Credit Suisse gives Abu Dhabi banks ‘outperform’ rating

“We increase our 12 month Target Prices for National Bank of Abu Dhabi and First Gulf Bank by 30 per cent bonus issue adjusted,” says Mohammed Hawa, an analyst with the investment in a latest review on Abu Dhabi-based banks.

Credit Suisse upgraded NBAD’s rating from Neutral to ‘Outperform’.

The investment bank maintained target price of Dh2.4 and Neutral rating for Abu Dhabi Commercial Bank. It adjusted Target Price for Union National Bank of Dh5.15 from Dh5.66 for the 10 per cent bonus share issue, while maintaining ‘Out Performing’ rating.

Valuations remain at 5-year lows while profitability is improving, said Credit Suisse’s analyst Mohammed Hawa in his comments.

ADCB is currently trading at the steepest discount of 84 per cent to its 5-year average P/B, while UNB, NBAD and FGB are trading at respective discounts of 72.1 per cent, 62.3 per cent and 61.6 per cent.

The January-March period results of the four Abu Dhabi banks were higher than consensus by 23.4 per cent on aggregate.

Credit Suisse revised aggregate net income estimates by 27.9 per cent for 2010E and 19.5 per cent for cumulative 2010E-2012E.

Abu Dhabi banks have underperformed GCC YTD, with NBAD increasing the least.

The Abu Dhabi Banking & Financials index, which comprises 17 companies, increased by 5.2 per cent, the least among the major GCC
banking indices.

Among four Abu Dhabi banks, NBAD’s share price increased the least at 5.6 per cent, while ADCB rallied the most at 16.7 per cent.

Average credit costs of the banks declined from a peak of 302 bps in fourth quarter of last year to 139 bps in first quarter 2010, indicating a slowdown in Non Performing Loan formation.

NBAD asset quality is the best, as reported in the first quarter of the year, with NPL ratio of 1.33 per cent and coverage of 161 per cent.

“We estimate the average NPL ratio to increase from 2.4 per cent in 2009 to 3.6 per cent in 2011E,” said Mohammed Hawa, Credit Suisse’s financial analyst. Top picks are NBAD and FGB for their high asset quality as NPL ratio below 2 per cent in the first three months, high capitalisation, ability to gain market share as other local banks struggle for liquidity, and attractive valuations.

Credit Suisse maintained an ‘Outperform’ rating on Union National Bank given cheap valuations.

The investment Bank Credit Suisse said that exposure to Dubai World is unlikely to increase credit 
costs significantly.

Dubai World owes $14.2 billion to non-government entities, a large chunk of which is likely to be owed to banks. Latest news reports indicate that Dubai World is offering a two per cent interest rate to banks on loans that are likely to have their maturity extended by 8 years.

The Credit Suisse said this would amount to a 40 per cent haircut on the present value of the loan amounts.

In the worst-case scenario, Abu Dhabi’s banks would take a provisioning of 10 per cent of their exposures.

The Abu Dhabi Banks’ Non Performing Loan ratios increased from 0.9 per cent in 2008 to 2.5 per cent in 2009, in line with the increase across the GCC banking sector.

This is still higher than only Qatar which recorded an NPL ratio of 1.4 per cent in 2009. Abu Dhabi banks also have the highest provisioning coverage at 100.8 per cent last year.

The UAE banking sector has the highest proportion of loans to total assets in the GCC, at 69.8 per cent in 2009, while its deposit-base as a source of funding remains relatively low at 64.7 per cent.—haseeb@khaleejtimes.com