Limited upside underpins Neutral rating
Three-way merger concludes; Synergies priced in. We value ADCB at AED9.00/share, following the merger with Union National Bank (UNB) and Al Hilal Bank (AHB), which took effect on 1 May-19. Our TP offers 2% upside, warranting a Neutral rating (vs. our previous Overweight call on standalone ADCB), drawing on: i) a likely bumpy integration process, on substantial clean-up, ii) lower RoAE vs. standalone ADCB (2022e RoAE of 14% vs. 16% for standalone), and iii) little room for upward revision in synergy guidance. ADCB trades on demanding multiples, with a 2019e P/B and P/E of 1.4x and 12.5x, respectively, against a 2019-22e EPS CAGR of 3.9% and sustainable RoE of 14.3%. This compares to 1.4x, 9x, 6%, and 16%, respectively, for UAE peers.
Merger to avail a more focused strategy. The merged entity is set to capture the third largest loans market share in the UAE of 16%, while ranking second in Abu Dhabi. ADCB boasts high domestic concentration (UAE loans at 94% of pro forma loan book), while we see international expansion unlikely in the medium-term; unfavourable, in our view. Islamic lending (22% of loan book), especially for retail, is set to be a focus area, through a digitised platform through AHB. This would prop up NIMs, in our view, for which we estimate a 11bps expansion to 3.15% over 2019-23e.
Lower loan growth prospects vs. UAE peers. We see ADCB’s loan book growing at a 2019-23e CAGR of 4.4%, weighed down by the 2019e clean-up and muted 2020e growth. This compares to a CAGR of 12.5% for UAE peers. Headwinds against higher lending growth in the medium-term include: i) higher competition with FAB [Neutral | TP AED14.0] in Abu Dhabi, especially with regards to large-scale corporate and governmental lending, and ii) lower international diversification vs. peers.
Our numbers leave room for several upside risks; Downplay MSCI story. We see CoR rising c11bps, and NPL ratio by c30bps over 2018-20e, underpinned by the clean-up. As the integration goes through, we look for CoR and NPL ratio to average c90bps and 4.3% over 2021-23e, respectively, reverting to UAE peers’ average. We do not account for an upward revision in the synergies target (13% of combined costs, phased out over 3 years), leaving room for upside. ADCB’s weight in the UAE MSCI index is set to increase to 17.2% from 15.5% in the Aug-19 rebalance, attracting inflows amounting to a minor c0.4% of market cap, insufficient to trigger re- rating.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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