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Transcript of UAE Banking Sector Report
Global Research
January 2007
Sector
UAE Banking Sector Report
UAE
Core earnings to lead growth
Global Investment House KSCCSector ResearchSouk Al-Safat Bldg., 2nd FloorP.O. Box 28807 Safat13149 KuwaitTel: (965) 240 0551Fax: (965) 240 0661Email: [email protected]://www.globalinv.net
Global Investment House stock market indices can be accessedfrom the Bloomberg page GLOHand from Reuters Page GLOB
Omar M. El-Quqa, CFAExecutive Vice [email protected] No:(965) 2400551 Ext.104
Shailesh Dash, CFAHead of [email protected] No:(965) 2400551 Ext.196
Faisal Hasan, CFASenior Financial [email protected] No:(965) 2400551 Ext.304
Chandresh BhattSenior Financial [email protected] No:(965) 2400551 Ext 270
Amit TripathySenior Financial [email protected] No:(965) 2400551 Ext.269
Mihir J. MarfatiaFinancial [email protected] No:(965) 2400551 Ext.421
Burhan AliAssistant Financial [email protected] No:(965) 2400551 Ext.229
Table of Contents
Investment Summary ................................................................................... 1
UAE Economy ............................................................................................ 4
Banking Sector in UAE ............................................................................... 7
Peer Group Comparison ............................................................................. 17
UAE Banking Sector Outlook .................................................................... 27
Valuation & Recommendation .................................................................. 28
Player Profiles
Abu Dhabi Commercial Bank ................................................................... 32
Abu Dhabi Islamic Bank ........................................................................... 46
Commercial Bank International ................................................................ 57
Emirates Bank International ..................................................................... 67
First Gulf Bank ......................................................................................... 83
Mashreq Bank ........................................................................................... 99
National Bank of Abu Dhabi .................................................................... 113
National Bank of Dubai ............................................................................ 128
Sharjah Islamic Bank ................................................................................ 147
United Arab Bank ..................................................................................... 157
Union National Bank ................................................................................ 170
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �
UAE Banking Sector Report
Outlook: POSITIVE
Investment Summary
- The oil price-led liquidity in the economy was a blessing for the UAE banking sector, which saw excellent growth in the last few years. Good times predominantly owed to the high credit and deposit growth on the back of relatively low interest rate environment, high oil prices and a flourishing economy.
- Consolidated assets of the banking sector grew by 4�.9% to AED638.0�bn at the end of 2005, thanks to the total credit growing by 43.0% to AED247.0bn on the back of strong economic growth. In terms of the size of the banking assets, UAE is second only to Saudi Arabia, which has aggregate banking assets of US$202bn as against UAE’s US$�74bn at the end of 2005.
- Banks in UAE primarily belong to two categories, national (local) and foreign, with the latter being restricted from operating more than eight branches. Currently, there are 46 banks operating in UAE, including branches and offices of foreign banks. There are 2� national banks in UAE, all of which are listed either on Abu Dhabi Securities Market (ADSM) or Dubai Financial Market (DFM).
- Among the GCC countries, UAE has the second highest number of banks after Bahrain. On July 3�st, 2006, Central Bank of UAE granted Saudi American Bank (SAMBA) and Doha Bank of Qatar a license to open a branch to carry-out commercial banking business in the UAE. With the opening of branches of these two banks, there will be representation of GCC national banks from all GCC Countries. Currently, the national banks present in UAE are National Bank of Oman, A�-Ahli Bank of Kuwait and National Bank of Bahrain.
- Another notable feature is the rapid stride that Islamic banking has made in the UAE. A range of Sharia-compliant products was introduced in the market and Islamic finance deals like Ijara transactions have become common in property purchasing deals. The region has witnessed Islamic Sukuks attracting large investor volumes with subscriptions exceeding expected issuance, even in big issues.
- Due to surplus liquidity in the system on the back of high oil prices helped banks to strengthen their deposit franchise during the last two years. Total deposits (excluding government deposits) increased by 35.4% to AED306.54bn at the end of 2005, whereas increased by only 7.7% to AED330.22bn at the end of first quarter of 2006. However, the share of deposits in total liabilities declined to 44% in the �Q-06 from 50.4% at the end of 2004.
- Over the years, credit facilities have led the asset growth of the UAE banking sector. After a sedate growth in 200�, growth of total credit accelerated in the following two years. Cashing in on the favorable macro-scenario, total credit increased by 37.7% to
Global Research - UAE Global Investment House
2 UAE Banking Sector Report January 2007
AED394.89bn in 2005, with the credit to residents growing at faster rate by 43.0% to AED353.�4bn. The total credit and credit to residents grew further by 2�.4% and 22.5% in the first quarter of 2006.
- The size of the banks under our coverage increased from AED265.99bn in 2004 to AED395.76bn in 2005, a growth 48.8% over the previous year. During the period 2002-05, asset size of the banks grew at a CAGR of 28.9%. In terms of size, the top three banks namely NBAD, EBI and ADCB contribute 50.7% of the overall size of the banks under review. Going forward, asset size of the banks under coverage is likely to register a CAGR of �7.5% over the next four years.
- Deposits grew at a CAGR of 26.0% for the period 2002-05 from AED�32.22bn in 2002 to AED264.7�.5bn in 2005. In order to support strong loan growth in the banking sector, resource mobilization is the key. Most of banks have also started focusing on medium term notes as a way of increasing their funding base. We expect deposit mobilization to grow at a CAGR of �8.9% over the next four years (2005-09) for the banks under coverage.
- Net loans grew at a CAGR of 33.7% for the same period. The net loan book increased from AED�00.8bn in 2002 to AED24�.�bn in 2005. In 2005, the net loans increased by 47.�% as compared to 2004. The growth on the consumer lending front is likely to slow down in 2006, but will still remain healthy for the banking sector. We also believe the banks will continue to witness strong lending requirements from the service and real estate sectors, especially the services sector. We estimate net loan portfolio of the banks under coverage to register a CAGR of 2�.3% for the period 2005-09.
- Profits of the banks under review, grew from AED3.47bn in 2002 to AED�2.�9bn in 2005 registering a CAGR growth of 52.�% for the period 2002-05. In 2005, profit growth was particularly stronger, as the all the banks witnessed healthy growth in fees and commission income due to the surge in capital markets. The fee income grew from AED2.28bn in 2004 to AED5.23bn, registering a growth of �29.9%. Net commission income, which is from core banking activities grew from AED5.79bn in 2004 to AED8.88bn in 2005, a growth of 53.4%. Profits for the banks under coverage is likely to register a CAGR of �2.0% on the back of 2�.3% growth in net interest income and 7.2% growth in non-interest income.
- The year 2005 has been a record year for UAE banks, as they were the most profitable thanks to the surging capital markets and IPOs tapping the market. The average return on average assets and return on average equity at 3.6% and 27.8% respectively reported in 2005, where as the average ROAA and ROAE in 2004 were 2.3% and �8.6% in 2004 respectively.
- Total non-performing loans of the banks under review amounted to AED4.04bn in 2005 as compared to AED4.72bn in 2004, which represented �.7% of the banks’ aggregate loan portfolio at the end of year 2005 as compared with 2.9% in 2004. UAE banks average coverage ratio (PLLs-to-NPLs) was ��6% in 2005 as compared to 97.�% at the end of 2004.
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January 2007 UAE Banking Sector Report 3
- The first nine months of 2006 has not been very rosy for the UAE banking sector, like seen in the year 2005. This is primarily because of the reduced fee and commission income, which saw a decline during the first nine months due to the slow down in capital market activity. However, the income from core banking activities has been healthy during the first nine months of 2006 which further substantiates our view that core income is likely to drive earnings growth going forward.
- In the first nine months of 2006, the net interest income of the banks under review reached AED8.23bn as compared to AED6.23bn during the same period corresponding year, registering a growth of 28.0%. On a q-o-q, the net interest income of the banks under review was AED2.73bn in the third quarter of 2006 as compared with AED2.34bn during the same period in corresponding year, registering a growth of �6.3%. Net income for the UAE banks under review reported a marginal growth of �.4% during the first nine months of 2006.
“Global” Valuation Matrix
Price Target Reco.%
ChangeBV * EPS * PBV PE
ADCB 6.0 5.7 Hold -5.9% 2.5 0.5 2.4 �2.0ADIB 52.4 60.5 Buy �5.6% �7.7 4.0 3.0 �3.�CBI 2.6 2.8 Hold 8.4% �.2 0.� 2.� 44.5EBI �2.� ��.7 Hold -3.�% 3.9 0.8 3.� �5.6FGB �2.8 �4.9 Buy �6.9% 6.7 �.� �.9 ��.3Mashreq Bank 270.0 257.7 Hold -4.6% 82.6 �6.4 3.3 �6.5NBAD 22.9 26.0 Buy �3.8% 6.6 �.7 3.4 �3.3NBD 9.0 �0.� Buy ��.8% 4.2 0.8 2.2 ��.7SIB 2.4 2.7 Buy ��.9% 2.0 0.2 �.2 �2.3UAB 8.0 6.9 Reduce -�3.9% �.5 0.3 5.2 28.6UNB 7.0 8.� Buy �5.6% 3.9 �.4 �.8 5.0
Note: * Based on 2006E
Source: Global Research, Market prices as on January 16, 2007
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4 UAE Banking Sector Report January 2007
UAE Economy
UAE’s efforts to enter into various trade agreements is a part of its pro-liberalisation approach. Along with this, restrictions on foreign investment in the country are getting progressively relaxed with the expansions of free zones. However, the agency law is still applicable in the country by which UAE firms have exclusive distribution rights of foreign brands within most of the emirates. There are also rumours on abrogation of this law, and the raising of the current ceiling of 49% stake that foreign companies can have in domestic companies. The director of the Sharjah Chamber of Commerce said in an interview with Gulf News that the limit may be raised to as high as 95% for ventures that promise to deliver significant benefits to the economy. The change in laws on foreign ownership of real estate in emirates like Abu Dhabi and Sharjah also signals the intent towards reaching the stage of being seamlessly integrated with the outside world. In Abu Dhabi, expatriates can now own surface property, but not the land within designated investment areas on a 99-year lease. These anticipated regulatory changes evinced plenty of interest, as the country is developing into an attractive destination for doing business. UAE is among the most competitive countries in the world and a haven for businesses, as per rankings in the Global Competitive Report 2004-05 issued by the World Economic Forum. UAE ranked third with regard to the organized efforts to improve competitiveness, and second globally after Bahrain regarding the tax burden on enterprises. Dubai in particular was judged as holding a rank higher than many other developed countries in many crucial factors, and even surpassing them. This is pretty much expected as Dubai is the hub of private sector activity within the UAE and is often at the forefront of economic reforms. UAE also topped the World Bank’s governance effectiveness list in the Middle East with a score of 86.�%.
The various initiatives towards privatisation have gone a long way in rendering the country as an attractive investment destination. Many government owned firms are already being privatised, or are at the doorstep. Abu Dhabi has taken the lead in privatisation, with the power sector already having large private players in operation. The new rules illustrated a similar approach by a series of privatizations of state-owned companies in Abu Dhabi, including Agthia, Aldar Properties and Aabar Petroleum Investments Company. The pro-liberalisation approach, excellent economic health and rapid improvement in the overall wealth levels in the country have led to an improvement in the sovereign credit rating of the country. Moody’s upgraded UAE’s country rating to A�, which is not bettered by any other country in the region, and equaled only by Qatar. Factors like healthy corporate performance and the deepening of the financial markets also helped the economy to improve its image on a global platform.
Another interesting development is the dramatic increase in the number of HNWIs within the country. Number of millionaires in the country is estimated at 52,800, form �.2% of the population, according to the World Wealth Report-2006 released by Merrill Lynch and Capgemini. However, on the flipside, there has been a dramatic increase in the cost of living in the country, already having a negative effect on the middle income group. Irrespective of the cost scenario, there seems to be no respite to the wheels of change in the country, literally through a slew of skyscrapers attracting money and people from all over the world.
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January 2007 UAE Banking Sector Report 5
GDP – on a growth trajectory UAE’s nominal GDP grew by 25.6% in 2005 to AED485.5bn (US$�32.2bn), according to the Ministry of Planning estimates. Real GDP grew by 8.2% to AED357.6bn, the growth being one of the highest in the world. Tremendous growth in the last two years has boosted the per capita income to an all time high and second highest within the GCC region next to Qatar. Oil and gas, which contributed 35.7% to the GDP had a phenomenal growth of 40.5% in ’05, on the back of a 33.8% growth in the previous year.
Table 1: Gross Domestic Product 2000 2001 2002 2003 2004 2005Nominal GDP (AED bn) 258.0 254.2 272.9 32�.8 386.5 485.5Nominal GDP (US$bn) 70.3 69.3 74.3 87.7 �05.3 �32.3Nominal GDP growth (%) 27.8 -�.5 7.3 �7.9 20.� 25.6Real GDP (AED bn) 258.0 262.4 269.3 30�.3 330.5 357.6Real GDP growth (%) 27.8 �.7 2.6 ��.9 9.7 8.2
Source: Central Bank of UAE
This has been the prime reason for the high overall growth in the GDP. Among the various sub-segments within the non-oil sector, the ‘Wholesale and Retail Trade’, ‘Restaurants and Hotels’, Financial Corporation Sector’ and the ‘Real estate and Construction’ segments recorded the highest growth rates. Table 2: GDP by economic activity (at current prices in AED mn) 2001 2002 2003 2004 2005Crude oil and Natural Gas 74,990 72,552 92,�36 �23,26� �73,�95 Quarrying 697 725 765 828 9�9 Manufacturing 35,�32 37,7�0 42,2�5 50,�59 6�,�94 Government Services 27,029 27,864 30,737 32,463 34,735 Wholesale, Retail trade & Repairing services 22,838 28,894 35,460 43,458 52,998 Transport, Storage and Communication �9,595 2�,742 24,692 27,263 32,642 Real Estate and Business Services �9,662 22,524 25,355 30,0�8 35,920 Construction �7,446 2�,478 26,072 28,97� 34,980 Agriculture and Fishing 8,862 9,�05 9,�52 �0,�00 ��,028 Restaurants and Hotels 5,435 6,025 6,525 7,343 8,946 Electricity, Gas and Water 4,890 4,930 6,009 6,720 7,935 Social and Personal Services 4,067 5,663 6,492 7,��3 7,607 Domestic Services and Households �,940 2,030 2,065 2,�26 2,382 Financial Corporation Sector �6,845 �7,3�4 �9,902 23,374 28,426 Imputed Bank Services (5,�92) (5,700) (5,825) (6,662) (7,395)GDP at Current Prices 254,236 272,856 321,752 386,535 485,512
Source: Central Bank of UAE
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6 UAE Banking Sector Report January 2007
The latter which contributes �4.6% to GDP had a growth of 20.2% in this segment, and a CAGR of �7.6% in the period 200�-’05. This sector was buoyed by the increasing investment in infrastructure, due to the country being positioned as an attractive tourist destination. However, it should be noted that GDP growth was higher due to consumption expenditure and trade surplus growth, rather than a major increase in investment. In the year 2005, the non-oil sector contribution to GDP stood at 64.3%, while the oil sector contributed 35.7% to GDP.
Consistent growth pattern expected to continue…The most positive aspect about the growth in the UAE is the fact that it has not been totally dependent on oil. For instance, Dubai economy, of which oil contributes just 6.�%, grew at high rates. We believe that the growth of the economy would be moderate in the longer term compared to the current high levels, though it would remain at rates higher than average. The oil sector can be expected to record high growth rates in 2006 due to the planned expansions. Growth in sectors like real estate and some of the other service-related sectors could be expected to be moderate in about two years from now. On the other hand, we expect manufacturing and trade to continue growing at high rates, in turn keeping the overall economic growth afloat. Spending in capital-intensive industries, especially petrochemicals and gas would prop up the economy in the longer term.
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January 2007 UAE Banking Sector Report 7
Banking Sector in UAE
The biggest beneficiary of the strong economic growth is the banking sector. Due to relatively low interest rate environment, high oil prices and a flourishing economy, banking sector assets witnessed strong growth. The UAE has a remarkably high number of banks. UAE has 2� local banks, 25 foreign banks, two specialized banks and around 50 representative offices of other foreign banks. Saudi Arabia, in contrast, has a population of around 25mn but has only �2 commercial banks. In line with its membership obligations, the UAE has been under pressure from the World Trade Organization to open up the banking sector more to foreign competition. In late 2004 the Central Bank of the UAE indicated that it will issue new licences, although none has so far been issued. Moreover, large stakes held by the government underline the significance of this sector, more so because of the government control on the macro-economy, which predominantly relies on oil revenues and trade.
