EUR 138.43 For Business Accounts Only

UAE banks | Direct play on macro recovery; Favour DIB

Prefer UAE banks to GCC peers. Our thesis hinges on: i) improving macroeconomic dynamics, enhanced business sentiment, and consumer confidence (positive GDP growth, improved PMI, credit card spending, real estate indicators), feeding into ii) improved loan growth outlook, iii) possible tailwinds from resolution of asset quality issues (incl. the NMC Health case), amid iv) attractive valuations (FY22e P/E multiple of 8.9x [excl. fairly valued FAB] vs. 14.5x for GCC peers and 1.11x for P/BV vs. 1.84x for peers), with a lucrative dividend yield (4.3% for FY21e vs. 2.5% for GCC peers).

UAE banks to benefit, as market rerates to draw near other oil-exporting markets (UAE market trades at a c50% discount, on FY22e PEG). Within our UAE banks coverage, we continue to favour DIB, owing to its high growth capacity within the government/services segments, supported by the FOL lift (potentially triggering up to USD100mn in passive flows). We also like ENBD’s current valuation and strong operational metrics. As for ADCB, it continues to build a decent record of cost synergies, while trading on attractive levels. A breakthrough to NMC’s restructuring process could act as a trigger to both ADCB (c1.4% of loans) and DIB (c1%).

Improved prospects for UAE banks for remainder of FY21, through FY23. We look for: i) loan growth of 6.9% p.a., on average, in FY21-23e, up from 3.7% in FY19-20, ii) stable-to-slightly lower NIMs in 2H21-22e vs. 1H21 levels, ahead of expansions starting FY23e, iii) stable-to-improving CTI, as pressure on operating income eases and opex savings continue to kick in, and iv) stable CoR levels y-o-y in FY22e, following a y-o-y drop in FY21e, despite the likely upward pressure on NPL ratios.

Monitor possible risks. While the UAE has one of the highest vaccination rates globally, risks arising from the spread of the Delta variant should not be ignored. Other risks include: i) a sharper correction to oil prices or the re-ignition of UAE-Saudi rift in the case of lack of OPEC cooperation, which may weigh on tourism, UAE property, and free zone trade, and ii) the real estate sector (c16% of sector loans) taking a turn, potentially impacting the overall health of the banking sector. On the flipside, faster-than-anticipated Fed rate hikes should translate into quicker-than-anticipated NIM/RoE expansions across banks.