National Bank of Abu Dhabi

[Pages:9]National Bank of Abu Dhabi

Still a Good Bet

Key Data

Closing Price* AED 9.81

Avg. Value Traded per Day AED 11 million

52-Week High AED 19.86

Market Cap AED 21.3 billion

52-Week Low AED 6.41

Shares Outstanding 2174.3 million

Reuters NBAD.AD

Bloomberg NBAD DH

Ownership Structure

Closely Held: 70.5%

Public: 29.5%

* As of June 10, 2009. Sources: Reuters, Abu Dhabi Securities Exchange, and NBK Capital

Rebased Performance

25.0

20.0

15.0 10.0

5.0

0.0 Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

NBAD

MSCI UAE

Sources: Reuters and NBK Capital

Apr-09

Jun-09

Key Ratios

2008 a 2009 f 20010 f 2011 f 2012 f

P/B P/E Dividend Yield

1.5 7.0 2.8%

1.0 6.9 3.1%

0.9 6.2 3.9%

0.8 5.4 4.5%

0.7 4.9 5.5%

Net Profit Growth 20.5% 2.8% 11.3% 13.5% 10.8% Net Interest Margin 2.6% 2.7% 2.7% 2.7% 2.7%

RoAE RoAA

23.6% 17.7% 15.7% 15.7% 15.4% 2.0% 1.8% 1.9% 2.0% 2.0%

1Q2009 IBP a AED 984 million

2Q2009 IBP f AED 988 million

1Q2009 IBP f AED 872 million

3Q2009 IBP f AED 959 million

IBP = income before provisions, a = actual, f = forecast. Sources: Reuters and NBK Capital

June 11, 2009

Highlights

12-Month Fair Value: AED 12.70

Recommendation: Buy ? Risk Level**: 2

Reason for Report: 1Q2009 Update

? Our estimate of the 12-month fair value of National Bank of Abu Dhabi (NBAD) stands at AED 12.70 per share, 29% above the share's closing price on June 10, 2009; hence, our "Buy" recommendation. This value is 14% lower than our prior fair value of AED 14.80 per share. The decrease in fair value is driven mainly by lower operating income and higher provisioning than previously forecasted, as well as a slight (0.5%) increase in the cost of equity.

? We now forecast loans to grow by a CAGR of 9% in the next five years, as opposed to our prior forecast of 12%. We expect net interest income to grow by a CAGR of 10% during the next five years, and to be the main earnings driver. We expect non-performing loans (NPLs) to increase to 1.5% and 1.9% of gross loans by end-2009 and end-2010, respectively. We forecast operating income to grow by 9% in 2009, but a higher growth rate in provisions and costs leads us to expect a 3% increase in net profit in 2009. In 2010, we see operating income and net profit growing by 9% and 11%, respectively.

? NBAD's capital adequacy ratio (CAR) jumped to 17% at the end of March 2009 from 13.7% at the end of 2008, mainly as a result of the AED 4 billion Tier I capital injection. The CAR will be boosted also by the conversion of AED 5.6 billion in government deposits into Tier II capital in 2Q2009. NBAD's Tier I ratio at the end of March 2009 was 15.3%, comfortably over the minimum required 11% by June 2009 and 12% by June 2010.

? NBAD reported a net profit of AED 770 million in 1Q2009, 12% below 1Q2008, 57% over 4Q2008, and 4% below our forecast. Operating income was more stable, reaching AED 1.4 billion, 12% over 1Q2008 and 7% over 4Q2008. Total provisioning stood at AED 214 million, much higher than levels witnessed in the past three years, but lower than the record of AED 394 million in 4Q2008.

Analysts

Raja Ghoussoub, CFA T. +971-4-365 2857 E. raja.ghoussoub@

Munira Mukadam T. +971-4-365 2858 E. munira.mukadam@

** Please refer to page 7 for recommendations and risk ratings.



June 11, 2009

Banking Sector ? National Bank of Abu Dhabi

VALUAtioN

Our estimate of NBAD's 12-month fair value per share stands at AED 12.70, 29% above the share's closing price on June 10, 2009; hence, our "Buy" recommendation. This value is 14% lower than our prior fair value of AED 14.80. The decrease in fair value is driven mainly by lower lending growth, lower operating income growth, and higher provisioning than previously forecasted, as well as a marginal increase in the cost of equity.