Table 3: Consolidated Balance Sheet of Banks in UAE(AED mn) 2001 2002 2003 2004 2005 Mar-06Cash & Deposits with CB 27,624 25,059 27,283 38,5�5 46,987 52,868 Due from Resident Banks �4,640 �5,995 �5,362 �7,046 29,366 28,499 Foreign Assets 97,52� ��0,732 ���,727 �26,�08 �75,028 �80,858 Credit Facilities �45,333 �65,6�� �96,906 246,953 353,�39 432,48� Claims on Government �0,565 �5,222 �9,650 29,�84 39,306 37,672 Claims on official entities 4,830 6,454 �2,2�5 �2,479 23,254 23,890 Claims on the Private Sector �27,985 �42,032 �62,769 20�,789 283,�04 356,233 Claims on other FI �,953 �,903 2,272 3,50� 7,475 �4,686 Domestic Investments 5,063 6,452 6,886 �0,046 �9,�95 22,506 Other Assets 7,600 7,70� 8,744 ��,079 �4,297 33,385 Total Assets 297,781 331,550 366,908 449,747 638,012 750,597
(AED mn) 2001 2002 2003 2004 2005 Mar-06LiabilitiesMonetary Deposits 28,927 35,��6 44,477 65,040 86,927 �00,639 Quasi-Monetary Deposits ��7,0�6 �26,599 �42,338 �6�,424 2�9,6�5 229,579 Foreign Liabilities 28,789 28,247 30,294 48,793 85,2�5 �02,379 Government Deposits 27,382 36,972 40,�33 5�,274 79,�79 7�,88� Government Lending Funds 37 28 23 �8 �7 �7 Due to Central Bank 52 ��6 �63 �8 209 �,0�6 Capital and Reserves 36,8�7 4�,023 44,455 52,463 78,�32 87,887 Due to Resident Banks �5,�96 �7,427 �7,899 �9,607 29,795 34,025 Unclassified Liabilities 43,565 46,022 47,�26 5�,��0 58,923 �23,�74 Total Liabilities 297,781 331,550 366,908 449,747 638,012 750,597
Source: Central Bank of UAE
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8 UAE Banking Sector Report January 2007
UAE also boasts of large private banks like National Bank of Dubai (NBD) held by prominent local businessmen and members of the ruling family; Mashreqbank, held by the Al Ghurair family; First Gulf Bank owned by the ruling family of Abu Dhabi and Commercial Bank of Dubai (CBD), which has most of its shares held by foreign banks. Another notable feature is the rapid strides made by Islamic banking sector in the country during the last couple of years, where most of the banks have either opened a new Islamic subsidiary or introduced an Islamic window to accommodate the growing needs of financing through the Islamic Sharia. A range of Sharia-compliant products were introduced in the market and Islamic finance deals like Ijara transactions have become common in mortgage deals. However, Islamic banking in UAE is still behind Bahrain, which continues to be the regional centre for Islamic Banking.
Consolidated assets of the banking sector grew by 4�.9% to AED638.0�bn at the end of 2005, thanks to the total credit growing by 43.0% to AED247.0bn. In terms of the size of the banking assets, UAE is second only to Saudi Arabia, which has aggregate banking assets of US$202bn as against UAE’s US$�74bn at the end of 2005. Apart from the growth in assets and the resultant increase in net interest income, the UAE banking sector was also helped by the steady presence of non-interest revenues, thereby lending stability to its earnings in times of interest rate fluctuations. Higher trade finance, a characteristic of UAE’s banking sector, and fees arising out of rising consumer banking activities have pushed up revenues in the form of fees and commissions. National banks - Dominance in the market….Banks in UAE primarily belong to two categories, national (local) and foreign, with the latter being restricted from operating more than five branches. Currently, there are 46 banks operating in UAE, including branches and offices of foreign banks. There are 2� national banks in UAE, all of which are listed either on Abu Dhabi Securities Market (ADSM) or Dubai Financial Market (DFM). Following the closing down of Standard Chartered Grindlays Bank Ltd. (consequent to the merger of Standard Chartered with ANZ Grindlays), the number of foreign banks in the country came down to 25 at the end of 2005 (25 banks since the end of 2003). Among the GCC countries, UAE has the second highest number of banks after Bahrain. On July 3�st, 2006, Central Bank of UAE granted Saudi American Bank (SAMBA) and Doha Bank of Qatar a full license each to open a branch to carry-out commercial banking business in the UAE. With the opening of two branches by these banks, there will be representation of GCC national banks from all GCC Countries. Currently, the national banks present in UAE are National Bank of Oman, A�-Ahli Bank of Kuwait and National Bank of Bahrain.
Looking at the number of foreign banks, one might feel that the national banks must be having a tough time in sustaining the current position in the UAE market. However, it is not the case when we look at the growth composition of the UAE banks balance sheet. There has not been any clear trend, though national banks were out performers in terms of credit growth in the first quarter of 2006. It is worth mentioning that the market share of national banks have increased from 75.9% in 2003 to 80.5% at the end of March 2006, whereas market share of foreign banks in terms of total assets has been declining since 2003 from 24.�% to �9.5% in first quarter of 2006. At the end of this period, national banks had a market share of 8�.7% in terms of credit and 80.5% in terms of assets.
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January 2007 UAE Banking Sector Report 9
Chart 1 : National Banks vs. Foreign Banks
Source: Central Bank of UAE
Moreover, growth in the banking assets has been across the board. Based on the performance in the last two years, it could be construed that foreign banks are yet to exhibit the same levels of aggression as that of the national banks, in turn not succeeding to increase their market share from the current low base. One of the areas, where the national banks are focusing now is small to medium enterprise (SMEs) banking, which is also the way to go about increasing their market share in the market.
Penetration level – high compared to other GCC countries. …The ratio of credit deployment to GDP for UAE is relatively higher as compared to other GCC countries. Oman has the lowest penetration level in terms of system credit to GDP. UAE’s ratio as at end 2005 is around 58% as compared to around 6�% for Kuwait, Bahrain around 53% and Qatar is around 56%.
Chart 2: Regional Penetration
Source: Global Research
700,000
600,000
500,000
400,000
300,000
200,000
100,000
-
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2003 2004 2005 1Q - 2006
National Banks Foreign Banks Percentage growth
10.7%
22.6%
41.9%
17.6%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%Saudi Arabia Kuwait UAE Bahrain Oman Qatar
39.3%42.5%
60.7%64.1%
85.4%63.2%
52.7%
65.8%
33.0% 31.8%
55.8%
68.3%
Loan to GDP Deposit to GDP
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�0 UAE Banking Sector Report January 2007
The penetration level in terms of deposit to GDP ratio for UAE is relatively low. As at end 2005, this ratio stood at around 63%, where as Kuwait is around 64%, Bahrain is 66% and Qatar is 68%. Although, UAE has a higher penetration when compared to Saudi Arabia (42.5%) and Oman (3�.8%), which has the lowest penetration in terms of deposit to GDP ratio at end 2005.
Approached bond markets too….The requirements for increased liquidity also forced a number of banks in the country to approach the bond market, a phenomenon not so popular in the country till some time back. The highlight of the various such issuances was that the banks were able to leverage on the current good health and raise the money at a relatively low cost.
• Emirates Bank International (EBI) was the first bank to tap the international bond market in the year 2002 and completed the third public issue in 2005 under a US3.5bn - Euro Medium Term Note (EMTN) programme. EBI has followed suit by launching a US$�.5bn euro commercial paper programme, which is also the first of its kind by a bank in the UAE.
• Bank like Mashreq Bank, which were already present in this market continued to successfully raise money through the subsequent tranches of its Euro Medium Term Notes maturing in 20�0.
• Abu Dhabi Commercial Bank (ADCB), which made rapid strides this year, issued its debut international bond, which is the largest of its kind to be issued from the region. The first part of the bank’s US$2.5bn Euro Medium Term Note programme has already been issued.
• National Bank Dubai (NBD) has established a US$3bn EMTN programme and US$�bn ECP programme, which will provide platform for multiple and ongoing bond issuance over time.
Various measures to raise the capital and improve liquidity by the UAE banks would brace them to comply with the new requirements necessitated by regulatory changes. In the first phase of implementation, banks have to migrate to Basel II Accord by the end of 2007. The raising of the Capital Adequacy Ratio (CAR) requirement does not particularly pose a threat to the banks in the country, though they will have to establish independent and reliable systems to monitor all the risks involved.
Looking out for more pastures to diversify…Armed with the wherewithal to expand, banks in the UAE have been looking abroad aggressively in the last �2-�8 months. Taking strategic stake in foreign banks to expand ones own exposure was a popular step, while some banks also entered into joint ventures. This signals not only the aggressive posture adopted by the UAE banks but also the fact that banks would have to increasingly look abroad in a scenario of the local market getting more and more competitive.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report ��
• Dubai Islamic Bank (DIB) was one of the front runners in expanding abroad among the UAE banks. It has signed an agreement with the Government of Sudan to acquire 60% stake in Al Khartoum Bank. The bank has also launched its operations in Turkey by opening a representative office. Additionally, a range of Islamic banking activities and products are marketed through a large branch network across Pakistan.
• Apart from DIB, Dubai Bank, a subsidiary of Emaar, has also taken an exposure in Pakistan by acquiring �8.75% stake in BankIslami Pakistan.
• Significant among the JVs have been those involving ADCB: a strategic alliance with Commercial International Bank in Egypt to service the non-resident Egyptians and an investment banking JV with Australian based Macquarie Bank. Additionally, ADCB, in alliance with Deutsche Bank, announced the completion of a Sharia compliant transaction for high net worth clients linked to a basket of commodities.
Hand in hand with the strategy of expanding abroad, banks in the country also liberalized the shareholding, allowing more foreign ownership. On this too, ADCB and DIB are in the forefront.
Islamic banking makes rapid strides….Another notable feature is the rapid stride that Islamic banking has made in the UAE. A range of Sharia-compliant products was introduced in the market and Islamic finance deals like ijara transactions have become common in property purchasing deals. The region has witnessed Islamic Sukuks attracting large investor volumes with subscriptions exceeding expected issuance, even in big issues. Interestingly, the contribution from the non-Islamic institutions to Islamic issues was about 60% of the amounts issued.
The significance of Islamic banking was further underlined as a few of the major banks started an Islamic banking wing or in some cases converted themselves into Islamic banks. For instance, EBI formed Emirates Islamic Bank by converting its subsidiary, Middle East Bank into an Islamic one. Market shares of most of the smaller Islamic banks, within the listed banks’ universe, showed an improvement in 2004. Also it can be seen that most of the larger banks except NBAD lost market share in terms of assets. Notable gainers among the medium sized banks include First Gulf bank and Abu Dhabi Islamic Bank.
Deposit mobilization , coming at a higher cost….High growth in credit was more or less matched by growth in deposits over the last few years. Deposits mobilization has been a significant factor of the UAE banks’ performance in the last 24 months. Total deposits (excluding government deposits) increased by 35.4% to AED306.54bn at the end of 2005, where as increased by only 7.7% to AED330.22bn at the end of first quarter of 2006. However, the share of deposits in total liabilities declined to 44% in the �Q-06 from 50.4% at the end of 2004.
This growth was led by deposits from the private sector business enterprises and individuals. Private sector, which contributed to almost 50% of the total deposits, grew by 59%, while public sector, which contributed to around �0%, grew by just �9%. After a year of slower growth in 2003, deposits from ‘Individuals’, which also form the major chunk of the total deposits, accelerated growing at �0% in 2005. However, growth of the short term deposits
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�2 UAE Banking Sector Report January 2007
could have also been helped by repatriation of the money from the foreign markets to invest in the buoyant local markets. The nature of the growth, being led by the monetary deposits supports this argument. After the healthy growth witnessed in the last two years, deposit growth slightly tempered in the first quarter of 2006 to 7.8%.
Chart 3: Deposit Mix – Break down
Source: Central Bank of UAE
Demand deposits saw a CAGR growth of 34.5% (2002-05), and continued the momentum going in to the 2005 at 34.3% as compared to 2004. Time deposit witnessed a CAGR growth of 20.4%, however the growth in the year 2005 was 38.3%. The healthy growth in time deposit augurs well for the banks as it will support the growth in the loan growth. Going forward, we believe that banks will have to increase their interest rate on time deposits to further attract more time deposit funds. Increase in the interest rates on time deposits was steep in the last twelve months, with the proportion of time deposits yielding rates of less than 2% coming down to 6% at the end of 2005 from 36% at the end of 2004. Contrary to the increase in the time deposits, there has been an overall shortening of the maturity of time deposits, reversing the past trend. However, this does not augur well for the banks, in terms of the longevity of deposits, particularly so when the deposit rates are up in line with the global interest rates.
Liability Mix –Changing with growthLiabilities grew at a CAGR of 24.3% for the period 2002-05 from AED33�.55bn in 2002 to AED638.0�bn in 2005. On a yearly basis the liabilities grew by 4�.9% in 2005 as compared to end of 2004. The deposits grew in line with the liabilities and at the same time its contribution to the total liabilities increased marginally from 59.9% in 2002 to 60.5% at the end of 2005. However, the deposits contribution declined substantially during the first three months of 2006 to 53.6%, mainly due to the drop in government deposits. During the period, the contribution of shareholders as a percentage of total liabilities remained in line with the previous, hovering at around �2.2% to �2.4%, but declined to ��.7% at the end of �Q-06.
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%2002 2003 2004 2005 Mar-06
Demand Deposit Time Deposit Savings Deposit Others
27.2%
7.1%
44.3%
21.4% 23.5%
40.8%
7.0%
28.7%29.6%
6.6%
35.5%
28.4%27.9%
40.6%
5.5%
26.0% 25.5%
5.0%
40.2%
29.3%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �3
Chart 4 : Liability Mix
Source: Central Bank of UAE
Bank Credit – Growing at a faster paceOver the years, credit facilities have led the asset growth of the UAE banking sector. After a sedate growth in 200�, growth of total credit accelerated in the following two years. Cashing in on the favorable macro-scenario, total credit increased by 37.7% to AED394.89bn in 2005, with the credit to residents growing at faster rate by 43.0% to AED353.�4bn. The total credit and credit to residents grew further by 2�.4% and 22.5% respectively in the first quarter of 2006.
Asset composition of UAE banking sector is characterized by a high proportion of claims on the private sector and an exceptionally high proportion of foreign assets. Foreign assets, which formed 27.4% of the total assets at the end of 2005, pertain to the investments made abroad by the government and funded by the banks in UAE. Most of this exposure is in the form of bank placements, and a significant portion of it is to top-rated banks in Western OECD countries. However, it can be seen that the proportion of foreign assets has come down during the last two years, from 32.7% in 200� to 27.4% in 2005, losing its share to credit facilities, which formed 55.3% of assets at the end of 2005, which is on a slightly higher side compared to other GCC countries.
As shown in chart below, growth in credit to residents is attributed to the growth in lending to private sector. As private sector lending contributes 80.4% of the credit to residents. Although the contribution has declined from 88.�% in 200� to 80.4% in 2005, it still plays an important role in driving the credit growth especially in favorable macro-economic conditions. In the �Q-06, the private sector credit increased by 40.3% to AED356.23bn as compared to AED283.�0bn at the end of 2005, bringing the contribution to 82.4% in terms of credit to residents.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%2002 2003 2004 2005 Mar-06
Customer Deposits Other Liabilities Foreign Liabilities Capital & Reserves
59.9%
19.2%
8.5%
12.4% 12.1%
8.3%
17.8%
61.9% 61.8%
15.7%
10.8%
11.7% 12.2%
13.4%
13.9%
60.5% 53.6%
21.1%
13.6%
11.7%
Global Research - UAE Global Investment House
�4 UAE Banking Sector Report January 2007
Chart 5 : Bank Credit – Private vs Public Sectors
Source: Central Bank of UAE
Though the movement in deposit rates and the shift in maturity have not been in favor of the banks, the sheer growth of deposits endowed them with adequate liquidity for fortuitous credit growth. Cashing in on the business upturn, banks were able to increase credit to residents by a higher rate in 2005 than the previous year. A look at the growth in credit by economic activity shows a few sectors which have consistently contributed to overall growth. Trade, construction, personal loans for business, Government, and personal loans for consumption were the five segments which took away the maximum credit. These five segments together accounted for over 74.8% of the gross credit at the end of September 2004. It can also be seen that real estate mortgage loans has shown staggered growth despite the glowing fortunes of the real estate sector. This is owing to the absence of an efficient legal system which could have helped banks to follow-up on the mortgage lending in an appropriate manner. It is risky to the extent that there is lack of clarity about the recourse that banks would be able to take up, in case the borrowers default.
