Banking – UAE National Bank of Abu Dhabi (NBAD) Initiation of Coverage 30 September 2010 May El Haggar Lamia El Etriby +202 3303 7766 Ext. 2220 +202 3303 7766 Ext. 2209 [email protected][email protected]1 Recommendation BUY Market Price (AED) 11.8 Fair Value (AED) 15.9 Upside Potential 35% ADX Index 2,660.9 Stock Data Reuters Code NBAD.AE Bloomberg Code NBAD UH Shares Outstanding (m) 2,392 Market Cap (AEDm) 28,222 Market Cap (USDm) 7,684 Free Float (%) 29.5% Free Cap (AEDm) 8,331 52-week range (AED) 12.45-11.80 Avg. Trading Volume (’000s) 299,721 Foreign Ownership Limit 25% NBAD vs. ADX Rebased Source: Bloomberg, Naeem Research Safety First – BUY We initiate coverage on NBAD with a BUY. Our DCF-based target price of AED15.9/share offers an upside of 35% from current levels. NBAD has shown more resilience than peers have during the financial crisis, with its asset quality holding up and a stable client base. NBAD has the lowest NPL ratio among peers at 1.5%. Due to its close ties with the government, NBAD’s recent asset growth was largely driven by government/public and corporate lending; however, it is now looking to expand its retail and Islamic businesses, in addition to increasing international presence. Better placed than local peers. NBAD has not suffered as much as its peers have from the financial crisis. This is due to its having a solid client base, largely comprising government and public sector entities and private corporations, and its diversified loan book. This helped asset quality to stay intact where, despite an increase, it still has the lowest NPL ratio among peers. NBAD also has good access to the wholesale lending market, which helps it to secure diverse sources of funding at reasonable prices. Well-positioned for future growth. NBAD’s high asset quality, strong capital base, close relationship with the government, and good access to funds give it the wherewithal to capitalise on growth opportunities arising from an economic recovery. NBAD plans to build exposure along different business lines such as retail, SMEs, and wealth management that will diversify revenue. Valuation indicates good upside. Our DCF-based fair value (using an excess equity return model) is AED15.9/share, which offers an upside of 35% from current levels. On a comparable basis, NBAD trades at a discount relative to regional peers on a PBV 2011f basis, but at a premium to local peers. We believe that it deserves this premium due to its higher asset quality, solid client base, and potential for growth in new segments such as retail and SMEs. Financial indicators and valuation multiples Year to 31 Dec 2008a 2009a 2010f 2011f 2012f NII (AEDm) 3,608 4,442 4,676 4,984 5,768 Net Profit (AEDm) 3,019 3,020 3,814 4,126 4,859 EPS (Basic) 1.26 1.26 1.59 1.73 2.03 EPS (% YoY) 21% 0% 26% 8% 18% PER (x) 9.3 9.3 7.4 6.8 5.8 PBV (x) 1.6 1.3 1.2 1.0 0.9 Dividend yield (%) 2.5 0.8 1.3 1.7 2.1 NIM (%) 2.4 2.5 2.3 2.4 2.5 ROAE (%) 23.6 17.4 17.2 16.1 16.5 ROAA (%) 2.0 2.0 1.9 2.0 2.1 Based on NBAD’s closing price as of 29 September 2010. Source: Company data, Naeem estimates 9 10 11 12 13 14 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Price (AED) NBAD ADX Rebased
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Banking UAE National Bank of Abu Dhabi (NBAD)mec.biz/term/uploads/NBAD-30-09-2010.pdf · 30/09/2010 · Reuters Code NBAD.AE Bloomberg Code NBAD UH Shares Outstanding (m) 2,392 Market
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09 Good Access to Funding Supports Liquidity Position
12 Well-positioned for Future Growth
12 Focus on New Services
15 New Services to Diversify Revenue Streams
18 Valuation Indicates Good Upside
18 DCF Valuation
18 Relative Valuation
20 Financial Summary
21 Disclosure Appendix
3
NATIONAL BANK OF ABU DHABI (NBAD)
Better Placed than Local Peers
Tight liquidity – one
of many woes
UAE BANKS – HANGING IN THERE
UAE banks have endured a tough operating environment over the past two
years with market conditions deteriorating well before the global economic
crisis reached its peak. First was a liquidity squeeze in mid-2008 that resulted
from hot money speculating on an AED de-peg from the USD fleeing the
banking system after it became obvious that the peg was to remain.
Approximately AED160bn worth of deposits left banks in 3Q08, resulting in the loan-to-deposits ratio (LDR) surging to 110% from 100% in 2007.
The government intervened to
support liquidity
However, the Abu Dhabi government has since taken several steps to support
banks’ liquidity, the most prominent of which was the c. AED70bn that the
Ministry of Finance injected in the form of deposits and later converted into Tier
II debt, thereby bolstering banks’ capital bases.
The government also injected further capital into large banks in the form of Tier I Perpetual Capital Notes.