We now forecast loans to grow by a CAGR of 9% during the five years ending in 2013, compared to our previous forecast of 12%. Lower income from fees and commissions than previously forecasted, and higher loan loss provisioning as asset quality weakens, will put further pressure on net profit. We forecast operating income to grow by 9% in 2009, but a higher growth rate in provisions and costs leads us to expect a 3% increase in net profit in 2009.

Our 12-month fair value for NBAD is AED 12.70 per share

Figure 1 Weighted Average Fair Value per Share

Valuation Method

Discounted Equity Cash Flow (DECF) Dividend Discount Model (DDM) Peer-Based Valuation Weighted Average Fair Value

Source: NBK Capital

Value (AED)

14.30 9.70 11.90 12.70

Weight (%)

60% 30% 10% 100%

Performance in 1Q2009

NBAD reported a net profit of AED 770 million in 1Q2009, 12% below 1Q2008, 57% over 4Q2008, and 4% below our forecast. However, net profit in 1Q2008 included a one-off gain of AED 165 million from the sale of land. Excluding that, net profit in 1Q2009 would have reflected a 9% y-on-y growth rate.

Operating income increased by 12% in 1Q2009 driven by net interest income, but a higher growth in costs and provisions led to a 12% drop in net profit in 1Q2009

Figure 2 Performance in FY2008 and 1Q2009

Figures in '000 AED

2008

% Change in 2008

Mar-09

% Change Q-o-Q

Net Loans and Advances Customer Deposits Shareholders' Equity Total Assets

111,764,267 103,481,145

14,356,599 164,654,480

40.2% 26.6% 28.0% 18.1%

115,871,668 97,868,439 18,300,027

161,135,135

3.7% -5.4% 27.5% -2.1%

Figures in '000 AED

Net Interest Income Net Fees and Commissions Net Investment Loss Net Foreign Exchange Gains Total Operating Income Total Costs Net Impairment Charge

Net Profit

2008

% Change in 2008

1Q2008

1Q2009

% Change Y-o-Y

3,607,565 1,131,307

(193,222) 424,039 5,301,282 (1,446,103) (717,080)

50.0% 776,681 1,096,654 27.8% 273,479 217,577

n/m (58,265) (55,444) 93.6% 71,446 147,341 44.6% 1,285,637 1,438,024 42.3% (328,077) (435,082) 1620.0% (68,152) (214,020)

41.2% -20.4%

-4.8% 106.2%

11.9% 32.6% 214.0%

3,018,735

20.5% 874,545 770,465

-11.9%

Sources: NBAD's financial statements and NBK Capital

2

June 11, 2009

Banking Sector ? National Bank of Abu Dhabi

Net interest income drove earnings and reached AED 1.1 billion, 41% over 1Q2008 but 6% below the record AED 1.16 billion achieved in 4Q2008. The record levels of net interest income in 4Q2008 and 1Q2009 reflect the repricing of loans on higher spreads that NBAD undertook.

Income from fees and commissions stood at AED 218 million in 1Q2009, 20% below 1Q2008. This quarterly figure for fees and commissions is at its lowest level since 4Q2007. In fact, 1Q2009 is the third quarter in a row when income from fees and commissions dropped on a q-on-q basis.

Net foreign exchange gains continued to be very robust, reaching a record AED 147 million in 1Q2009, growing 106% y-on-y and 49% q-on-q. The AED 99 million in net foreign exchange gains that were logged in 4Q2008 were 36% over 4Q2007, which resulted in 94% growth for FY2008. These sky-high growth rates reflect NBAD's focus on that earning stream, having significantly expanded its foreign exchange desk over the past few quarters.

For the third quarter in a row, investment losses weighed on the bottom line. Net investment losses stood at AED 55 million in 1Q2009, lower than the losses of AED 85 million and AED 203 million incurred in 3Q2008 and 4Q2008, respectively. The majority of these losses relate to the marking-to-market of NBAD's trading portfolio. According to management, the widening credit spreads were the main reason behind the drop in the fair value of the bank's trading portfolio.