Table 4: Bank (gross) credit to residents by sector
(AED Million) 2004 2005CAGR
2002-’05Mar-06
Wholesale trade 5�,325 60,983 �9.8% 62,��3 Construction 3�,68� 4�,897 �5.7% 44,�52 Personal loans for business purposes 35,5�9 70,458 50.4% �05,586 Personal loans for consumption purposes 24,069 27,256 �5.5% 27,935 Government 29,�84 39,306 37.2% 37,672 Retail trade �8,�76 24,��0 2�.6% 28,900 Electricity, Gas and Water 9,099 �0,534 48.5% 9,209 Manufacturing �3,602 �7,8�3 2�.6% 22,440 Transport, Storage & Communications 6,834 �0,702 27.8% �3,269 Financial Institutions (excl banks) 3,50� 7,475 57.8% �4,686 Mining & Quarrying 2,692 3,7�2 �8.8% 6,5�5 Agriculture 862 955 -6.�% �,0�6 Miscellaneous 20,409 37,938 44.7% 58,987 TOTAL 246,953 353,139 28.7% 432,480
Source: Central Bank of UAE
265,000
215,000
165,000
115,000
65,000
15,000
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%2001 2002 2003 2004 2005
Private Sector Public Sector Bank Credit Growth
5.0% 14.0%
18.9% 25.4%
43.0%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �5
Trade is the second largest contributor of credit at the end of �Q-06. The activity picked up substantially in the recent years, after suffering a setback in �998, owing to the Asian financial crisis. Credit offtake by this segment grew at a CAGR of 20.3% since 2002. Credit to Government, likewise, grew at a CAGR of 37.2% during the same period. The growth in this segment reflects the increasing reliance of the government agencies on bank financing, especially for the big ticket projects in the country.
Personal loans – growing faster and biggerCredit growth across segments exhibited a very strange trend, particularly the ‘Business and industrial sector’ as well as the ‘Mortgaged real estate loans’ to the residents. The growth was led by the ‘Loans, advances and overdrafts’ to financial institutions and the Mortgaged real estate loans. This exactly mirrors the intuitive expectations from a booming market. It should be noted that ‘Personal loans for business purposes’ showed excellent growth in the last �5 months. The personal loan for business purposes comprises of 20% of the total credit in 2005 as compared to �4.4% in 2004. There is a dichotomy here, where we do not see a high growth for the overall loans and advances to ‘Business and industrial sector’, but buoyancy in the personal loans towards financing their business needs. This could possibly mean diversion of a part of the personal loans, which augurs well for the banks in a rising interest rate scenario. The category of personal loans cover a wide range of loans, including those made to proprietors of small businesses. A huge increase could also reflect increased borrowing among the retail investors for investment in the stock market, which could be the case for the last year as there were a lot of IPO’s that tapped the market.
Project financing and real estate financing are two of the segments to grow substantially lately, though not yet borne out by the bulk of numbers due to the nascent nature of such lending. On the real estate front, with the dramatic increase in demand, a number of developers have started leveraging, and at times make it risk free by asking the buyers to finance the construction by paying installments. Also, the loans given to projects, which are into production of building materials, surged in the last two years. Despite the increased lending to the newer segments, net non-performing loans (NPL) as a proportion of total loans remained in control at around 3%, though a result of heavy provision on a gross NPL, which forms more than �0% of the total loans. It should be noted that such high provision have a substantial negative effect on the profitability of banks, but then it can be expected in fast growing loan portfolio.
Average lending rates improve marginally – stiff competition….The movement in the lending rates has been favorable for the banks. This could be the result of exposures to a few relatively riskier areas like real estate and stock market financing. There has been an ostensible shift in the proportion of lending at higher rates compared to that in the previous year. Though this has been aided by a rising interest rate environment, it has also been the result of the aggressive posture adopted by banks aiming good short term results, in a competitive scenario. However, on the flip side when looked at in the context of a burgeoning personal loans portfolio and higher provision, it could be gauged that higher lending rates are also the result of the banks being risk seekers. Deterioration in the quality of loans could negatively affect the banks in the longer term.
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�6 UAE Banking Sector Report January 2007
Chart 6 : Movement of the interest rates
Source: Central Bank of UAE
We do not expect the spreads to increase in the future too, as the interest rates have already started going up, and it is unlikely that banks would be able to increase the lending rates commensurately. The Central Bank has been raising the interest rate on CDs in line with the increase in Fed rates, which is a pointer to the trail for interest rate expenses in the future. On the other hand, if the banks are presented with similar opportunities as now to take high risk exposures in segments like real estate and stock investment financing, we could see the sustenance of spreads for some more time.
10.0
8.0
6.0
4.0
2.0
0.0Q1-’03 Q2-’03 Q3-’03 Q4-’03 Q1-’04 Q2-’04 Q3-’04 Q4-’04 Q1-’05 Q2-’05 Q3-’05 Q4-’05
3Month Inter-bank Rate Lending rate to business
in %
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �7
Peer Group – Comparison
The peer group comparison is done on eleven banks, namely NBAD, EBI, ADCB, NBD, Mashreq Bank, UNB, FGB, ADIB, SIB, CIB and UAB. The size of the banks under our coverage increased from AED265.99bn in 2004 to AED395.76bn in 2005, a growth 48.8% over the previous year. During the period 2002-05, asset size of the banks grew at a CAGR of 28.9%. In terms of size, the top three banks namely NBAD, EBI and ADCB contribute 50.7% of the overall size of the banks under review. The contribution of these banks to the total has remained more or less the same, which was more than 50% historically (2002: 50.8%, 2003: 50.�%, 2004: 50.�% and 2005: 50.7%). Going forward, overall nature of the UAE economy is buoyed by high oil revenues and with increasing foreign direct investment, thus ushering next round of economic expansion. This growth in economy augurs well for the banking industry as it will be flushed with liquidity. We believe that the opportunities for lending will continue due to the strong growth in the corporate sector coupled with changing demographics in the country. The banks have also started concentrating on Small and Medium Enterprises (SMEs), which will be the trend going forward.
Chart 7: Balance Sheet Size
Source: Company Reports
Deposits grew at a CAGR of 26.0% for the period 2002-05 from AED�32.22bn in 2002 to AED264.7�bn in 2005. In order to support strong loan growth in the banking sector, resource mobilization is the key. Most of banks have also started focusing on medium term notes as a way of increasing their funding base.
Asset Size (AEDbn)
Mashreq Bank
NBAD
EBI
ADCB
NBD
UNB
FGB
ADIB
SIB
CBI
UAB100
75
50
25
0
Global Research - UAE Global Investment House
�8 UAE Banking Sector Report January 2007
Chart 8: Growth in Deposits (Banks under review)
Source: Company Reports
Banks have also increased their branch and ATM networks throughout the Emirates. A strong deposit franchise is likely to result in deposit mobilization. This will further help banks to shore up their lending book, thereby increasing their core banking activities.
In 2005, Customer deposits grew by 4�.5% as compared to a growth of 26.�% in 2004. As at end 2005, the deposits of the banks under review reached AED264.7�bn as compared to AED�87.02bn in 2004. The top three banks as per asset size namely NBAD, EBI and ADCB, accounted for 47.8% of the total deposits. The contribution from the banks have remained in the same range during the period 2002-2005. Chart 9: Customer Deposits - 2005
Source: Company Reports
Gross loans and advances grew at a CAGR of 32% for the period 2002-05. Gross loans increased from AED�06.6bn in 2002 to AED245.2bn in 2005. In 2005, gross loans grew by 46.�% as compared to 2004. This was partly due to the buoyancy in the stock market as consumer lending gathered momentum. In the first quarter of 2006, the banks witnessed huge growth in lending due to the boom in the IPO market, however, the second and third quarters
300,000
260,000
220,000
180,000
140,000
100,000
95.0%
85.0%
75.0%
65.0%
55.0%
45.0%
35.0%
25.0%
15.0%
5.0%2002 2003 2004 2005
Deposits % Growth
91.5%
12.1%26.1%
41.5%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
22.5%
14.0%12.8% 12.5%
11.3%9.7%
6.8% 6.5%
1.5% 1.1% 1.1%
NBAD NBD ADCB EBI MashreqBank
UNB ADIB FGB GBI SIB UAB
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �9
stabilized the growth of first quarter. In 2006, the growth on the lending side will still be healthy but will not be able to match the growth witnessed in the year 2005.
Net loans grew at a CAGR of 33.7% for the period 2002-05. The net loan book increased from AED�00.8bn in 2002 to AED24�.�bn in 2005. In 2005, the net loans increased by 47.�% as compared to 2004. We believe banks will continue to witness strong lending requirements from the service and real estate sectors, especially the services sector. Government’s efforts to diversify the economy and improve the investment climate through regulatory and structural measures in various sectors will also augur well for the banking sector going forward.
Chart 10: Loans and Advances - 2005
Source: Company Reports
The top three banks (NBAD, ADCB and EBI) contributed 55% of the overall loans (gross) in 2005. During the period 2002-05, the market share of these three banks have declined from 6�.3% in 2002 to 55% in 2005. NBAD’s market share has been declining during this period from 23.9% in 2002 to 2�.3% in 2005. Similarly, the market share of EBI has declined from �8.5% in 2002 to �6.2% in 2005.
Table 5: Market Share for Gross LoansGross Loans 2002 2005 DIFFERENCEFGB 3.0% 5.7% 2.7%NBD 8.8% ��.5% 2.7%ADIB 2.9% 5.5% 2.6%CBI 0.0% �.4% �.4%UNB 8.8% 8.8% -0.�%SIB �.6% �.4% -0.�%UAB �.6% �.2% -0.3%ADCB �7.8% �7.5% -0.3%EBI �8.5% �6.2% -2.3%NBAD 23.9% 2�.3% -2.6%Mashreq Bank �3.0% 9.4% -3.6%
Source: Company Reports, Global Research
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%NBAD ADCB EBI NBD Mashreq
BankUNB FGB ADIB CBI UAB SIB
21.3%
17.5%16.2%
11.5%
9.4%8.8%
5.7% 5.5%
1.4% 1.4% 1.2%
The top three banks contributed morethan half of the loan portfolio at theend of 2005.
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20 UAE Banking Sector Report January 2007
On the other hand, the other banks that have witnessed an increase in market share of lending book are NBD, FGB and ADIB. NBD’s share increased from 8.8% in 2002 to ��.5% in 2005, FGB’s contribution increased from 3.0% in 2002 to 5.7% in 2005, while ADIB’s market share increased from 2.9% in 2002 to 5.5% in 2005. Mashreq bank was the biggest loser in terms of market share, as it dropped from �3.0% in 2002 to 9.4% in 2005.
Chat 11: Gross Loans Vs Deposits (banks under review)
Source: Company Reports
The growth in loans and advances has been in line with the growth in deposits. Gross loans as a percentage of deposits has increased from 80.7% in 2002 to 92.6% in 2005. However, there is still room for the banks to expand their loan portfolio, as the banks have to maintain the restrictive Advances to Deposit ratio of �00% as per the Central Bank of UAE regulation. Any growth in the lending side will be facilitated by the banks provided that banks are able to maintain their deposit growth.
Profits of the banks under review, grew from AED3.47bn in 2002 to AED�2.�9bn in 2005 registering a CAGR growth of 52.�% for the period 2002-05. In 2005, profit growth was particularly stronger, as all the banks have witnessed healthy growth in fees and commission income due to the surge in capital markets. The fee income of banks under review grew from AED2.28bn in 2004 to AED5.23bn, registering a growth of �29.9%. Net interest income, which is from core banking activities grew from AED5.79bn in 2004 to AED8.88bn in 2005, a growth of 53.4%. In our opinion, the banks will continue to witness growth in the core banking activities going forward.
Banks’ performance in a scenario of adverse interest rate movements owed to a few innovative steps taken by banks, resulting in robust growth of the non-interest income. In spite of being competitive, the consumer capacity of the UAE market is not fully penetrated. Banks were quick to seize this opportunity as they focused on diversifying into new areas of businesses and packaging their existing products in more attractive ways. Apart from more focus on retail banking, mortgage financing and leasing, segments like credit cards and mutual funds managed by banks took a huge leap over the last two years.
275,000
225,000
175,000
125,000
75,000
94.0%
88.0%
82.0%
76.0%
70.0%2002 2003 2004 2005
80.7%
87.7%89.8%
92.6%
Deposits Gross Loans Gross Loans as % of Deposits
AED
mn
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 2�
• UAE is now more mature in terms of credit card penetration, acceptance and state-of-the-art infrastructure, according to Denzil Lawson, General Manager of Master Card International. He revealed in an interview published in ‘Banking and Finance UAE’ that more than 60% of the UAE credit cardholders prefer card to cash.
• Another source of income which has seen a surge is that from managing of mutual funds. Funds saw substantial success in the last �2 months, thanks to the booming stock markets.
• Also the spate of IPOs in the UAE market presented a windfall for the banks, who were rewarded through the processing fees, interest on the money raised and the interest on loans for investing in IPOs. This was substantial considering that money raised was mostly in the order of billions of dirhams. UAE banks are allowed to lend at a �:5 rate meaning that an investor would have to shell out little less than AED�7 to make a subscription purchase of AED�00.
Chart 12: Return Ratios (Average for banks under review)
Source: Global Research
The year 2005 has been a record year for UAE banks, as they were the most profitable thanks to the surging capital markets and IPOs tapping the market. The average return on average assets and return on average equity were at 3.6% and 27.8% respectively in 2005, where as the average ROAA and ROAE were 2.3% and �8.6% respectively in 2004. NBAD had the highest average ROAE of 43.9% in 2005, followed by CBI with 40.8%. In terms of average ROAA, FGB was leading the way with RoAA of 5.4% followed by CBI at 5.2% respectively in 2005.
During 2002, the top three banks (NBAD, EBI & ADCB) contributed 52.�% of the total profitability. In 2005, the contribution of the top three banks dropped to 5�.0%. The number one bank, NBAD’s market share contribution increased from �8.9% in 2002 to 2�.2% in 2005. NBAD has been able to maintain its market share as the number one in the banking sector.
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
30.0%
26.0%
22.0%
18.0%
14.0%
10.0%2002 2003 2004 2005
ROAA ROAE
15.6% 15.0%
18.6%
27.8%
Global Research - UAE Global Investment House
22 UAE Banking Sector Report January 2007
Chart 13: Profitability - 2005
Source: Company Reports
Cost to income ratio of the banks under review ranged between �5% and 36%. In 2005, the lowest cost to income ratio was for CBI at �5.�% and the highest was for SIB at 35.2%. However, one has to consider that 2005 was the year when fees from banking services grew by more than �00% and hence cost to income ratio is likely to be distorted depending on the contribution of broking income of banks. Chart 14: Operating Efficiency - 2005
Source: Company Reports
Under such a scenario, a better parameter to gauge operating efficiency is operating expense (Opex) as a percentage of average assets (AA), which was in the range of 0.5% and 2.3%. In 2005, the lowest cost to AA ratio was for CBI at 0.5% and the highest was for UAB at 2.3%. The number one bank, NBAD had a cost to AA ratio of 0.9% at the end of 2005.
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
21.2%
15.7%14.3% 14.2%
9.5% 9.0% 8.7%
2.8%1.9% 1.5% 1.3%
UABSIBCBIADIBFGBFGBUNBEBIMashreqBank
ADCBNBAD
Top three banksaccounted for more than50% of the total profile
by the banks under reviewat the end of 2005
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
25.0%
2.0%
1.5%
1.0%
0.5%
0.0%NBDCBISIBADIBMashreq
BankFGBNBADADCBUNBEBIUAB
Cost to Income Ratio OPEX to AA
2.3%
1.6%
1.0%1.1% 0.9%
1.2%
2.0%
0.6%
2.0%
0.5%
1.2%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 23
Chart 15: Non-Commission Income - 2005
Source: Company Reports
Non-commission income of banks increased from AED3.99bn in 2004 to AED9.03bn, a growth of �26.3%. During the last three years, non-commission income has grown at a CAGR of 6�.2%. Fees from banking services increased from AED2.28bn in 2004 to AED5.23bn in 2005, a growth of �29.9%. This growth in the non-interest income in the year 2005 was the primary factor for the growth in the overall profits. The year 2005 was a record year for the banks in the UAE, however, for the year 2006, the banks under coverage are unlikely to match the profits achieved in 2005.
