.3 412.7 5.0%

Operating Profit 1,055.4 936.1 12.7%


Net Profit attributable to the parent 1,045.8 934.7 11.9%


Provisions to remain on the higher side due to a multitude of factors FGB’s non-performing exposure to DH has been partially reduced from AED621mn to AED456mn due to successful restructuring of one portion of the loan. The remaining portion stands classified as non-performing with AED149mn or 33% (of exposure) as provisions against it, up from AED62mn which constituted a 10% coverage then. We believe that the bank will need to increase its coverage of this exposure further, perhaps even double it from current levels. We take our cue from the constant hiccups the restructuring process is facing and from the fact that ENBD’s provisions currently cover 55% of its exposure to the same entity. Even if, FGB chooses to double its provisions, an addition of AED150mn will be easily doable for the bank given that the amount forms only 2% of its operating income. We also expect write-offs to continue though markedly lower than the AED1.4bn we saw in 2012, due to the bank’s stringent write-off policy for retail loans.


2012

2013e

2014e

2015e

Net Interest/Financing Income 1% 1% -3% -6%

Total Non-Interest/Financing Income 8% 12% 8% 12%

Total Operating Income 3% 4% 0% -3%

Provisions expense 2% 9% 21% 25%

Operating Expenses 2% 10% 11% 9%

Net Profit 3% -3% -9% -9%

Gross Loans & Financings -3% -3% -6% -10%

Total Assets 5% -5% -8% -9%

Deposits from Customers 6% -3% -7% -10%

Source: Global Research Enticing dividends may continue… FGB distributed another handsome dividend in 2012 amounting to 83% of its par value higher than our expectations of 77% and constitutes a payout ratio of 60%. We expect FGB to keep its investors happy with a dividend in the range of 70 – 80%


May 2013 33

throughout our forecast period. This would result in a payout ratio in the range of 35 – 50% which is slightly on the conservative side with respect to the bank’s dividend history.

Valuation update – Reduced to HOLD on surge in price despite rise in fair value In continuation of our expectation from the previous year, we see FGB’s spreads shrinking in 2013 as well. Albeit, since starting March 2013, the bank has started saving 100 – 125bps by the repayment of AED4.5bn in MoF deposits which cost 5.0% in 2012 and would have cost 5.25% in 2013, the expected drop in the yield on assets is likely to be much greater as was witnessed in 1Q13. We nevertheless see a 4%YoY rise in the bank’s top-line in 2013 driven by volumes. We foresee the bank’s bottom-line being actively driven by increased revenues with little support coming in from an ease-off in provisioning. Our conservative stance leaves some room for upside in the bank’s earnings on lower than assumed provisions, which has the potential to affect our valuation positively. FGB still offers the highest ROE for 2013 and over the forecast period within our UAE banking universe. Despite a 24% rise in our valuation for the stock, we believe that the bank’s price currently incorporates all the positives it has to offer especially since the stock has seen a massive rally with the price rising 40% since our last call in 2012 and 24% since the beginning of this year. We have raised our fair value on the stock from AED12.81/share to AED15.34/share but slashed our recommendation to HOLD

offering potential upside of just 3.3%.


May 2013 34

FGB in Charts



May 2013 35



May 2013 36





Fee & Commission Income 1,487 1,212 1,300 1,404 1,544 1,714 1,971

Investment Income 351 21 130 196 159 173 184

Other Income 210 171 320 294 309 340 374



Provisions expense (1,639) (1,553) (1,653) (1,579) (1,505) (1,417) (1,252)


Profit Before Taxation 3,544 3,706 4,191 4,442 4,996 5,929 7,108

Taxation & Minority Interest (124) 2 (36) (45) (51) (59) (70)

Net Profit Attributable to Parent 3,420 3,707 4,154 4,396 4,945 5,870 7,039

Cash Balances 8,526 9,587 12,844 12,279 13,199 14,727 15,988






Investment in Associates 517 444 393 432 475 523 575

Investment Properties 7,049 7,538 7,772 8,021 8,277 8,608 8,953

Net Fixed Assets 626 620 626 656 688 725 764

Other Assets 3,156 3,557 3,147 2,675 2,702 2,756 2,811

Total Assets 140,758 157,480 175,034 186,869 203,716 224,081 252,567





Paid-up Capital 1,375 1,500 3,000 3,000 3,000 3,000 3,000


Other Reserves/Convertible Bonds 8,896 11,395 10,621 10,859 10,859 10,859 10,859






Fee Income Yield 1.5% 1.2% 1.1% 1.1% 1.1% 1.1% 1.1%



Cost of Funds 2.2% 1.7% 1.6% 1.5% 1.4% 1.5% 1.7%

Net Spread 3.6% 3.9% 3.8% 3.6% 3.6% 3.8% 3.8%




Loan Loss Reserve 3,294.8 3,621.7 3,751.8 5,331.1 6,836.2

Date post:	15-Feb-2021
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

UAE Banking - GulfBase.com · 2013. 5. 26. · Global Research Sector - Banking May 26, 2013 UAE...

Documents