Flagging investor interest in local markets has led to Union National Bank (UNB) being dropped from MSCI Barra's UAE index, a move that could spell trouble for the Emirates's attempts to be listed as an emerging market.
From this month, the bank will cease to be included on the MSCI indexes used as a benchmark by regional and international asset managers when allocating funds.
"At the time of the November 2010 Semi-Annual Index Review, Union National Bank of Abu Dhabi did not meet the necessary liquidity requirements and consequently was deleted from the MSCI Global Standard Indices," a spokesman for MSCI said.
The move could result in less liquidity for the UAE's stocks and increased difficulty when raising cash, analysts said.
"The volume on the stock is very low for this bank, which is probably why the decision was made," said Tarik el Mejjad, an analyst at Nomura International in London. "The removal is likely to diminish UNB's trading volume further and increase volatility on the stock."
The decision would increase pressure on the already low levels of liquidity in the Emirates's markets, Mr el Mejjad said. "This is another clear indication that the UAE may not be classified into the MSCI emerging markets index in June 2011."
To boost liquidity in local markets, the UAE has sought listing as an emerging market on a number of indexes maintained by financial information providers, including MSCI Barra and Standard and Poor's. Dow Jones lists the UAE as an emerging market. In September, the FTSE Group listed the Emirates as an emerging market, contributing to a rally in stocks in Abu Dhabi and Dubai.
However, UNB lost much of its gains in the past two weeks, its stock price falling 12.4 per cent in four days to a low of Dh3.04 per share.
But UNB's decline became an advance on Wednesday, with the stock rising 6.21 per cent to Dh3.17.
Fadi al Said, a fund manager at ING in Dubai, said stocks usually experienced a pronounced initial sell-off after being delisted by an index, followed by a rebound as investors reconsidered the stock's value.
"Usually the impact is exaggerated, and this is exactly what we saw," he said. "I'm sure some people saw value, as the stock is trading at a decent value."
UNB was "not a heavyweight in the index", Mr al Said said. "If a stock like Emaar was dropped, this might have a real effect, as it's widely held."
Sebastien Henin, a portfolio manager at The National Investor in Abu Dhabi, said the threat of other UAE companies being delisted by MSCI Barra was small.
"UNB was the smallest bank among the largest banks on the index. You cannot see the same thing happening on the other big banksbecause their free float is bigger as well."
Representatives of UNB could not be reached for comment.