Chart 16: Asset Quality
Source: Company Reports
2400
2100
1800
1500
1200
900
600
300
0
115.0%
100.0%
85.0%
70.0%
55.0%
40.0%
25.0%
10.0%UAB EBI UNB ADCB NBAD FGB Mashreq
BankADIB SIB CBI NBD
Non-int.inc Fee inc. Cintn.
AED
mn
33.9%
99.2%
68.0%
85.6%
76.8%
28.6%
14.7%
48.3%
100.0%
42.2%
45.7%
9.0%
7.0%
5.0%
3.0%
1.0%
120.0%
110.0%
100.0%
90.0%
80.0%
70.0%
60.0%2002 2003 2004 2005
NPL/Gross Loans Coverage
71.2% 72.7%
97.1%
116.0%
Global Research - UAE Global Investment House
24 UAE Banking Sector Report January 2007
Total non-performing loans of the banks under review amounted to AED4.04bn in 2005 as compared to AED4.72bn in 2004, which represented �.7% of the banks’ aggregate loan portfolio at the end of year 2005 as compared with 2.9% in 2004. ADCB had the highest non-performing loans (NPLs) amongst the peer group, representing 23.8% of the sector’s total NPLs and 2.2% of the bank’s gross loans, which is well above the average in the sector. In 2005, NBD has the lowest NPLs to Gross Loans ratio in the banks under review of �.2%, followed by EBI (�.4%) and NBAD (�.5%).
UAE banks average coverage ratio (PLLs-to-NPLs) was ��6% in 2005 as compared to 97.�% at the end of 2004. Mashreq Bank had the highest coverage ratio of 2�6.6% followed by UNB with �56.6% coverage.
ADCB has done commendable job in reducing its NPLs to Gross Loans ratio from �9% reported in 2002 to 2.2% at the end of 2005. Similarly, FGB has also reduced its NPLs to Gross Loans ratio from �5.8% in 2002 to 2.4% at the end of 2005. It is worth mentioning that due to these two banks, the ratio of overall NPLs to Gross Loans has reduced from 7.8% in 2002 to �.7% at the end of 2005. The average NPL/Gross Loans ratio in the UAE banking sector is �.7% which is almost same as the largest banking sector in the GCC, Saudi Arabia.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 25
Third Quarter 2006 Results
The first nine months of 2006 has not been very rosy for the UAE banking sector, like seen in the year 2005. This is primarily because of the reduced fee and commission income, which saw a decline during the first nine months due to the slow down in capital market activity. However, the income from core banking activities has been healthy during the first nine months of 2006.
In the first nine months of 2006, the net interest income of the banks under review reached AED8.23bn as compared to AED6.43bn during the same period in the corresponding year, registering a growth of 28.0%. On y-o-y, the net interest income of the banks under review was AED2.73bn in the third quarter of 2006 as compared with AED2.34bn during the same period in corresponding year, registering a growth of �6.3%.
Table 6: Key Income Statement Indicators 3Q2006 (y-o-y) 9M2006 (y-o-y)
Net
interest income
Non-interest income
Net Profit
Net interest income
Non-interest income
Net Profit
ADCB 7.5% -48.8% -29.5% 36.7% �6.9% 9.5%ADIB 27.7% �08.3% �7.4% 37.9% �99.2% 70.�%CBI �4.8% -67.6% -29.0% �8.�% -��5.6% -�06.4%EBI 29.2% -3.2% -�0.2% 35.9% 25.6% �8.7%FGB 8.8% �37.0% 57.3% 6�.0% 56.6% 59.6%Mashreq Bank �2.2% �6.4% 9.3% ��.5% -23.5% 2.0%NBAD �0.9% -48.4% -26.9% 8.3% -47.�% -2�.2%NBD 23.2% 28.3% �0.8% 2�.2% -�4.8% -�2.5%SIB �3.4% 6�.6% �6.2% 30.5% 36.�% 0.�%UAB 32.4% 33.2% 39.0% 34.5% 6.2% 26.�%UNB 22.2% -72.9% -47.6% 4�.6% -27.7% -9.0%Total 16.3% -16.7% -11.3% 28.0% -14.3% 1.4%
Source: Company Reports
The non-interest income of the banks under review during the first nine months of 2006 was AED5.70bn as compared to AED6.65bn during the same period in the corresponding year, reporting a drop of �4.3%. On a q-o-q, the non-interest income of the banks under review was AED�.84bn in the third quarter of 2006 as compared with AED2.2�bn, reporting a drop of �6.7%.
Net income for the UAE banks under review reported a marginal growth of �.4% during the first nine months of 2006. The net income of the banks under review was AED9.05bn as compared with AED8.93bn. Banks like CBI, NBAD, UNB and NBD have reported a drop in net income during the first nine months of 2006. In the first nine months of 2006, ADIB’s net income reported a growth of 70.�%.
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26 UAE Banking Sector Report January 2007
Table 7: Key Balance Sheet Indicators As at September 2006 (y-t-d)
Customer
DepositsNet Loans Asset Size
ADCB 20.4% 28.�% 25.2%ADIB 26.8% 3�.0% 38.4%CBI �8.4% �9.6% 34.7%EBI 29.8% 50.2% 34.5%FGB 32.7% 64.3% 37.5%Mashreq Bank 4.0% 20.4% ��.8%NBAD -3.8% 3.7% �.5%NBD 2�.8% 38.6% 23.5%SIB 50.8% 20.�% 27.6%UAB -0.6% �3.3% 2.9%UNB -0.�% 24.�% 3.2%Total 13.8% 28.4% 19.3%
Source: Company Reports
On the funding side, the bank’s customer deposits witnessed healthy growth year-to-date. Yearly growth in customer deposits was �3.8% from AED264.7�bn at the end of 2005 to AED30�.�9bn in the first nine months of 2006. Most of the banks have started shifting their focus to medium term notes as a way of increasing funding base, which is also more stable for the banks. Banks have been able to raise external funding in the range of 35bps to 55bps above LIBOR, this is mainly due to the healthy ratings assigned to most of the banks by the rating agencies. In our opinion, this will be the trend going forward for the banks to increase the external funding base to support the increasing demand from lending side.
On the lending side, the net loans of the banks under review increased from AED24�.�bn in 2005 as compared to AED309.5bn at the end of first nine months of 2005, registering a YTD growth of 28.4%. In banks, FGB reported the highest growth of 64.3%, from AED�3.60bn in 2005 to AED22.35bn at end of first nine months of 2006. The primary factor which contributed to the growth in the lending portfolio of FGB was real estate mortgage financing. EBI was the other bank that reported healthy growth of 50.2% in its loan portfolio, mainly due to the increased lending in personal loans coupled with construction and government lending.
The total asset of the banks under review stood at AED472.33bn at the end of first nine months of 2006 as compared to AED395.76bn at end of 2005, reporting a growth of �9.3%. In our opinion, the banks will continue to show growth in the total assets especially from their core banking activities. In banks, ADIB reported the highest growth of 38.4% during the first nine months of 2006, followed by FGB reporting a growth of 37.5%.
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January 2007 UAE Banking Sector Report 27
UAE Banking Sector Outlook
UAE banks have benefited from strong economic growth witnessed during the last three years on the back of high oil prices and production. Buoyancy in the capital market activity helped banks register strong profitability by way of enhanced fee income and gains on AFS portfolio. During the last three years, the credit deployment to consumer, construction & real estate and manufacturing segments was particularly strong. A number of real estate friendly regulations were initiated which gave a further fillip to the real estate sector.
Going forward, we expect the demand from the corporate as well as the consumer segment to remain strong. Industrial and construction sectors are likely to be the key growth drivers. Tourism, hotels and resorts are being promoted, which is likely to give a further fillip to loan growth. Manufacturing sector is likely to attract attention as there are lot of projects in the pipeline particularly iron, steel and cement sectors. Changing demographics and the increasing expatriate population is likely to boost the consumer lending segment. Going forward, consumer lending is likely to be the key growth driver over the next two years.
On the funding side, banks are looking at raising funds by way of short and medium-term loans. Deposit franchise of banks registered a CAGR of 26.0% during the last three years. However, banks are raising funds in order to support loan growth with a longer duration. The above mentioned big-ticket projects are long-term in nature and hence in order to avoid asset-liability mismatches, banks are raising funds from the overseas market.
During the last three years, profits grew at a CAGR of 52.�% on the back of core income growth of 27.4% and non-interest income growth of 6�.2%. Going forward, we expect core income to drive earnings growth. The thrust on diversification towards different economic segments is likely to result in demand for funds to remain strong. However, banks which benefited from strong capital market activity registered exceptional profit growth during the last two years. In our opinion, core banking operations are likely to be the key focus areas in the years to come.
For the universe of banks under our coverage, profits for the nine-month period registered a marginal �.4% increase as compared to the nine-month period of the previous year. Most noticeable is the strong growth in core income, which increased by 28.0% in 9M2006 as compared to the same period previous year. The marginal earnings growth is primarily attributed to the decline in non-interest income by �4.4% in 9M2006 as compared with 9M2005. During 2006, the capital markets witnessed a downward bias, which resulted in the lack of IPO related activities as compared to the previous year.
On a y-o-y basis, profits of the banks under coverage declined by ��.3% on the back of lower non-interest income. However, core income registered a strong growth of �6.3% in 3Q2006 as compared to 3Q2005. Non-interest income declined by �7.�% in 3Q2006 as compared to the same quarter of the previous year.
In a nutshell, core underlying banking income has remained strong YTD despite the downward bias in the capital markets. Government thrust towards providing further impetus to economic growth is likely to benefit the banking sector. In our opinion, the long-term outlook for the banking sector is positive on the back of buoyant core banking activities.
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28 UAE Banking Sector Report January 2007
Valuation & Recommendation
For arriving at the fair value of the banks under review, we have used two valuation methods:
�. Cash flow approach represented by the Dividend Discounting Model 2. Market approach represented by Peer Group valuation.
Dividend Discounting Model - DDM
The DDM model constructed is based on a 4-year forecast of dividends as cash flows (2006-09). The dividends for the forecasted period and the terminal value are then discounted back at the cost of equity to arrive at the total net present value (NPV) of the company. In our calculations, we have made the following assumptions in order to arrive at the equity value of individual banks:
�. Cost of Equity of �0.�% derived using Capital Asset Pricing Model.
2. Risk free rate of 5.�%.
3. Equity risk premium of 5.0%.
4. Beta of �. The actual beta of the banks is less than �, but to more appropriately reflect the market risk we have taken it as �.
5. Terminal growth rate of 3.0%.
Table 8: Value as per DDM Approach DDM ValueADCB 5.49 ADIB 64.30 CBI 2.7� EBI �2.�5 FGB �4.34 Mashreq Bank 269.27 NBAD 28.25 NBD 9.9� SIB 2.�0 UAB 7.62 UNB 7.65
Source: Global Research
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January 2007 UAE Banking Sector Report 29
Peer Group Valuation
The peer group valuation is done by comparing the price to book value (P/BV) multiples enjoyed by similar companies.
Table 9: Companies average P/BV ratios in the banking sector
Equity 2006
(AED mn)
Shares Out.(mn)
BV/Share (AED)
Price (AED)
Market Cap.
(AED mn)
P/BV(x)
ADCB 9,895.6 4,000.0 2.5 6.0 24,040.0 2.43 ADIB 2,659.0 �50.0 �7.7 52.4 7,852.5 2.95 CBI �,237.8 �,000.0 �.2 2.6 2,6�0.0 2.�� EBI 9,230.3 2,33�.9 4.0 �2.� 28,2�5.9 3.06 FGB 8,504.3 �,250.0 6.8 �2.8 �5,937.5 �.87 Mashreq Bank 7,258.7 86.6 83.8 270.0 23,387.3 3.22 NBAD 8,549.0 �,224.� 7.0 22.9 27,970.2 3.27 NBD 5,923.3 �,296.8 4.6 9.0 ��,67�.0 �.97 SIB 2,�8�.� �,�00.0 2.0 2.4 2,65�.0 �.22 UAB �,034.8 635.5 �.6 8.0 5,083.7 4.9� UNB 6,�86.2 �,562.5 4.0 7.0 ��,000.0 �.78 Total/Average 62,660.1 14,637.3 4.3 160,419.1 2.56
Source: Global Research, Market prices as on Jan. 16, 2007
As indicated in the table 9, the average P/BV multiple for the banks in UAE is around 2.56x. Therefore, on the basis on industry average P/BV of 2.56x, the value of the banks under review is given in the table below.
Table 10: Value as per Market Approach P/B valueADCB 6.33 ADIB 45.40 CBI 3.30 EBI 9.99 FGB �7.�4 Mashreq Bank 2��.37 NBAD �7.00 NBD �0.67 SIB 5.08 UAB 3.95 UNB 9.87
Source: Global Research
As the book value multiples vary with time and are dependent on several factors such as market sentiment and other qualitative factors, we have provided 20% weightage to the P/BV multiple and 80% to the DDM method.
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30 UAE Banking Sector Report January 2007
Table 11: Valuation DDM Value P/B Value Weighted PriceADCB 5.49 6.33 5.66 ADIB 64.30 45.40 60.52 CBI 2.7� 3.30 2.83 EBI �2.�5 9.99 ��.72 FGB �4.34 �7.�4 �4.90 Mashreq Bank 269.27 2��.37 257.69 NBAD 28.25 �7.00 26.00 NBD 9.9� �0.67 �0.06 SIB 2.�0 5.08 2.70 UAB 7.62 3.95 6.89 UNB 7.65 9.87 8.09
Source: Global Research
Table 12: “Global” Valuation Matrix
Price Target Reco.%
ChangeBV * EPS * PBV PE
ADCB 6.0 5.7 Hold -5.9% 2.5 0.5 2.4 �2.0ADIB 52.4 60.5 Buy �5.6% �7.7 4.0 3.0 �3.�CBI 2.6 2.8 Hold 8.4% �.2 0.� 2.� 44.5EBI �2.� ��.7 Hold -3.�% 3.9 0.8 3.� �5.6FGB �2.8 �4.9 Buy �6.9% 6.7 �.� �.9 ��.3Mashreq Bank 270.0 257.7 Hold -4.6% 82.6 �6.4 3.3 �6.5NBAD 22.9 26.0 Buy �3.8% 6.6 �.7 3.4 �3.3NBD 9.0 �0.� Buy ��.8% 4.2 0.8 2.2 ��.7SIB 2.4 2.7 Buy ��.9% 2.0 0.2 �.2 �2.3UAB 8.0 6.9 Reduce -�3.9% �.5 0.3 5.2 28.6UNB 7.0 8.� Buy �5.6% 3.9 �.4 �.8 5.0
Note: * Based on 2006E
Source: Global Research, Market prices as on January 16, 2007
PLAYER PROFILES
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32 UAE Banking Sector Report January 2007
• The bank provides retail, commercial, investment and merchant banking services, through its network of 42 domestic branches, 2 branches in India and �24 ATMs.
• The bank has presence in retail (personal accounts, debit cards, credit cards and loans), corporate banking (investment banking, commercial banking, treasury and trade finance), private banking and wealth management segments.
• This is the second year of high growth since restructuring began in 2003 and is a direct reflection of the Board and management’s common vision, goals and objectives. A number of new initiatives were launched in 2005, which are now coming into effect and which will also form part of the longer-term strategy of the Bank, particularly joint ventures to deliver investment banking and corporate advisory products.
• In 2005, joint venture with Macquarie Bank of Australia have catapulted the bank into prominent new position to deliver investment banking and corporate advisory products for infrastructure development, mainly in the UAE. In a second joint venture with Macquarie for treasury products, the Australian bank has supplied technology and structuring capabilities while ADCB delivered local, regional expertise through tailor made products to customers.
