UAE banks relatively undervalued compared to GCC peers, says analyst
Emirates NBD, ADCB and Dubai Islamic Bank all have strong fundamentals that could drive investor interest, says EFG Hermes
Banks in the UAE are undervalued compared to regional peers as they navigate a soft property market and challenging global economic conditions, but there are a number of catalysts that could lift prices of individual lenders, according to EFG Hermes.
In a series of notes published on listed UAE banks, the EFG Hermes analysts said that based on price-to-earnings ratios, UAE lenders are valued at 9.5 times their expected 2020 earnings, which is much lower than the 13.6x that Saudi banks are valued at and 15.3x valuations of Kuwaiti banks.
Although residential property prices fell 9 per cent in Dubai and 10 per cent in Abu Dhabi year-on-year in the third quarter, according to JLL, and prices are likely to fall further in the short term, "the government is beginning to take steps to boost demand and control supply", EFG Hermes' banking analysts Shabbir Malik and Rajae Aadel said in a note.
"Large banks with well diversified loan books and high break-even cost of risk should be better positioned to grapple with potential stress in this segment," the note said, pointing out that Emirates NBD and RAKBank have relatively low levels of exposure to the sector, at 16 per cent of total loans and 14 per cent, respectively.
Emirates NBD, following its recent acquisition of Turkey's Denizbank and a $1.75 billion (Dh6.45bn) rights issue, could benefit from up to $1bn worth of passive fund inflows from plans to increase its foreign ownership limit to 40 per cent of total shares. Although its purchase of the Turkish lender could dilute returns in the short-term, the deal "helps diversify the group's loan book and mitigates the impact of US rates on the group's [interest rate] spreads", the note said.
Abu Dhabi Commercial Bank, meanwhile, was trading at a 12-month low of Dh7.55 per share as markets closed last week despite the fact it recently announced a much quicker timeline for completing its three-way merger than expected (to 13-14 months from an initial 23-30 months) and increased its cost synergies target by 37 per cent after closing overlapping branches, bringing the total number down to 84, from 130 previously.
Dubai Islamic Bank, meanwhile, remains attractive due to the forthcoming takeover of Noor Bank. The recently announced swap ratio of 1 DIB share for every 5.49 Noor Bank shares means that it is buying the bank at a discount of 70 per cent of its book value, meaning it is likely to add to earnings next year. It is also expected to make savings through cutting staff costs (which were 75 per cent of Noor's operating expenses in the first nine months of 2019), premises and IT costs.
Overall, EFG Hermes believes smaller banks in the UAE will face more pressure to consolidate. There are 50 lenders in the country, but the four biggest — First Abu Dhabi Bank, Emirates NBD, ADCB and DIB — account for 70 per cent of total loans.
The "eroding competitiveness of the smaller banks will increase pressure on the remaining 46 banks to consolidate or find a niche to continue to have optimal profitability", it said.
Ratings agency Moody's Investors Service said the overall outlook for GCC banks next year remains stable, underpinned by solid economic growth and lenders' strong levels of capital buffers.
“Government spending programmes will push average non-hydrocarbon GDP growth to 2.6 per cent in 2020, providing favourable operating conditions for the region’s banks,” said Nitish Bhojnagarwala, vice president and senior credit officer at Moody’s.
Updated: December 1, 2019 08:18 PM