EUR 189.19 For Business Accounts Only

UAE banks | DIB, ENBD stand out, amid a weak macro backdrop

Prefer Dubai banks, against limited macro triggers, a softened flow story. The UAE has been grappling with: i) the recent oil price volatility (weak Brent prices, averaging USD64/bbl since 2019 onset up until the Aramco drill, vs. the UAE’s fiscal breakeven oil price of USD65/bbl, amid slowing output), ii) weakening demand (Sep-19 PMI eased to lowest reading in 8 years), and iii) subdued construction activity (y-t-d award intake dropped by 39% y-o-y). This, coupled with the current and potential trading flow drawers (heightened flows to Kuwait ahead of its MSCI upgrade, in addition to the potential Aramco IPO), limit trading triggers. Our top picks, DIB and ENBD, trade on a 2020 P/BV of 1.1x, P/E of 6.3x, with a 2019-22e earnings CAGR of 6.0%, and a sustainable RoE of 15.5%, against 1.5x, 9.5x, 9.6%, and 16.3%, respectively, for MENA peers.

Monetary ease a relief, as competition continues to intensify. UAE banks struggled to pass on the 2018 rate hikes, particularly to corporates, with EIBOR maintaining a downward trajectory since end-2018, while banks’ cost of funding continued to escalate. For banks under coverage, NIMs compressed by c10bps in 2018, and another c11bps in 1H19. For our coverage, we look for a flat NIM trend over 2019-22e, and a 2019-24e loan CAGR of 7.7% vs. a five-year historical CAGR of 5.6%, largely bolstered by consolidations. We see the lower interest rate environment ameliorating asset quality outlook (expect NPL ratios to rise by c12bps, and NPL coverage by 11pps over 2019-24e, on average).

Maintain OW on DIB, ENBD; UAE top picks on undemanding valuation. DIB boasts: i) the best repricing gap among peers (+16 months vs. c+11 months for peers), ii) an aggressive growth trajectory (2019-24e loan CAGR of 11.5%), iii) y-t-d underperformance vs. peers in terms of share price movement (+8% vs. +20%), and iv) a maintained growth outlook, amid the potential acquisition of Noor Bank. We also like ENBD on: i) its cheap valuation (2020e P/BV of 0.9x vs. 1.5x for MENA peers), ii) the potential trigger from a possible 40% FOL increase (likely to be proposed in the 1Q20 OGM), and iii) diversification amid the ongoing international expansions, with the DenizBank acquisition upping international loans to 30% of total book by 2024e from c7% before consolidation.

Upgrade ADCB to OW on valuation; Remain Neutral on FAB. We upgrade ADCB to OW from Neutral, yet see no short-term catalysts in the stock. ADCB’s below-average loan growth prospects (2019-24e CAGR of 5.6% vs. 7.7% for peers) underpin its below-average sustainable RoE (13.6% vs. 15.5%), for which we assign an implied 2020e P/BV of 1.4x. FAB trades on demanding multiples, with a 2020e P/BV of 2.0x, a hefty premium of c14% vs. MENA large cap regional peers. That said, the bank remains a beneficiary of the MSCI flow story, and we favour its international expansion plans in the medium-term.