Reuters Code:ADCB.AD
Listing:Abu Dhabi Securities Market
CMP:AED 6.0 (As on �6th January, 2007)
Abu Dhabi Commercial Bank
Key DataEPS (AED) *
BVPS (AED) *
P / E (x)
P / BV (x)
Avg. daily vol. (‘000)
52 week Lo / Hi (AED)
Market Cap (AED mn)
Target Price (AED)
0.5
2.5
�2.0
2.4
�,5��.4
5.22 – �0.90
24,040.0
5.70
Source: Global Research* Projected (2006)
Background
• Abu Dhabi Commercial Bank PJSC (ADCB) is a public joint stock company with limited liability, incorporated in the Emirate of Abu Dhabi, United Arab Emirates. The Bank changed its name from Khalij Commercial Bank to Abu Dhabi Commercial Bank, after merging with Emirates Commercial Bank and Federal Commercial Bank on � July �985.
Hold
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January 2007 UAE Banking Sector Report 33
Analysis of financial performance – 2005
ADCB outperformed our earnings estimate for 2005 on the back of a sharp increase in non-interest income and net interest income. Customer deposits was lower by 28.6% as compared to our estimate of AED47.6bn for 2005. However, in order to bolster its funding mix, the bank raised funds via short and medium term borrowings to the tune of AED7.75bn in 2005. Balance sheet size was marginally higher by 0.5% as against our forecast of AED57.2bn.
Gross loans and net loans was also marginally higher by 0.3% and 0.6% respectively as against our projections. Variance in profits was 62.6%, primarily due to strong increase in non-interest income and net interest income. Deviation in non-interest income was �36.8% and in net interest income was �3.0%.
Within non-interest income, net commission income increased from AED246.9mn in 2004 to AED�,092.9mn in 2005, annual growth of 342.6%. Net fee and commission income includes net income of AED586.0mn from the bank’s activities relating to IPO’s by UAE companies. Our estimate for net commission income for 2005 was AED469.2mn. During the last three years, the overall funding of the bank increased from AED22.9bn in 2002 to AED47.7bn in 2005, CAGR of 27.8%. Customer deposits grew from AED�8.3bn in 2002 to AED33.9bn in 2005, CAGR of 22.9% for the period under review. However, the contribution of deposits to the total funding base declined from 79.8% in 2002 to 7�.�% in 2005.
Chart 1: Funding Mix
Source: Company Reports, Global Research
Deposits from banks increased from AED3.4bn in 2002 to AED6.0bn in 2005, CAGR of 20.8% during the last three years. Share of these deposits declined from �5.0% in 2002 to �2.7% in 2005.
In 2004, ADCB and the Government of Abu Dhabi entered into an agreement whereby the Government acquired AED�,200mn of non-performing loans that were previously indemnified by the Government through a guarantee to the tune of AED�,200mn. In exchange
100%
80%
60%
40%2002 2003 2004 2005
Deposits from Customers Deposits from BanksLong-term loans Short and medium term borrowings
18.3
3.4
1.2 1.2
3.4
19.4
3.2
29.8
7.75
6.0
33.9
Global Research - UAE Global Investment House
34 UAE Banking Sector Report January 2007
for the passing of direct credit risk from the bank to the Government, the bank received an immediate settlement of AED483mn. Effective from January �, 2005, the bank is entitled to request, on an annual basis, a repayment of the proceeds due from the sale of the loans and advances equivalent to the annual interest payable by the bank on a Government deposit of AED7�7mn.
During 2004, ADCB entered into a new agreement with the Government of Abu Dhabi whereby AED483mn of the original long-term loan was repaid and the remaining balance was converted to a customer deposit. This represents a non-cash transaction during the year. Interest is payable annually to the Government of Abu Dhabi.
The share of these long-term loans from the Government of Abu Dhabi as percentage of the total funding base was 5.2% in 2002 and 5.0% in 2003. However, these loans were repaid in 2004 as discussed above.
During 2005, the bank raised funds by way of short and medium-term borrowings to the tune of AED7.7bn. The contribution of these borrowings to the total funding as at end 2005 stood at �6.2%.
Consumer Loans – The Key Driver To Credit Growth…
Gross loan book of the bank increased from AED�9.0bn in 2002 to AED42.9bn in 2005, CAGR of 3�.2% for the period under consideration. Consumer loans continued to dominate the lending portfolio, as the share of retail loans to overall gross loan portfolio increased from 42.�% in 2002 to 52.5% in 2005. Consumer loans increased from AED8.0bn in 2002 to AED22.5bn in 2005, registering CAGR of 4�.2% for the period 2002-05. The main factors contributing to the strong performance in the consumer segment were a favorable economic environment in the UAE. Net revenues also benefited from significant increase in fees and commissions.
Deployment to the Government sector too witnessed strong growth during the last three years. Loans to this economic segment increased from AED�.4bn in 2002 to AED4.6bn in 2005, CAGR of 47.9%. The proportion of Government sector loans to the total gross lending book increased from 7.5% in 2002 to �0.7% in 2005.
On the construction sector front, the bank has reduced its exposure as the gross lending to this sector declined from AED3.9bn in 2002 to AED2.0bn in 2005, CAGR 20.�%. The contribution to the total gross loans too declined from 20.3% in 2002 to 4.6% in 2005.
Manufacturing sector registered growth as the bank’s deployment towards this segment increased from AED905.�mn in 2004 to AED�,67�.0mn in 2005, y-o-y growth of 84.6%. Energy sector deployment increased from AED�.0bn in 2002 to AED2.�bn in 2005, registering a CAGR of 25.8% for the period under review.
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January 2007 UAE Banking Sector Report 35
Chart 2: Loan Break-Up
Source: Company Reports, Global Research
Non-Performing Loans
Gross non-performing loans (NPLs) of the bank have witnessed sharp improvement during the last three years. Gross NPLs declined from AED7,350mn in 2002 to AED�,250mn in 2005. During this period the gross lending portfolio grew at a CAGR of 3�.2% from AED�9.0bn in 2002 to AED42.9bn in 2005.
Gross NPLs to gross loans ratio declined from �9.0% in 2002 to 2.2% in 2005. During the same period, the coverage ratio of the bank improved from 44.�% in 2002 to 76.3% in 2005. The bank has focused on managing risks to ensure compliance within approved risk measures and controls which include market, credit and operational risk. In order to manage credit concentration, the bank tries to diversify lending activities to avoid undue concentrations of risks with individuals or groups of customers in specific locations or businesses.
Chart 3: Asset Quality
Source: Company Reports, Global Research
100%
80%
60%
40%
20%2002 2003 2004 2005
Personal Others Government Financial institution Energy
Construction Trading Manufacturing Transport Agriculture
42.1%
8.8%
20.3%
15.8%
9.2%
39.6%36.8%
5.6%
7.4%4.6%
11.8%
52.5%
45.0
35.0
25.0
15.5
AED
bn
10.0
8.0
6.0
4.0
2.0
0.02002 2003 2004 2005
Gross Loans NPLs
19.021.0
29.3
42.9
1.32.1
7.47.7
AED
bn
Global Research - UAE Global Investment House
36 UAE Banking Sector Report January 2007
Non-interest income
During the last three years, non-interest income grew at a CAGR of 83.7% from AED206.�mn in 2002 to AED�,277.3mn in 2005. Due to the buoyancy in the capital market, the bank witnessed strong growth from net commission income. Net commission income of the bank increased from AED�32.5mn in 2002 to AED�,093.0mn in 2005, CAGR of �02.�%.
In 2005, net commission income included net income to the tune of AED586.0mn from the bank’s activities relating to IPO’s by UAE companies. Adjusted for this IPO driven income, net commission income of the bank grew at a CAGR of 64.�% for the period 2002-05.
Contribution of net commission income to total non-interest income increased from 64.3% in 2002 to 85.6% in 2005. Net gains from dealing in foreign currencies increased from AED34.�mn in 2002 to AED86.�mn in 2005, CAGR of 36.2%. Share of foreign currency gains to total non-interest income declined from �6.6% in 2002 to 6.7% in 2005.
Chart 4: Non-interest income break-up
Source: Company Reports, Global Research
Margins
Net interest margins of the bank improved from 2.7% in 2002 to 2.9% in 2005. Yield on interest earning assets increased from 4.4% in 2002 to 5.3% in 2005. On the funding side, cost of interest bearing liabilities increased from 2.�% in 2002 to 2.7% in 2005.
100%
90%
80%
70%
60%2002 2003 2004 2005
Net commission income
Dividend IncomeGain on sale of non-trading investments
Net gains from dealing in foreign currenies & derivatives
Gains on trading investmentsOther operating income
64.3%
16.6%
0.9% 0.0%
7.9%
10.4%8.2%
2.1%0.6%
20.1%
69.0%
79.4%
16.1%
0.5%1.0% 3.2% 3.2%
1.6%3.6%
0.2%
6.7%
85.6%
0.0%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 37
Chart 5: Margins
Source: Company Reports, Global Research
Operating efficiency
Overhead cost increased from AED207.9mn in 2002 to AED5�5.5mn in 2005, CAGR of 35.4% during the last three years. Net interest income plus non-interest income of the bank increased from AED936.3mn in 2002 to AED2,649.9mn in 2005, CAGR of 4�.5%. Robust increase in total income resulted in efficiency ratio (i.e. cost to income ratio) improving from 22.2% in 2002 to �9.5% in 2005.
One more indicator to gauge efficiency is operating expense (opex) to average assets, which increased from 0.8% in 2002 to �.�% in 2005. However, the increasing trend in this ratio is commensurate with the increase in business volumes. The opex to average assets of �.�% for the year 2005 is below its peers. Overhead costs are likely to be on the higher side to support strong business growth.
Scalability of business operations require a strong risk management and effective banking platforms to be in place. During the year 2005, the bank implemented its new core banking system ‘FLEXCUBE’ which has enabled the introduction of a wide range of up-to-date services and delivery channels, including online banking for companies and individuals, call centers and brokerage services.
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%2002 2003 2004 2005
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
Yield on interest earning assets Cost of interest bearing liabilities
Net interest margin
2.7%
2.6%2.6%
2.9%
4.4% 2.1% 3.8%1.4%
4.0%1.6% 5.3%
2.7%
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38 UAE Banking Sector Report January 2007
Chart 6: Cost Structure
Source: Company Reports, Global Research
Improving Return Ratios
On the back of strong growth in net interest income (CAGR 23.4%) and non-interest income (CAGR 83.7%) during the period 2002-05, net profit of the bank increased from AED590.3mn in 2002 to AED�,9�2.2mn in 2005, registering a CAGR of 48.0%. During the period 2002-05, the bank’s return ratios improved significantly due to buoyant economic environment coupled with increasing capital market activities. Return on average equity increased from �5.0% in 2002 to 28.8% in 2005. Correspondingly, return on average assets increased from 2.2% in 2002 to 4.0% in 2005.
Chart 7: Return Ratios
Source: Company Reports, Global Research
35.0%
30.0%
25.0%
20.0%
15.0%2002 2003 2004 2005
1.2%
1.1%
1.0%
0.9%
0.8%
0.7%
0.6%
0.5%
0.4%
1.1%1.0%
0.9%
0.8%
Cost to income ratio Opex to average assets
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
5.0%
4.0%
3.0%
2.0%
1.0%2005200420032002
15.0%
9.8%
18.2%
28.8%
4.0%
2.4%
1.4%
2.2%
ROAAROAE
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January 2007 UAE Banking Sector Report 39
Analysis of Nine-Month Performance - 2006
• Balance sheet size of ADCB increased from AED57.5bn in 2005 to AED72.0bn in 3Q2006, a year-to-date growth of 25.2%. On a sequential basis, the asset size increased by 5.2% from AED68.4bn in 2Q2006.
• Customer deposits of the bank increased from AED37.6bn in 2Q2006 to AED40.9bn in 3Q2006, registering a sequential growth in deposit franchise by 8.8%. However, on a year-to-date, the growth in customer deposits was strong at 20.4%.
• The bank continued its thrust towards credit deployment as its gross lending portfolio registered a growth of 28.4% year-to-date. Gross loan book increased from AED42.9bn in 2005 to AED55.�bn in 3Q2006. On a q-o-q basis, gross loans registered ��.�% growth.
• Net loans too registered a similar growth as that in the gross loan portfolio. Year-to-date, net loans increased by 28.�% and on a sequential basis, it grew by ��.3% to reach AED54.0bn in 3Q2006.
• Investments (both trading and non-trading) increased from AED2.2bn in 2005 to AED3.2bn in 3Q2006, registering a year-to-date growth of 45.8%. Sequentially, the growth in investment book is modest at around 2.6%.
Table 1: Key Balance Sheet ItemsAmount AED mn 2005 2Q2006 3Q2006 q-o-q y-t-dInvestments (Trading & Non-Trading) 2,�64.3 3,077.3 3,�56.4 2.6% 45.8%Gross Loans 42,878.2 49,537.5 55,050.7 ��.�% 28.4%Net Loans 42,�64.� 48,545.3 54,0�2.� ��.3% 28.�%Customer Deposits 33,937.4 37,560.6 40,864.9 8.8% 20.4%Balance Sheet Size 57,484.4 68,402.8 7�,98�.9 5.2% 25.2%
Source: Company reports
• Net profit after minority interest increased from AED�.42bn in 9M2005 to AED�.56bn in 9M2006, an increase of 9.5%.
• Net interest income increased from AED953.0mn in 9M2005 to AED�,302.6mn in 9M2006, registering a growth of 36.7% for the period under review. Non-interest income of the bank increased from AED935.3mn in 9M2005 to AED�,093.3mn in 9M2006, registering a growth of �6.9%.
• Provision for loan losses of the bank increased sharply from AED�04.8mn in 9M2005 to AED278.9mn in 9M2006, a growth of �66.0%. Total operating expenses too increased from AED358.5 in 9M2005 to AED499.0mn in 9M2006, a growth of 39.2%, which is in-line with the strong business growth.
• Net profit declined by 28.0% from AED580.7mn in 3Q2005 to AED4�8.0mn in 3Q2006 on the back of lower net fee and commission income. Net interest income of the bank increased from AED4�7.4mn in 3Q2005 to AED448.6mn in 3Q2006, a growth of 7.5%.
Global Research - UAE Global Investment House
40 UAE Banking Sector Report January 2007
• Non-interest income of the bank registered a sharp decline of 48.8% from AED344.0mn in 3Q2005 to AED�76.�mn in 3Q2006. This is primarily due to the decline in net fee and commission income, which reduced from AED296.5mn in 3Q2005 to AED�35.5mn in 3Q2006, a decline of 54.3%.
Table 2: Income StatementAmount AED mn 3Q2005 3Q2006 % 9M2005 9M2006 %Interest income 704.3 �,�04.5 56.8% �,64�.6 2,954.9 80.0%Interest expense (286.9) (655.9) �28.6% (688.7) (�,652.3) �39.9%Net Interest Income 417.36 448.60 7.5% 952.95 1,302.56 36.7%Net fee and commission income 296.5 �35.5 -54.3% 796.4 962.9 20.9%Net gains from dealing in forex & derivatives
23.6 29.9 26.7% 6�.6 �28.5 �08.5%
Dividend income - 0.3 NA 2.� 3.8 75.3%Other operating income 23.9 �0.5 -56.�% 75.2 (�.9) -�02.5%Non-interest income 344.0 176.1 -48.8% 935.3 1,093.3 16.9%Provision for loan losses (38.�) (3�.3) -�7.9% (�04.8) (278.9) �66.0%Net operating income 723.�8 593.39 -�7.9% �,783.45 2,��6.96 �8.7%Staff expenses (87.8) (�03.8) �8.2% (223.0) (293.0) 3�.4%Depreciation (8.4) (��.�) 3�.7% (2�.6) (30.0) 39.0%Other operating expenses (46.3) (59.6) 28.7% (��4.0) (�76.�) 54.5%Total Operating Expenses (�42.5) (�74.5) 22.4% (358.5) (499.0) 39.2%Operating Profit 580.64 418.91 -27.9% 1,424.94 1,617.94 13.5%Overseas income tax expense 0.0 (0.9) -2378.9% (0.4) (�.7) 290.0%Net Profit 580.67 418.04 -28.0% 1,424.51 1,616.25 13.5%Attributed to: Equity shareholders 580.7 409.4 -29.5% 1,424.5 1,560.3 9.5%Minority interest - 8.6 NA - 55.9 NA
Source: Company Reports
Outlook:
• In 2003, the bank had undertaken a restructuring exercise to focus on core banking and enhancing its fee income revenue base. In 2005, the bank increased emphasis on retail banking. This is a direct reflection of the Board and management’s common vision, goals and objectives.
• During the last three years, the credit deployment to consumer, construction & real estate and manufacturing segments was particularly strong. Recently, a number of real estate friendly regulations have been put in place which is likely to give a further fillip to the real estate sector.