Costs stood at AED 435 million, 33% over 1Q2008 but 2% below the record AED 444 million seen in 4Q2008. This y-on-y cost growth, although still relatively high, is lower than the 47% and 42% growth rates witnessed in FY2007 and FY2008, respectively. The cost-to-income ratio increased to 30% in 1Q2009, compared to 27% in 2008, but remains below the bank's medium-term expected level of 35%.

Net provisioning charges reached AED 214 million (the majority of which were general provisions), 214% over 1Q2008 but 46% below the record AED 394 million taken in 4Q2008. Asset quality indicators, although still very satisfactory, weakened slightly during 1Q2009. NPLs increased by 16% (AED 175 million) in 1Q2009, from AED 1,072 million in December 2008 to AED 1,247 million in March 2009. Despite the 16% increase in NPLs during 1Q2009, the NPLs-to-gross loans ratio just inched up to 1.06% in March 2009, from 0.95% in December 2008. The NPL coverage ratio slightly decreased from close to 145% in December 2008 to around 140% in March 2009. At the end of March 2009, total general provisions stood at AED 1 billion, representing 0.86% of total performing loans. Total specific provisions, on the other hand, stood at AED 750 million, representing 60% of NPLs.

Net loans grew by 4% in 1Q2009 to reach AED 115.9 billion, after dropping slightly (1%) in 4Q2008. Net loans' growth for FY2008 had reached 40%, mainly because of the high growth witnessed during 1H2008, but not 2H2008. Real estate and construction loans were among the fastest growing in 2008, expanding by 94% and 73%, respectively, and accounting for 10% and 21% of the total increase in loans in 2008. Loans extended to the services sector expanded by 80% in 2008, to account for 12% of the total increase in loans. Loans to banks and financial institutions expanded by 70%, and represented 15% of the total increase in loans. Finally, consumer loans expanded by 43% in 2008, to account for 10% of the total increase in loans.

Deposits, on the other hand, dropped by 5% (AED 5.6 billion) in 1Q2009 to stand at AED 97.9 billion. The main reason for this drop is a transfer of AED 4 billion from government deposits to Tier I capital. Hence, without that, deposits would have dropped by only AED 1.6 billion (1.6%) in 1Q2009. While government deposits dropped sharply in 1Q2009, corporate/private sector deposits and retail deposits expanded significantly (23% and 19%, respectively) in 1Q2009.

NBAD's simple loans-to-deposits ratio (LDR) stood at 118% at the end of March 2009, higher than the sector's average of 104%. However, NBAD has conveyed that its regulatory loans-tostable resources ratio complies with the Central Bank of the UAE's (CBUAE) cap of 100%.

3

June 11, 2009

Banking Sector ? National Bank of Abu Dhabi

NBAD's capital adequacy ratio (CAR) jumped to a very high 17% at the end of March 2009, from 13.7% at the end of 2008, primarily because of the AED 4 billion Tier I capital injection. It is important to mention that the CBUAE has required banks to have a minimum Tier I ratio of 11% by June 2009 and 12% by June 2010. NBAD's Tier I ratio at the end of March 2009 was a comfortable 15.3%.

outlook and forecasts

We have reduced our forecast for loan growth from a CAGR of 12% to 9% for the five years ending in 2013. Slower economic growth, tighter liquidity, real estate market troubles, and increased risk-aversion on NBAD's part are the main factors behind this reduction. Recent IMF projections assume a slight contraction (0.6%) of the UAE's real GDP in 2009, followed by a marginal growth of 1.6% in 2010. However, the recent surge in the price of oil (+30% in the month of May) is encouraging. The price of oil is currently 127% above the low it reached in December 2008. Additional comfort can be derived from the UAE's stock markets' recent performance. The Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM) have advanced by 14% and 32%, respectively, since the end of March 2009. Other than the overall difficult economic environment, NBAD will face pressure on its lending capabilities due to its relatively high LDR. NBAD's management indicated that bringing down the bank's LDR to below 100% is a medium-term objective for the bank.