Fig. 2: Capital injected by Government (AEDm)
Bank Tier I Capital Tier II Capital
Emirates NBD 3,500 11,502
Abu Dhabi Commercial Bank 4,000 6,617
National Bank of Abu Dhabi 4,000 5,606
First Gulf Bank 4,000 4,510
Mashreq Bank - 3,444
Union National Bank 2,000 3,200
Abu Dhabi Islamic Bank 2,000 2,207
Commercial Bank of Dubai - 1,842
National Bank of Fujairah - 643
Commercial Bank International - 607
National Bank of Umm Al Quwain - 578
Total 19,500 40,756
Source: Banks’ financials, Naeem Research
Fig. 1: The UAE’s LDR
Source: Central Bank of UAE, Naeem Research
100%
102%
104%
106%
108%
110%
200
400
600
800
1,000
1,200
2006 2007 2008 2009 Aug-10
AED (bn)
Loans Deposits L/D Ratio (RHS)
4
INITIATION OF COVERAGE
Liquidity is easing...
...but the UAE’s LDR is still high
Weakening asset quality – the
current concern
LLPs as a percentage of loans
jumped on higher provisioning
UAE banks are no longer in as tight a liquidity position as before, thanks to the
government’s intervention, coupled with a slowdown in lending growth. The
UAE’s LDR fell to 104% in 2009 and 103% in August 2010, but remains high
compared with its neighbouring countries’ average of 75%.
Fig. 3: The UAE’s LDR vs. that of neighbouring countries
Source: Central banks of the relevant countries, Naeem Research
Most banks now maintain their total loans and advances/stable resources ratio,
a broader measure of liquidity set by the Central Bank of the UAE (CBUAE) that
includes, in addition to deposits, shareholders’ equity and interbank liabilities as a base for calculating liquidity, below the 100% cap required by the CBUAE.
With the global financial crisis in full swing, UAE banks faced a further
challenge, that of deteriorating asset quality. Investment write-downs and
higher client default rates forced banks to dramatically increase provisioning.
Aggregate provisions booked by the six largest banks (controlling c. 61% of the
sector’s total assets) almost tripled in 2009 to AED11.6bn cf. AED4.1bn in 2008. Provisions booked in 1H10 rose 56% YoY to AED5.9bn.
This building of provisions led the sector’s loan loss provisions (LLPs) as a
percentage of gross loans to jump from 2.5% in 2008 to 4.1% in 2009, as the
LLP balance surged 73% YoY to reach AED43.3bn in 2009 due to a 65.5%
increase in the specific provisions balance (which are provisions taken on non-
Fig. 4: Provisions, 2008 vs. 2009 Fig. 5: Provisions, 1H09 vs. 1H10
Source: Company data, Naeem Research
20%
40%
60%
80%
100%
120%
Leb
an
on
Eg
yp
t
Jo
rdan
KS
A
Bah
rain
Ku
wait
UA
E
Qata
r
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
UNB NBAD MASQ FGB ADCB ENBD
AED (bn)
2008 2009
0.0
0.5
1.0
1.5
2.0
UNB NBAD MASQ FGB ADCB ENBD
AED (bn)
1H09 1H10
5
NATIONAL BANK OF ABU DHABI (NBAD)
Profits hurt by high provisioning
NBAD’s asset quality the least
affected
performing loans – NPLs). In the meantime, the LLPs/gross loans ratio further
increased to 4.7% in 1H10, as both specific provisions and collective provisions increased by 13% and 21%, respectively.
Fig. 6: Quarterly progress of the sector’s LLP ratio
Source: CBUAE, Naeem Research
Tight liquidity, difficult operating environment (which limits growth), in addition
to the weakening asset quality, negatively affected the sector’s profits in 2009,
with two out of the six largest banks slipping into net loss in 4Q09. In 2010,
only one bank turned into net loss in 2Q10, however, banks overall
performance in 2Q10 was much weaker than in 1Q10, due to the booking of higher provisions, to account for the continuous asset quality deterioration.
Fig. 7: Development of net profit of selected banks (2009-1H10)
Source: Bank financials, Naeem Research
Throughout this difficult period, NBAD has been able to hold its ground. Its
asset quality has been the least affected among those of local peers (NPLs at
1.5% in 1H10 – the lowest among UAE banks). Further, its more prudent
growth policy and close relationship with the Abu Dhabi government (NBAD is c.
70% owned by the Abu Dhabi Investment Council – ADIC), which, besides
giving it liquidity support, provides it with the ability to tap multiple funding channels, affording it a better liquidity position than peers.
NBAD – HIGHEST ASSET QUALITY AMONG PEERS
A diversified loan book and solid client base
NBAD was more prudent than its peers in growing its loan book over the boom
years (2005-2008) wherein its loan book rose at a three-year CAGR of 29.5%
compared with the sector’s CAGR of 39%. However, due to its close ties with
the Abu Dhabi government, it has a far superior client base, which largely
comprises the government, public and corporate private sectors.