• A number of new initiatives were launched in 2005, which are now coming into effect and which will also form part of the longer-term strategy of the bank, particularly joint ventures to deliver investment banking and corporate advisory products. Changing demographics and the increasing expatriate population is likely to boost the consumer lending segment. Going forward, consumer lending is likely to be the key growth driver over the next two years.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 4�
• In order to increase fee-based income, the bank is taking various measures to increase its cross-sell ratio. Currently, the bank has around 2�0,000 retail customers and 2,000 corporate customers. The cross sell ratio on the retail base is around 2. The bank has 400 direct sales agents which are on commission basis.
• ADCB’s focus will continue to be on high performance, measured in terms of return on equity, growth in earning per share and cost control. At the same time the bank will continue to meet the highest standards of customer expectations and business practices across all spheres of business activities.
Valuation:
Based on the current market price of AED6.0, the stock is trading at �2.0x 2006E earnings and 2.4x 2006E book value. Based on 2007E, the stock is trading at �0.6x earnings and 2.2x book value. The estimated fair value works out to AED5.7 based on DDM and peer group valuation method, which is lower by 5.9%. Hence, we reiterate our earlier rating and recommend a HOLD on the stock.
Global Research - UAE Global Investment House
42 UAE Banking Sector Report January 2007
Bal
ance
She
etA
DC
BA
ED
mn
2003
2004
2005
2006
E20
07E
2008
E20
09E
Ass
ets
Cas
h ba
lanc
es
�69
.0
279
.2
290
.�
289
.4
40�
.4
4�7
.3
396
.�
Bal
ance
s w
ith C
entr
al B
ank
�,�
45.8
�
,400
.7
�,4
�2.2
�
,595
.8
�,3
88.4
�
,�80
.�
944
.�
Dep
osit
with
ban
ks 4
,633
.2
5,0
�4.0
9
,989
.3
��,
787.
3 �
0,3�
3.9
8,3
02.7
5
,977
.9
Loa
ns &
Adv
ance
s (n
et)
�9,
270.
5 2
8,50
�.5
42,
�64.
� 5
5,65
4.�
67,
793.
� 8
�,3�
3.3
95,
837.
2 T
radi
ng in
vest
men
ts -
2
97.0
3
92.8
�
57.�
�
72.8
�
86.7
�
96.0
N
on-t
radi
ng in
vest
men
ts 2
,956
.7
2,2
36.�
�
,77�
.5
2,6
68.2
3
,�57
.8
3,6
74.0
4
,20�
.�
Oth
er a
sset
s 4
3�.0
4
63.8
�
,06�
.2
�,5
9�.9
�
,878
.4
2,�
78.9
2
,484
.0
Prop
erty
& E
quip
men
t �
45.0
2
0�.�
4
03.2
4
87.6
5
62.2
6
3�.9
6
73.3
T
otal
Ass
ets
28,
751.
2 3
8,39
3.3
57,
484.
4 7
4,23
1.6
85,
668.
1 9
7,88
5.0
110
,709
.8
Lia
bilit
ies
Due
to b
anks
3,3
63.6
3
,�72
.�
6,0
49.5
6
,533
.4
6,9
25.4
7
,27�
.7
7,5
62.5
C
usto
mer
dep
osits
�9,
368.
2 2
9,8�
�.6
33,
937.
4 4
2,76
�.�
5�,
3�3.
3 6
0,54
9.7
70,
237.
7 L
ong-
term
loan
s �
,200
.0
-
-
-
-
-
-
Shor
t and
med
ium
term
bor
row
ings
-
-
7,7
49.5
�
2,39
9.2
�3,
0�9.
� �
3,67
0.�
�4,
353.
6 O
ther
Lia
bilit
ies
339
.8
449
.3
�,�
29.6
�
,920
.4
2,2
27.6
2
,539
.5
2,9
45.8
T
otal
Lia
bilit
ies
24,
271.
6 3
3,43
3.0
48,
865.
9 6
3,61
4.1
73,
485.
5 8
4,03
1.0
95,
099.
6 Sh
areh
olde
rs’
Equ
ity
Paid
-up
equi
ty c
apita
l �
,250
.0
�,2
50.0
4
,000
.0
4,0
00.0
4
,000
.0
4,0
00.0
4
,000
.0
Prop
osed
bon
us s
hare
s -
2
50.0
-
-
-
-
-
St
atut
ory
& le
gal r
eser
ves
�,0
24.3
�
,�84
.4
�,5
66.8
�
,967
.4
2,4
�9.5
2
,956
.0
3,5
74.�
G
ener
al r
eser
ve �
,850
.0
�,9
25.0
2
,000
.0
2,0
25.0
2
,050
.0
2,0
75.0
2
,�00
.0
Fore
ign
curr
ency
adj
ustm
ents
-
-
-
-
-
-
-
Ret
aine
d ea
rnin
gs �
3.2
�7.
2 9
66.2
�
,842
.5
2,6
08.8
3
,388
.5
4,�
36.0
Fa
ir v
alua
tion
rese
rve
29.
6 2
�.3
75.
9 6
0.7
6�.
9 6
3.2
64.
4 Pr
opos
ed d
ivid
ends
3�2
.5
3�2
.5
-
70�
.0
�,0
�7.3
�
,34�
.2
�,6
99.6
T
otal
Sha
reho
lder
s’ E
quit
y 4
,479
.6
4,9
60.3
8
,608
.9
10,
596.
6 1
2,15
7.5
13,
823.
9 1
5,57
4.1
Min
orit
y In
tere
st
-
-
9.5
2
0.9
25.
0 3
0.0
36.
1 T
otal
Lia
bilit
ies
& S
hare
hold
ers’
Equ
ity
28,
751.
2 3
8,39
3.3
57,
484.
4 7
4,23
1.6
85,
668.
1 9
7,88
5.0
110
,709
.8
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 43
Inco
me
Stat
emen
tA
DC
BA
ED
mn
2003
2004
2005
2006
E20
07E
2008
E20
09E
Inte
rest
Inc
ome
�,0
6�.5
�
,3�0
.8
2,4
49.3
3
,997
.2
4,7
64.5
5
,6�7
.6
6,6
6�.6
In
tere
st E
xpen
se (
333.
4) (
463.
8) (
�,07
6.7)
(2,
2�4.
8) (
2,73
0.7)
(3,
�83.
2) (
3,67
0.7)
Net
inte
rest
inco
me
728
.1
847
.0
1,3
72.6
1
,782
.4
2,0
33.8
2
,434
.4
2,9
90.8
N
et c
omm
issi
on in
com
e �
45.7
2
46.9
�
,093
.0
�,�
36.7
�
,204
.9
�,3
25.4
�
,43�
.4
Net
gai
ns f
rom
dea
ling
in f
orei
gn c
urre
ncie
s &
der
ivat
ives
42.
5 5
0.2
86.
� �
46.4
�
75.7
2
07.3
2
40.5
D
ivid
end
Inco
me
�.2
�
.6
2.4
3
.9
4.6
5
.4
6.�
G
ains
on
trad
ing
inve
stm
ents
-
3.2
4
5.8
-
-
-
-
Gai
n on
sal
e of
non
-tra
ding
inve
stm
ents
4.5
(
0.6)
20.
4 �
.2
�.2
�
.4
�.6
O
ther
ope
ratin
g in
com
e �
7.3
9.8
2
9.5
0.6
0
.7
0.8
0
.9
Non
-int
eres
t inc
ome
2��
.�
3��
.�
�,2
77.3
�
,288
.8
�,3
87.�
�
,540
.2
�,6
80.5
L
ess
: Pro
visi
ons
for
Loa
n L
osse
s (
283.
3) (
�9.8
) (
2�2.
4) (
354.
6) (
3�2.
8) (
290.
0) (
39�.
�)N
et o
pera
ting
inco
me
655
.9
�,�
38.3
2
,437
.5
2,7
�6.6
3
,�08
.�
3,6
84.7
4
,280
.2
Les
s : S
taff
cos
ts (
�75.
9) (
222.
5) (
3��.
7) (
399.
4) (
46�.
6) (
543.
3) (
645.
5)L
ess:
Oth
er o
pera
ting
expe
nses
(54
.�)
(98
.8)
(�7
6.5)
(26
4.8)
(33
�.0)
(39
7.2)
(47
6.7)
Les
s: D
epre
ciat
ion
(�8
.4)
(20
.3)
(27
.3)
(39
.�)
(44
.0)
(50
.6)
(56
.6)
Tot
al O
pera
ting
exp
ense
s (
248.
4) (
341.
6) (
515.
5) (
703.
3) (
836.
6) (
991.
2) (
1,17
8.8)
Ope
rati
ng p
rofi
t 4
07.5
7
96.7
1
,922
.0
2,0
13.4
2
,271
.5
2,6
93.5
3
,101
.4
Les
s: P
rovi
sion
for
tax
(2.
5) 3
.9
(0.
4) (
0.6)
(0.
8) (
0.9)
(�.
0)N
et P
rofi
t bef
ore
min
ority
inte
rest
405
.0
800
.6
�,9
2�.5
2
,0�2
.7
2,2
70.7
2
,692
.6
3,�
00.4
M
inor
ity in
tere
st -
-
(
9.4)
(9.
8) (
�0.0
) (
�0.�
) (
�0.2
)N
et P
rofi
t 4
05.0
8
00.6
1
,912
.2
2,0
02.9
2
,260
.7
2,6
82.5
3
,090
.2
P&
L A
ppro
pria
tion
Acc
ount
:O
peni
ng B
alan
ce 2
.9
�3.
2 �
7.2
966
.2
�,8
42.5
2
,608
.8
3,3
88.5
N
et P
rofi
t for
the
year
405
.0
800
.6
�,9
�2.2
2
,002
.9
2,2
60.7
2
,682
.5
3,0
90.2
R
ealis
ed g
ain
on s
ale
of a
vaila
ble
for
sale
inve
stm
ents
(2.
2) 0
.5
(0.
7) -
-
-
-
D
iffe
renc
es a
risi
ng o
ut o
f ov
erse
as b
ranc
hes
2.9
2
.3
(3.
�) -
-
-
-
R
ealis
ed g
ains
on
AFS
inve
stm
ents
+IA
S 39
Adj
sust
men
ts -
-
-
-
-
-
-
T
rans
fer
to S
tatu
tory
& le
gal r
eser
ves
(8�
.0)
(�6
0.�)
(38
2.4)
(40
0.6)
(45
2.�)
(53
6.5)
(6�
8.0)
Tra
nsfe
r to
gen
eral
res
erve
-
(75
.0)
(75
.0)
(25
.0)
(25
.0)
(25
.0)
(25
.0)
Boa
rd o
f D
irec
tors
rem
uner
atio
n (
�.9)
(�.
9) (
�.9)
-
-
-
-
Cas
h D
ivid
end
(3�
2.5)
(3�
2.5)
-
(70
�.0)
(�,
0�7.
3) (
�,34
�.2)
(�,
699.
6)St
ock
Div
iden
ds -
(
250.
0) (
500.
0) -
-
-
-
C
losi
ng B
alan
ce 1
3.2
17.
2 9
66.2
1
,842
.5
2,6
08.8
3
,388
.5
4,1
36.0
Global Research - UAE Global Investment House
44 UAE Banking Sector Report January 2007
Cas
h F
low
Sta
tem
ent
AD
CB
AE
D m
n20
0320
0420
0520
06E
2007
E20
08E
2009
EO
pera
ting
Ope
ratin
g A
ctiv
ities
7�9
.5
545
.0
2,0
6�.�
2
,407
.6
2,6
29.�
3
,035
.0
3,5
50.�
Pr
ofit
befo
re ta
x an
d m
inor
ity in
tere
st 4
07.5
7
96.7
�
,922
.0
2,0
�3.4
2
,27�
.5
2,6
93.5
3
,�0�
.4
Dep
reci
atio
n �
8.4
20.
3 2
7.3
39.
� 4
4.0
50.
6 5
6.6
Dec
reas
e in
trad
ing
inve
stm
ents
4.4
(
297.
0) (
95.8
) -
-
-
-
O
vers
eas
taxa
tion
refu
nded
/ (p
aid)
9.9
4
.9
-
0.6
0
.8
0.9
�
.0
Fore
x ad
just
men
t 2
.5
2.�
(
2.9)
-
-
-
-
Impa
irm
ent o
f lo
ans
& a
dvan
ces
305
.8
�33
.�
3�8
.6
354
.6
3�2
.8
290
.0
39�
.�
Rec
over
y of
pro
visi
ons
for
doub
tful
loan
s &
adv
ance
s (
22.5
) (
��3.
3) (
�06.
2) -
-
-
-
G
ain
on s
ale
of f
ixed
ass
ets
(0.
2) (
0.6)
-
-
-
-
-
Gai
n on
sal
e of
non
-tra
ding
inve
stm
ents
(4.
5) 0
.6
-
-
-
-
-
Dir
ecto
rs r
emun
erat
ion
(�.
9) (
�.9)
(�.
9) -
-
-
-
W
orki
ng C
apit
al
(64
7.6)
(75
8.9)
(11
,796
.3)
(6,
273.
4) (
1,81
2.2)
(2,
002.
4) (
2,27
9.2)
Dec
/ (in
c) lo
ans
and
adva
nces
(2,
�53.
3) (
7,�6
3.6)
(�5
,427
.6)
(�3
,72�
.0)
(�2
,�39
.0)
(�3
,520
.2)
(�4
,523
.9)
Dec
/ (in
c) O
ther
ass
ets
(74
.8)
(36
.2)
(59
7.4)
(53
0.6)
(28
6.5)
(30
0.5)
(30
5.�)
Inc/
(dec
) in
dep
osits
to b
anks
3
59.7
(
3,40
0.�)
(57
7.0)
(2,
�20.
2) �
,36�
.9
�,9
23.8
2
,�64
.7
Inc/
(dec
) in
dep
osits
fro
m b
anks
�
68.0
2
.8
-
484
.0
392
.0
346
.3
290
.9
Inc/
(dec
) in
dep
osits
fro
m c
usto
mer
s �
,�05
.3
9,7
26.4
4
,384
.3
8,8
23.7
8
,552
.2
9,2
36.4
9
,688
.0
Inc/
(dec
) in
oth
er li
abili
ties
(52
.6)
���
.8
42�
.4
790
.7
307
.3
3��
.9
406
.3
Tot
al o
pera
ting
71.
9 (
213.
9) (
9,73
5.2)
(3,
865.