We expect net interest income to drive earnings going forward. NBAD already has repriced part of its lending book, which explains the record levels of net interest income logged in 4Q2008 and 1Q2009. Going forward, we expect a drop in spreads and margins from their 1Q2009 levels. The dropping EIBOR (2.5% currently, compared to 4.3% at the end of 2008) will also put pressure on net interest income. Furthermore, recent CBUAE data shows an 11% drop in personal loans between December 2008 and April 2009 for the UAE's banking sector as a whole. The drop in the share of high-margin personal loans, if it persists, will put pressure on spreads and net interest margins of all UAE banks. All in all, we expect net interest income to increase by 17% in 2009, accounting for 73% of operating income in FY2009. We believe that downward pressure will continue on lending-related fees because lending growth (estimated at 10% in 2009) will be significantly lower than the 40% achieved in 2008. Market-related fees, on the other hand, will very much depend on the stock markets' performance. We will see a positive surprise to our forecasts if the recent bullish performance is sustained throughout 2009. We expect a 16% drop in net fees and commissions in FY2009 before they grow by a CAGR of 9% during the following four years. We expect foreign exchange gains to continue to feed the bottom line, and investment losses to be less of a worry going forward. In fact, if the credit and stock markets continue their favorable performance, we could see a reversal of prior investment losses.

We forecast operating income to grow by 9% in 2009, but a higher growth rate in provisions and costs leads us to expect a 3%

increase in net profit in 2009

Figure 3 Forecasts

Net Loans and Advances Customer Deposits

Net Interest Income Net Fees and Commissions Total Operating Income Total Costs Provisions for Credit Losses Net Profit

Source: NBK Capital

2009 Forecasts ('000 AED)

Old

New

% Change

2009 % Change

5-year CAGR

128,371,063 123,168,324 121,793,182 105,510,556

3,674,676 1,328,081 5,474,126 (1,873,522)

(262,376) 3,225,022

4,212,382 947,043

5,779,008 (1,752,816)

(789,289) 3,102,407

-4.1% -13.4%

14.6% -28.7%

5.6% -6.4% 200.8% -3.8%

10.2% 2.0%

16.8% -16.3%

9.0% 21.2% 12.3%

2.8%

9.1% 7.9%

9.7% 3.3% 8.6% 12.7% -7.2% 9.2%

4

June 11, 2009

Banking Sector ? National Bank of Abu Dhabi

As for costs, we believe that their growth will slow considerably (as already seen in 1Q2009) from the growth rates seen in 2007 and 2008 (which exceeded 40%). The burst of the real estate bubble will help in limiting cost growth. On the other hand, the ongoing branch expansion strategy will continue to exert pressure on the cost base. NBAD plans to increase its number of branches to 100 in a three-year period, from 86 currently. We believe that NBAD's costto-income ratio will gradually increase from the 27% level seen in 2008; however, we expect NBAD to be able to maintain a cost-to-income ratio below 35%, which is the bank's selfimposed medium-term expected level.

We also expect an increase in credit loss provisioning going forward. At the end of 2008, real estate and construction loans accounted for 21% of NBAD's loans. In addition, consumer loans represented another 10% of loans. We believe that these categories carry a relatively high risk, especially during the current times of low economic growth and falling real estate market. Furthermore, the margin lending book was also significant, representing around 11% of total loans at the end of 2008. However, the local stock markets' recently bullish performance (ADX +14% and DFM +32% since the end of March 2009) alleviates the worry of significant, if any, losses derived from that portfolio. We expect the NPLs-to-gross loans ratio to increase to around 1.5% by the end of 2009, and to 1.9% by the end of 2010. We also expect a drop in the NPL coverage ratio. However, we believe that heavy provisioning will maintain that ratio at over 100% during our forecast horizon. All in all, we forecast operating income to grow by 9% in 2009, but a higher growth rate in provisions and costs leads us to expect a 3% increase in net profit in 2009.

We expect NBAD to comfortably maintain a Tier I ratio in excess of 12% in our forecast horizon, as the CBUAE will require starting in June 2010. NBAD is expected to convert AED 5.6 billion in government deposits (received during 2008) into Tier II capital during 2Q2009, which will boost the bank's total capital adequacy ratio significantly. Finally, we view as extremely valuable the fact that NBAD is an Abu Dhabi-based bank with majority ownership by Abu Dhabi's government, especially during the current period of economic turbulence. Indeed, we believe that Abu Dhabi's government will step in to support NBAD if help is ever needed.

5

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download