Fig. 8: NBAD’s loan growth vs. peers
Source: Bank financials, Naeem Research
NBAD’s 2009 loan growth outpaced
that of the industry
NBAD’s close relationship with the government, the public sector, and large
corporations has helped it to grow its loan book at a faster pace than peers in
down times. In 2009, gross loans grew 18% cf. sector growth of 4%, driven
mainly by the public sector, which contributed 49% to loan growth during the
year. While NBAD’s 1H10 loans growth slowed down to just 2.4%, it still
outpaced the sector’s growth of 1.4%. The corporate sector contributed the
most to loan growth in 1H10, comprising 43% of total loan book. NBAD’s
management has stated that it will continue lending on a selective basis during
2010 in order to maintain its solid relationships with clients. We forecast
NBAD’s loan book to grow 3.4% by 2010 year-end to AED140.2bn.
-20%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 1H10
NBAD ADCB FGB ENBD MASQ UNB
7
NATIONAL BANK OF ABU DHABI (NBAD)
Exposure to over 10 sectors
High exposure to the real estate and
construction sectors
NBAD’s loan book is also well-diversified across sectors, thereby mitigating
default risk.
Although 23% of NBAD’s loans are to the real estate and construction sectors,
we are not overly concerned, as we believe that the bulk of these loans are
given to government-backed entities (i.e. the Abu Dhabi government that have
a lower sovereign risk than its neighbour Dubai), which would be bailed out if financial difficulties resulted in default of payment.
Fig. 9: Breakdown of loans by customer type
Fig. 10: Breakdown of loans by economic sector
Note: Breakdown of loans is as of June 2010
Source: Company data, Naeem Research
NBAD’s NPL ratio was improving until
the financial crisis
Building up provisions
NBAD maintained
the lowest NPL ratio among peers
Manageable exposure
NBAD’s asset quality improved in the years up to 2009, with NPLs as a
percentage of gross loans reaching a low of 0.9% in 2008. However, with the
entire sector hit by the global financial crisis, and default risk, by both
corporate and retail clients, spiking and culminating with Dubai World
requesting a restructuring of its USD24.9bn debt in late-2009, the asset quality
of all banks deteriorated. In 2009, NPLs as a percentage of gross loans jumped to an average of 3.3% for the six largest banks cf. 1.0% in 2008.
This led banks to build up provision levels in anticipation of further
deterioration in asset quality, with aggregate provisions taken by the six largest
banks nearly tripling in 2009 to AED11.6bn cf. AED4.1bn in 2008. Loan loss
provisions (LLPs) as a percentage of loans, which works as an indicator of
future deterioration expected by banks, also shot up to an average of 2.8% for the six largest banks in 2009 cf. 1.7% in 2008.
Despite NBAD’s NPLs rising to 1.3% in 2009, and further to 1.5% in 1H10, its
NPL ratio is still well below the peer average of 3.3% and 3.1% in 2009 and
1H10, respectively. Meanwhile, its provision cover has remained high at 158%
in 2009 and 147% in 1H10 cf. a sector average of 122% in 1H10. This should
ease pressure on the bank’s P&L, not requiring it to take additional provisions
in the event of further deterioration.
Government 13%
Public Sector12%
Corporate 58%
Retail 17%
Agriculture0%
Energy12%
Manufacturing6%
Construction6%
Real Estate17%
Trading4%
Transport4%
Banks and f inancial
institutions
13%
Services8%
Government12%
Retail Consumption
11%
Retail Others 6%
Others1%
8
INITIATION OF COVERAGE
Fig. 11: NPL ratio and provision cover of UAE's six largest UAE banks, 1H10
Source: Banks’ financials, Naeem Research
Limited exposure to defaulting entities
NBAD’s relative prudence in granting loans in boom years and its superior client
base has paid off in down times, limiting its exposure to high-profile defaulters.
Its exposure to the failed Saudi groups – Saad and El Gosabi – stood at just
USD8.7m (0.02% of loan book), while its exposure to Dubai World is USD225m (0.6% of loan book); these represent the lowest exposures among local peers.
Easing back on
provision building
Asset quality to get worse, before it
gets better
Dubai World creditors approved the restructuring deal in early September 2010,
but there is as yet no clear picture as to how banks are going to treat this
exposure, or the level of impairments that will be charged to P&Ls. Currently,
DW exposures are classified as OLEMs (Other Loans Especially Mentioned), which is a category between performing loans and NPLs
NBAD’s strong asset quality gives it the option to ease pressure on its bottom
line by booking lower new provisions than its peers. This effect is already
evident in 1H10, where provisions booked were c. 7% lower than what was
booked in 1H09, while for peers it increased 65%. NBAD’s management has
stated that it would stick to its policy of maintaining a level of c. 1.25% of credit risk-weighted assets as collective provisions.
We believe that the UAE’s banking sector is not yet out of the woods.
Additionally, due to the lagged effect of credit quality deterioration, we expect
NBAD’s NPL ratio to peak at 2% of gross loans in 2011, before gradually falling
back to 1.5% in 2015. We expect provision cover to remain comfortably above 100%.
Fig. 12: Banks’ exposures to Dubai World and troubled Saudi groups