8) 8
16.9
1
,032
.6
1,2
71.0
In
vest
ing
Add
ition
s to
fix
ed a
sset
s, n
et o
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(�9
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(76
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(22
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(�2
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(��
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(�2
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(98
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�.0
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.6
-
-
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.7
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Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 45
FACT SHEETADCB
2003 2004 2005 2006E 2007E 2008E 2009EProfitability
- Return on Average Assets �.4% 2.4% 4.0% 3.0% 2.8% 2.9% 3.0%- Return on Average Equity 9.8% �8.2% 28.8% 2�.6% 2�.5% 22.7% 23.4%- Net interest income / Op. Income after Provisions for Loan Losses 67.8% 72.7% 47.6% 52.6% 55.4% 58.2% 60.7%
Margins- Net income / Revenues 38.2% 6�.�% 78.�% 50.�% 47.4% 47.8% 46.4%- Operating profit / Revenues 38.4% 60.8% 78.5% 50.4% 47.7% 47.9% 46.6%- Interest Expense to Interest Income 3�.4% 35.4% 44.0% 55.4% 57.3% 56.7% 55.�%- Interest Income to Interest Earning Assets 3.8% 4.0% 5.3% 6.2% 6.�% 6.3% 6.5%- Interest Expense to Interest Bearing Liabilities �.4% �.6% 2.7% 4.0% 4.�% 4.2% 4.2%- Net Spread 2.3% 2.3% 2.6% 2.2% 2.0% 2.�% 2.3%- Net Interest Margin 2.6% 2.6% 2.9% 2.8% 2.6% 2.7% 2.9%
Efficiency-Cost / Op. Income after Provisions for Loan Losses 37.9% 30.0% 2�.�% 25.9% 26.9% 26.9% 27.5%- Staff Expense / Op. Income after Provisions for Loan Losses 26.8% �9.5% �2.8% �4.7% �4.9% �4.7% �5.�%- Cost to Average Total Assets 0.9% �.0% �.�% �.�% �.0% �.�% �.�%
Liquidity- Loans to Interest Earning Assets 72.4% 78.5% 76.9% 78.3% 82.8% 86.8% 90.3%- Loans to Customer Deposits �08.6% 98.3% �26.3% �32.4% �34.6% �36.8% �39.2%- Customer Deposits to Equity 464.8% 64�.4% 394.2% 432.�% 460.6% 485.�% 506.2%- Due from Banks to Due to Banks �37.7% �58.�% �65.�% �80.4% �48.9% ��4.2% 79.0%
Credit Quality- Provisions to Average Gross Loans �.4% 0.�% 0.6% 0.7% 0.5% 0.4% 0.4%- Non Performing Loans (AED ‘000) 7,698,000 2,086,000 �,250,000 �,350,062 �,677,�26 �,934,823 2,28�,�33 - Loan Loss Reserve (AED ‘000) �,766,222 793,054 7�4,�00 945,043 �,257,844 �,547,859 �,938,963 - NPLs to Gross Loans �8.0% 4.7% 2.2% �.9% 2.0% 2.0% 2.�%- NPLs to (Equity + Loan loss reserve) 63.7% 25.4% �0.0% �2.5% �3.5% �3.8% �4.4%- Loan Loss Reserve to Gross Loans 8.4% 2.7% �.7% �.7% �.8% �.9% 2.0%- NPL Coverage 46.7% 57.3% 76.3% 87.2% 89.2% 92.8% 96.3%
Capital Adequacy- Equity to Total Assets �4.5% �2.�% �5.0% �3.3% �3.0% �2.8% �2.5%- Equity to Gross Loans �9.8% �5.9% 20.�% �7.5% �6.�% �5.�% �4.2%
Constitution of Total Income- Net commission income / Op. Income after Provisions for Loan Losses 22.2% 2�.7% 44.8% 4�.8% 38.8% 36.0% 33.4%- Other operating income / Op. Income after Provisions for Loan Losses 32.2% 27.3% 52.4% 47.4% 44.6% 4�.8% 39.3%
Operating Performance- Change in Net Interest Income after Provisions for Loan Losses -24.7% 86.0% 40.3% 23.�% 20.5% 24.6% 2�.2%- Change in Other Income 2.5% 47.4% 3�0.5% 0.9% 7.6% ��.0% 9.�%
Ratios Used for Valuation- Shares in Issue (‘000) �25,000 �25,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 - EPS (AED) 3.2 6.4 0.5 0.5 0.6 0.7 0.8 - Book Value Per Share (AED) 33.3 37.2 2.2 2.5 2.8 3.� 3.5 - Market Price Year End (AED) * 6�.0 �36.0 ��.� 5.8 6.0 6.0 6.0 - P/E (x) �8.8 2�.2 23.� ��.5 �0.6 9.0 7.8 - P/BV (x) �.8 3.7 5.� 2.3 2.2 �.9 �.7
* Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
Global Research - UAE Global Investment House
46 UAE Banking Sector Report January 2007
• All contracts, operations and transactions are carried out in accordance with Islamic Shari’a principles.
• ADIB commenced its operations with a paid-up capital of AED�bn which was divided into �00 million shares, the value of each share being AED�0. The shares are quoted on the Abu Dhabi Securities Market.
• ADIB has a 27% stake in an Islamic bank called Bosnia Bank International in Bosnia and 23% stake in Abu Dhabi National Takaful PJSC (Islamic Insurance Company) based out of Abu Dhabi.
Table 1: ADIB - Subsidiaries Name Country Holding ADIB Invest UAE �00.00% Abu Dhabi Islamic Finance Services UAE �00.00% Bourouj UAE �00.00% Bosnia Bank International Bosnia-Herzegovina 27.27% Abu Dhabi National Takaful Company UAE 23.00% Bosnia Bank International Real Estate Company [via Bosnia Bank International]
Bosnia-Herzegovina -
Source: Zawya
Reuters Code:ADIB.AD
Listing:Abu Dhabi Securities Market
CMP:AED 52.35 (As on �6th January, 2007)
Abu Dhabi Islamic Bank
Key DataEPS (AED)*
BVPS (AED)*
P / E (x)
P / BV (x)
Avg. daily vol.
52 week Lo / Hi (AED)
Market Cap (AED mn)
Target Price (AED)
4.0
�7.7
�3.�
3.0
882,��5
�03.5/40.8
7,852.5
60.5
Source: Global Research* Projected (2006)
Background
• Abu Dhabi Islamic Bank (ADIB) was established on 20th May �997 as a Public Joint Stock Company through the Amiri Decree No. 9 of �997. The Bank commenced commercial operations on ��th November �998, and was formally inaugurated by His Highness Sheikh Abdullah Bin Zayed Al Nahyan, UAE Minister of Information and Culture on �8th April �999.
Buy
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 47
Shareholding Structure
- The founders of Abu Dhabi Islamic Bank hold 39% of its equity while the remaining 6�% is held by approximately �00,000 shareholders. Out of the nine BOD seats, 3 are from The Abu Dhabi Investment Authority, ADIA, � from the private department of President of UAE, � from department of finance and 4 by elections. The bank got the permission to increase the share capital to AED3bn.
- The founding shareholders of ADIB are:
• Members of the Ruling Family • The Abu Dhabi Investment Authority (ADIA)• Prominent UAE Nationals
- Recently, Emirates International Investment Co. announced that the company with its affiliates had acquired 37% of the bank’s shares, and was considering buying more. However, Abu Dhabi Securities Market is required by law to give name of all shareholders holding more than 5% stake in the company and it has announced that only the government has more than 5% stake in the bank.
Recent Developments
- In Nov-06, Moody’s Investors Service has assigned an A2 foreign-currency rating to ADIB’s upcoming floating-rate senior sukuk trust certificates due in 20��. The sukuk trust certificates will be issued under a US$5bn Trust Certificate Issuance Programme. Moody’s has assigned A2 and A3 ratings for senior sukuk and subordinated sukuk trust certificates that could be issued under the programme.
- In Nov-06, Fitch Ratings upgraded expected ratings on ADIB’s US$5bn trust certificate issuance programme to long-term ‘A’ from ‘A-’ (A minus) and short-term ‘F�’ from ‘F2’ for senior unsecured trust certificates and long-term ‘A-’ (A minus) from ‘BBB+’ for subordinated trust certificates.
- ADIB announced the opening of its 32nd branch in the UAE at the Bain Al Jesrain area in the capital. Currently the bank has 32 branches and around 60 ATMs and it is looking to increase its branches by �5 by mid-2007.
- ADIB launched ‘Al Shorouq’, a Shariah-compliant open-ended investment product that will invest in emerging, blue-chip stocks and real estate projects. «Al Shorouq ‘I’Limited is a special purpose vehicle (SPV) registered in the Cayman Islands for the sole purpose of investing in real estate owned by ADIB. The fund subscriptions of by Al Shorouq would be invested in real estate as well as Shariah-compliant manufacturing projects. ADIB will act as Wakeel (sponsor) for the issuer.
- ADIB and CALYON announced the successful closing of the US$200mn Syndicated Mudaraba restricted with Commodity Murabaha Financing Facility for Bank TuranAlem.
Global Research - UAE Global Investment House
48 UAE Banking Sector Report January 2007
Analysis of Financial Performance – 2005
- ADIB’s balance sheet size grew at a CAGR of 4�.7% during the last three years. Asset size increased from AED7.8bn in 2002 to AED22.�8bn in 2005. The contribution of net murabahas to total assets was 3�% in 2002 which improved to 38% in 2005. The share of Murabaha & Mudaraba with financial institutions decreased from 49% in 2002 to 27% in 2005.
- During the period 2002-05, customer deposits increased from AED5.2bn in 2002 to AED�8.0bn in 2005, registering a CAGR of 5�.4%. Deposit base as a percentage of total balance sheet increased from 67% in 2002 to 8�% in 2005.
Chart 1: Composition of Deposits
Source: Global Research
- The composition of deposits underwent a major change with the Wakala Deposits which constituted 8% of total deposits in 2002, witnessed strong growth and accounted for 56% of total deposits in 2005. We expect the strong growth in wakala deposits to continue in medium term. On the other hand, investment accounts which constituted 78% of total deposits in 2002 witnessed a major decline and in 2005 accounted for only 25% of total deposits. The total number of bank’s retail customers are around �80,000.
Table 2: Murabaha & Islamic Financing Mix 2002 2003 2004 2005Murabaha 95.7% 96.3% 9�.0% 92.4%Istisna’a 2.3% 2.0% �.6% �.5%Mudaraba �.7% �.4% 7.2% 6.0%Others 0.3% 0.2% 0.2% 0.�%Total 100.0% 100.0% 100.0% 100.0%
Source: Global Research
- The bank has been primarily doing Murabaha financing as it accounted for more than 90% of the total loans and advances of the bank in the period 2002-05. However, the bank’s Ijara financing grew at a strong CAGR of 9�.3% in 2002-05 period as it reached AED5.�4bn. We expect that Ijara Financing to show strong growth as the bank intends to enter retail Ijara financing in a big way.
100%
80%
60%
40%
20%
0%2002 2003 2004 2005
Investment Accounts Non-Investment Accounts Wakala Deposits
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 49
- Gross loans to deposit ratio of the bank declined from �0�.3% in 2002 to 80.8% in 2003 but again increased to 93.7% in 2005. The management intends to maintain 90 – 95% of loan to deposit ratio although the norm is �00% by the central bank.
- The net profit of the bank increase by a CAGR of 65.8% as it increased from AED75.6mn in 2002 to AED344.7mn in 2005. This was mainly on the back of its core net commission income which grew by CAGR of 68.�%. The bank’s return ratios namely return on average equity and return on average assets witnessed significant improvement during the period under review. Return on average equity increased from 7.8% in 2003 to 2�.2% in 2005. Correspondingly, return on average assets increased from �.2% in 2003 to 2.0% in 2005.
Chart 2: ADIB - Return Ratios
Source: Global Research
- The income from Islamic Financing increased at lower CAGR of 90.7% in 2002-05 as compared to the payment to depositors which increased at a CAGR of �25% over the same period as a result of higher yields. According the management, initially the bank was focusing on corporate banking and government business but now the thrust has shifted towards retail banking. The bank now has at least one branch in each Emirate.
- Non-core income of the bank grew at a CAGR of 25.7% during the last three years from AED58.0mn in 2002 to AED��5.�mn in 2005. Net fees and commission income increased from AED24.6mnmn in 2002 to AED55.6mnmn in 2005. Strong capital market activity during the last two years contributed to the significant increase in fee income. Investment gains on the trading portfolio increased from AED3�.5mn in 2002 to AED57.6mn in 2005, growing at a CAGR of 22.3% for the period under review. The contribution of these gains to total non-interest income in 2002 was 50% in 2005.
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%2002 3003 2004 2005
Return on Average Equity Return on Average Assets
RO
AE
RO
AA
Global Research - UAE Global Investment House
50 UAE Banking Sector Report January 2007
Chart 3: ADIB - Margins
Source: Global Research
- With the overall increase in interest rates, ADIB’s spreads improved from 2.�% in 2002 to 3.7% in 2005. We expect the spread to stabilize at the current levels over the medium term.
- During the last three years, operating expense (opex) increased at a CAGR of 34.2% to reach AED246.0mn in 2005. The cost to average assets remained in the range of 0.5%-0.6% between 2002-05 period. Cost to Income ratio improved from 58.4% in 2004 to 4�.7% in 2005.
- The bank calculates capital adequacy ratio (CAR) in accordance with UAE Central Bank and Basel I Accord. The minimum CAR requirement as per UAE Central Bank is �0% and as per Basel I Accord is 8%. The CAR of ADIB at the end of 2005 was �4.�% as compared to 2�.4% reported in the previous year. The bank currently has a CAR of ��.�% (end of �H-2006).
Analysis of Financial Performance – 9M-2006
- ADIB assets reported YTD growth of 38.4% as it reached AED30.7bn at the end of 3Q-2006 from AED22.�8bn reported at the end of 2005. Ijara financing witnessed a strong growth of 7�.55% as its reached AED8.8bn at the end of Sep-06. We believe that Ijara financing will continue to record strong growth in the medium terms as the bank goes aggressive in targeting the retail customers.
60.0%50.0%40.0%30.0%20.0%10.0%0.0%
4.0%
3.0%
2.0%
1.0%
0.0%2002 2003 2004 2005
Commission Expense to Commission Income Net Spread
Com
mis
sion
Exp
/Com
mis
sion
Inc
ome
Spr
ead
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 5�
Table 3: ADIB - Key Financial Data - 9M-2006
Source: ADIB
- Murabaha and other Islamic financing, which constituted 33.4% of the total assets at the end of 3Q-2006, recorded YTD growth of 25% as it reached AED�0.27bn at the end of 3Q-2006.
- On the liabilities side, customer deposits continued to account for the major chunk of liabilities, constituting 74% of the total funding mix at the end of sep-06. Customer deposits too recorded a strong YTD growth of 27% as it reached AED22.8bn at the end of Sep-06. The growth in customer deposits can be primarily attributed to growth in investment accounts which reached AED9.4bn at the end of 3Q-2006 as compared to AED4.5bn recorded at the end of 2005.
Table 4: Income Statement
(AED mn)9M-2005
9M-2006
% Change
3Q-2005
3Q-2006
% Change
Income from Murabaha & Mudaraba with FIs
�98.6 4�0.0 �06.4% 92.� 64.9 -29.5%
Income from Islamic Financing
66�.4 �,�42.7 72.8% 243.4 399.3 64.0%
Investment Income 28.2 52.6 86.3% �0.5 �8.� 72.9%Fee & Commissions 35.7 66.8 87.0% �7.3 22.6 30.5%Gain from Sale of Investments 5.6 89.5 �5�0.7% �.9 2�.3 �024.7%Other Income 0.4 0.3 -23.6% 0.� 0.0 -69.5%Operating Income 930.0 1,761.8 89.5% 365.3 526.1 44.0%Distribution to Depositors (467.5) (�,0��.2) ��6.3% (206.6) (299.6) 45.0%Operating Expenses (224.2) (344.3) 53.6% (62.0) (��2.2) 80.9%Minority Interest (0.2) (�.2) 652.5% (0.0) (�.0) 4790.0%Net Profit 238.1 405.1 70.1% 96.6 113.4 17.3%
Source: ADIB
- ADIB reported a strong 70% growth in net profits as it grew to AED405.�mn in 9M-2006 as compared to AED238.�mn reported in the corresponding period of the previous year.
- Income from Murabaha and Islamic financing continues to account the major portion of ADIB’s operating income as it grew by 72.7% in 9M-2006 as compared to 9M-2005.
Balance Sheet ‘AED mn’ 3Q2005 FY
2005 2Q2006 3Q2006
Growth- YoY
Growth - QoQ
Growth - YTD
Investments �,�34.8 �,37�.2 2,672.7 2,66�.8 �34.6% -0.4% 94.�%Islamic Financing (L&A) �2,349.7 �3,359.2 �8,649.� �9,097.7 54.6% 2.4% 43.0%Total Assets 22,504.7 22,189.4 29,608.3 30,713.1 36.5% 3.7% 38.4%Customer deposits �8,307.6 �8,03�.0 2�,646.4 22,868.2 24.9% 5.6% 26.8%Total Liabilities 20,67�.4 20,�74.3 27,�84.� 28,�76.8 36.3% 3.7% 39.7%Share capital �,000.0 �,000.0 �,500.0 �,500.0 50.0% 0.0% 50.0%Total shareholders’ equity 1,833.2 2,015.1 2,424.3 2,536.3 38.4% 4.6% 25.9%Total Liabilities and Shareholders’ Equity
22,504.7 22,189.4 29,608.3 30,713.1 36.5% 3.7% 38.4%
Global Research - UAE Global Investment House
52 UAE Banking Sector Report January 2007
- The increase in customer deposits coupled with the rise in yields, had its effect on the distribution of depositors as it grew to AED�.0�bn in 9M-2006 as compared to AED467mn reported in the corresponding period of the previous year.
Outlook
Abu Dhabi Islamic Bank will face the increased competition in the Islamic banking sector arena which will have an effect on its margins. However, we expect bank to show strong growth with the backing of the government which will make it a key player in the big-ticket government projects in Abu Dhabi. The bank, being present in the energy center of UAE, will have access to the increased liquidity and projects due to the growth in oil sector of the Emirate. We are not concerned on the reports that Emirates International Investment Co has acquired 37% stake in the bank as it is said it was not held by a single entity and hence will not tantamount to controlling stake. High oil price has resulted in a lot of liquidity in the system and hence UAE economy is witnessing strong growth which will trickle down to the banking sector.
