EUR 147.94 For Business Accounts Only

UAE banks | Reiterate sector view; Favour ENBD and FAB

Maintain positive outlook on Dubai activity. This is driven by Dubai’s strong pipeline, where we calculate contractor backlogs remain robust for 2018 at USD69bn (70% more that of Abu Dhabi), supported by dedicated infrastructure spending (47% y-o-y budgeted increase in 2018 vs. 27% in 2017). We note that oil price stability appears to be stimulating activity in Abu Dhabi, where industry data suggests project award growth of 17% this year, after a weak 2017 following the emirate’s fiscal consolidation measures. This should trigger a pickup in credit growth for banks under coverage (+7.5% in 2018e vs. +4.1% in 2017). On IFRS 9 application, starting January 2018, banks unanimously expect the future impact to be manageable. 

ENBD is our preferred exposure to Dubai’s market. The awaited rise of the stock’s FOL to 20% from 5% (pending AGM approval on 27 March), as part of a capital increase to finance a potential acquisition of Turkey’s DenizBank, is key for unlocking ENBD’s deep value (28% discount to peers). The market estimates a P/BV multiple of 1.0-1.3x for the deal. We do not factor in future returns from the acquisition (account only for Denizbank’s RWAs), however, our valuation (pre-rights) offers 30% upside. ENBD remains a strong beneficiary from a potential rise in Dubai’s economic activity, with capacity to benefit the most from higher rates due to its favourable balance sheet (lowest asset duration of 1.6 years and highest CASA at 55%).  

Upgrade FAB to OW from N following a successful 2017. Management’s delivery on phase 1 of the integration process exceeded expectations (actual synergies 2x higher-than-expected in 2017; annual run-rate cost synergy target up 50%), and the key part of the balance sheet optimisation plan is complete. We upgrade our loan growth assumptions (CAGR of +9.5% during 2018-20e). FAB remains ahead on liquidity (LTD=83.5%) and efficiency (C-to-I=30.1%). Potential RoE expansion (>18% in 2020e) justifies our implied 2018e P/BV of 1.9x. Management’s plan to expand international operations (Saudi, Egypt, and India) could represent an upside. We also upgrade ADCB to Overweight from Neutral, but see limited ST catalysts for the stock. ADCB has the best asset quality metrics (NPLs=2.2%, coverage=163%), although liquidity (LTD=100%) and efficiency (C-to-I=33%) weigh on profitability.

DIB’s capital hike is key to sustaining growth and dividends. DIB aims to double its capital via raising AED5.0bn in equity (1:3 rights issue, 45% discount to market price on a date to be set by BoD). We expect DIB will continue outperforming peers on loan growth (+14.7% in 2018e and +17.4% in 2019), in line with its aggressive credit strategy, high retail exposure and capacity to lend to the government. Post-rights, we forecast a stable dividend yield of 8.1% in 2018-20e. We believe that a stronger-than-expected rerating of ENBD would bring DIB to the limelight as the play on Dubai’s activity, particularly if it continues to lag until the finalisation of the rights issue.