According to the management, in order to tap the retail market, the bank plans to adopt a three tier approach to capture retail clients. The bank plans to target (in order):
• High- Salaried customers in Abu Dhabi and Al Ain.• Medium- Salaried customers in Abu Dhabi and Al Ain.• Non-Salaried customers.
We believe that this approach will help in getting the bank (viewed as a corporate bank traditionally) to the high margin retail banking customers. The bank has created a commercial unit and is targeting commercial customers for Islamic finance. We believe that deposit growth will continue to be in double digits in the next couple of years. The bank is still looking favorably towards increasing its exposure in the real estate business, especially in Abu Dhabi.
Valuation:
Based on the current market price of AED52.35 ADIB stock is trading at �3.�x 2006F earnings and 3.0x 2006F book value. The bank has shown strong performance in its core income and we expect it to show good growth, albeit at lower levels than the past. Based on the combination of DDM and Relative valuation method, we recommend a BUY on the stock with a price target of AED60.5, an upside of �5.5% from current levels.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 53
BA
LA
NC
E S
HE
ET
AD
IBA
mou
nt in
AE
D m
n20
0320
0420
0520
06 (
F)
2007
(F
)20
08 (
F)
2009
(F
)A
sset
s:B
ank
& c
ash
equi
vale
nts
485.
� 6�
�.�
�,��
4.0
�,2�
7.2
�,20
6.0
�,4�
7.0
�,60
4.9
Mur
abah
a w
ith F
Is�,
992.
0 3,
46�.
4 6,
025.
9 7,
35�.
6 8,
086.
7 8,
895.
4 9,
784.
9 G
ross
Mur
abah
a &
oth
er I
slam
ic F
inan
cing
3,63
0.2
4,83
4.3
9,42
8.�
�4,�
42.2
�7
,253
.5
�9,8
4�.5
2�
,825
.7
Def
erre
d Pa
ymen
t(�
36.8
)(2
59.6
)(�
,022
.6)
(�,4
�4.2
)(�
,725
.3)
(�,9
84.2
)(2
,�82
.6)
Net
Mur
abah
a3,
493.
4 4,
588.
7 8,
405.
6 �2
,728
.0
�5,5
28.�
�7
,857
.4
�9,6
43.�
Ij
ara
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g2,
570.
� 3,
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8 5,
�46.
0 9,
520.
0 �2
,852
.0
�5,4
22.4
�7
,735
.8
Inve
stm
ents
628.
7 79
�.8
�,37
�.2
2,77
9.0
3,79
�.9
4,59
4.6
5,33
2.5
Net
Ass
ets
34.8
44
.3
�09.
9 �3
4.9
�55.
4 �7
9.9
209.
4 O
ther
ass
ets
39.6
63
.�
209.
3 26
�.6
300.
8 34
6.0
380.
5 L
ess
: pro
visi
on
(22.
9)(5
4.9)
(�92
.3)
(353
.6)
(500
.4)
(644
.8)
(785
.7)
Tot
al A
sset
s9,
220.
7 12
,687
.2
22,1
89.4
33
,638
.7
41,4
20.7
48
,067
.8
53,9
05.5
L
iabi
litie
s:D
ue to
ban
ks a
nd F
Is�,
585.
� �,
436.
0 �,
702.
� 5,
�06.
2 6,
�27.
5 6,
004.
9 5,
704.
7 C
usto
mer
Dep
osits
6,�2
3.5
9,56
8.8
�8,0
3�.0
25
,243
.4
3�,5
54.3
37
,865
.2
43,5
44.9
Pr
opos
ed c
ash
divi
dend
s70
.0
70.0
-
- -
- -
Oth
er li
abili
ties
���.
7 �7
6.7
434.
3 62
9.7
705.
3 78
9.9
884.
7 T
otal
Cur
rent
Lia
bilit
ies
7,89
0.3
��,2
5�.5
20
,�67
.4
30,9
79.4
38
,387
.�
44,6
60.0
50
,�34
.3
Min
ority
Int
eres
t -
- 0.
3 0.
3 0.
3 0.
3 0.
3 O
wne
r’s
Equ
ity:
Paid
-up
Equ
ity C
apita
l�,
000.
0 �,
000.
0 �,
000.
0 �,
500.
0 �,
500.
0 �,
500.
0 �,
500.
0 Pr
opos
ed B
onus
Sha
res
- -
200.
0 -
- -
- St
atut
ory
Res
erve
43.9
56
.2
90.6
�5
0.9
225.
4 3�
9.9
425.
� G
ener
al R
eser
ve43
.9
56.2
90
.6�5
0.9
225.
4 3�
9.9
425.
� R
eval
uatio
n R
eser
ve70
.6
�23.
8 36
6.�
402.
7 44
2.9
487.
2 53
6.0
Ret
aine
d E
arni
ngs
�72.
� �9
9.5
274.
4 45
4.4
639.
6 78
0.5
884.
8 T
otal
Sha
reho
lder
’s E
quit
y1,
330.
4 1,
435.
6 2,
021.
7 2,
659.
0 3,
033.
3 3,
407.
5 3,
770.
9 T
otal
Lia
bilit
ies
9,22
0.7
12,6
87.2
22
,189
.4
33,6
38.7
41
,420
.7
48,0
67.8
53
,905
.5
Global Research - UAE Global Investment House
54 UAE Banking Sector Report January 2007
OP
ER
AT
ING
ST
AT
EM
EN
T
AD
IBA
mou
nt in
AE
D m
n20
0320
0420
0520
06 (
F)
2007
(F
)20
08 (
F)
2009
(F
)In
com
e fr
om I
slam
ic F
inan
cing
& I
nves
ting
Ass
ets
207
.0
426
.0
�
,335
.5
2
,�58
.7
2
,834
.6
3
,336
.2
3
,809
.4
Paym
ent t
o D
epos
itors
(46
.�)
(
�43.
9)
(72
0.7)
(�,
252.
�) (
�,6�
5.7)
(�,
834.
9) (
2,09
5.2)
Net
Com
mis
sion
Inc
ome
161
.0
282
.1
614
.8
906
.7
1
,218
.9
1
,501
.3
1
,714
.2
Fees
, Com
mis
sion
& F
orex
Gai
ns
39.5
28.8
55.6
97.3
�
�6.8
�
34.3
�
54.4
In
com
e fr
om I
nves
tmen
ts
23.9
34.�
57.6
�
55.6
49.3
62.9
74.5
O
ther
Inc
ome
�
.9
�
.7
2
.0
2
.4
3
.�
3
.8
4
.8
Les
s : P
rovi
sion
s fo
r Im
pair
men
t
(3.4
)
(
5�.4
)
(�3
9.4)
(
�6�.
2)
(�4
6.8)
(
�44.
5)
(�4
0.9)
Non
Int
eres
t Inc
ome
65
.3
64
.6
��5
.�
255
.4
�69
.�
20�
.0
233
.7
Ope
rati
ng I
ncom
e
2
22.9
2
95.2
5
90.5
1,0
00.9
1,2
41.2
1,5
57.8
1,8
07.0
G
ener
al &
Adm
inis
trat
ion
Exp
ense
s
(
33.7
)
(
57.0
)
(
85.2
)
(�2
3.5)
(
�54.
4)
(�8
5.2)
(
222.
3)E
mpl
oyee
Cos
t
(
78.6
)
(�0
3.4)
(
�45.
8)
(25
5.2)
(
3�9.
0)
(39
8.7)
(
498.
4)D
epre
ciat
ion
(�0
.0)
(��
.9)
(�5
.0)
(20
.5)
(25
.0)
(30
.0)
(36
.0)
Ope
rati
ng E
xp.
(
122.
3)
(17
2.3)
(
246.
0)
(39
9.1)
(
498.
4)
(61
4.0)
(
756.
7)O
pera
ting
pro
fit
100
.6
122
.9
344
.5
601
.7
742
.9
943
.8
1
,050
.3
Min
ority
Int
eres
t
-
-
(0.2
)
(�.4
)
(�.4
)
(�.4
)
(�.4
)N
et P
rofi
t Aft
er M
inor
ity I
nter
est
�00
.6
�22
.9
344
.7
603
.2
744
.3
945
.3
�
,05�
.8
Net
Pro
fit
attr
ibut
able
to
shar
ehol
ders
100
.6
122
.9
344
.7
603
.2
744
.3
945
.3
1
,051
.8
P&L
App
ropr
iatio
n A
ccou
nt:
O
p B
alan
ce o
f Res
erve
s
�
62.6
�
72.�
�
99.5
2
74.4
4
54.4
6
39.6
7
80.5
N
et P
rofi
t for
the
year
�00
.6
�22
.9
344
.7
603
.2
744
.3
945
.3
�
,05�
.8
Trf
r to
Sta
tuto
ry R
eser
ve
(
�0.�
)
(
�2.3
)
(
34.5
)
(
60.3
)
(
74.4
)
(
94.5
)
(�0
5.2)
Trf
r to
Gen
eral
Res
erve
(�0
.�)
(�2
.3)
(34
.5)
(60
.3)
(74
.4)
(94
.5)
(
�05.
2)D
irec
tor’
s Fe
e
(0.9
)
(0.9
)
(0.9
)
(0.9
)
(0.9
)
(0.9
)
(0.9
)B
onus
Sha
res
-
-
(
200.
0)
-
-
-
-
C
ash
Div
iden
d
(
70.0
)
(
70.0
)
-
(30
�.6)
(
409.
4)
(6�
4.4)
(
736.
2)C
l Bal
ance
of R
etai
ned
Ear
ning
s
�
72.�
�
99.5
2
74.4
4
54.4
6
39.6
7
80.5
8
84.8
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 55
CA
SH F
LO
W S
TA
TE
ME
NT
AD
IBA
mou
nt in
AE
D m
n20
0320
0420
0520
06(F
)20
07(F
)20
08(F
)20
09(F
)O
pera
ting
Ope
rati
ng A
ctiv
itie
s
110
.9
1
90.1
490
.3
783.
9 91
5.2
1,11
8.9
1,2
27.8
N
et P
rofi
t�0
0.6
�22.
9 34
4.7
603.
2 74
4.3
945.
3 �,
05�.
8 D
epre
ciat
ion
�0.0
��
.9
�5.0
20
.5
25.0
30
.0
36.0
L
oss/
(gai
n) o
n In
vest
men
t Pro
pert
ies
(3.7
)(9
.7)
(22.
5)
-
-
-
-
Dir
ecto
r Fe
e(0
.9)
(0.9
)(0
.9)
(0.9
)(0
.9)
(0.9
)(0
.9)
Prov
isio
ns f
or I
mpa
irm
ent
4.9
65.9
�5
4.0
�6�.
2 �4
6.8
�44.
5 �4
0.9
Div
iden
d In
com
e W
orki
ng C
apit
al(6
40.8
)
838
.4
2,5
12.4
73
7.5
501.
1 51
9.5
4
51.1
In
c. in
Mur
abah
a an
d M
udar
aba
with
FIs
�,24
9.4
(740
.7)
(��5
.0)
(�,3
25.7
)(7
35.2
)(8
08.7
)(8
89.5
)D
ec/ (
inc)
Isl
amic
Fin
anci
ng &
Inv
estin
g A
sset
s(�
,093
.8)
(�,�
50.4
)(3
,762
.7)
(4,3
22.4
)(2
,800
.2)
(2,3
29.2
)(�
,785
.7)
(Inc
reas
e) /
Dec
reas
e in
Ija
ra(�
,835
.5)
(575
.9)
(2,0
20.4
)(4
,374
.�)
(3,3
32.0
)(2
,570
.4)
(2,3
�3.4
)(I
ncre
ase)
/ D
ecre
ase
in o
ther
ass
ets
(�0.
4)(2
3.5)
(�46
.2)
(52.
3)(3
9.2)
(45.
�)(3
4.6)
Inc/
(dec
) fr
om b
anks
& o
ther
fin
anci
al in
stitu
tions
93.4
(�
8�.4
)(�
63.0
)3,
404.
2 �,
02�.
2 (�
22.5
)(3
00.2
)In
c/(d
ec)
of d
epos
its f
rom
cus
tom
ers
922.
8 3,
445.
3 8,
462.
2 7,
2�2.
4 6,
3�0.
9 6,
3�0.
9 5,
679.
8 In
c/(d
ec)
othe
r lia
bilit
ies
33.3
65
.�
257.
6 �9
5.4
75.6
84
.6
94.8
A
ccru
ed Z
akat
-
-
-
-
-
Tot
al O
pera
ting
(529
.9)
1,02
8.5
3,00
2.7
1,52
1.5
1,41
6.3
1,63
8.4
1,67
8.9
Inve
stin
g
Cap
ex, N
et(�
6.0)
(2�.
5)(8
0.6)
(45.
5)(4
5.5)
(54.
6)(6
5.5)
N
et P
urch
ase
of in
vest
men
ts(�
56.9
)(�
�4.7
)(3
29.3
)(�
,37�
.2)
(972
.7)
(758
.4)
(689
.2)
Tot
al I
nves
ting
(173
.0)
(136
.2)
(409
.8)
(1,4
16.7
)(1
,018
.1)
(813
.0)
(754
.7)
Fin
anci
ng
D
ivid
end
paid
to s
hare
hold
ers
(50.
0)(7
0.0)
(70.
0)(3
0�.6
)(4
09.4
)(6
�4.4
)(7
36.2
)
C
apita
l Inc
reas
e
-
-
-
300.
0
-
-
-
Min
ority
Int
eres
t
-
-
0.
3
-
-
-
-
Tot
al F
inan
cing
(50.
0)(7
0.0)
(69.
7)(1
.6)
(409
.4)
(614
.4)
(736
.2)
Net
Cha
nge
in C
ash
(752
.8)
822.
4 2,
523.
2 �0
3.2
(��.
2)2�
�.0
�87.
9 N
et C
ash
at b
egin
ning
660.
8 (9
2.0)
730.
4 �,
��4.
0 �,
2�7.
2 �,
206.
0 �,
4�7.
0 N
et C
ash
at e
nd(9
2.0)
730.
4 3,
253.
6 �,
2�7.
2 �,
206.
0 �,
4�7.
0 �,
604.
9
Global Research - UAE Global Investment House
56 UAE Banking Sector Report January 2007
FACT SHEET ADIB
2003 2004 2005 2006F 2007F 2008F 2008FProfitability
- Return on Average Assets �.2% �.�% 2.0% 2.2% 2.0% 2.�% 2.�%- Return on Average Equity 7.8% 8.9% 2�.2% 25.8% 26.2% 29.4% 29.3%- Provisions/ Total Op. Income �.5% �7.4% 23.6% �6.�% ��.8% 9.3% 7.8%- Non-Commission income/ total Op. Income 29.3% 2�.9% �9.5% 25.5% �3.6% �2.9% �2.9%- Dividend Payout ratio 69.6% 57.0% 0.0% 50.0% 55.0% 65.0% 70.0%
Margins
- Net income/ Revenues 45.�% 4�.6% 58.4% 60.3% 60.0% 60.7% 58.2%- Commission Expense to Commission Income 22.2% 33.8% 54.0% 58.0% 57.0% 55.0% 55.0%-Commission Income to Commission Earning Assets 2.7% 4.3% 8.3% 8.4% 8.2% 8.�% 8.�%- Commission Expense to Commission Bearing Liabilities 0.7% �.5% 4.7% 5.0% 4.8% 4.5% 4.5%- Net Spread 2.�% 2.8% 3.7% 3.4% 3.4% 3.6% 3.6%- Net Commission Margin 2.�% 2.9% 3.8% 3.5% 3.5% 3.6% 3.7%
Efficiency
-Cost to Total Op Income 54.9% 58.4% 4�.7% 39.9% 40.2% 39.4% 4�.9%- General & Administration Expense to Total Op Income �5.�% �9.3% �4.4% �2.3% �2.4% ��.9% �2.3%- Cost to Average Total Assets 0.5% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5%
Liquidity
- Loans to Customer Deposits �0�.3% 83.2% 80.8% 93.7% 95.4% 93.�% 90.9%- Customer Deposits to Equity 460% 667% 892% 949% �040% ����% ��55%
Credit Quality
- Provisions to Total Operating Income �.5% �7.4% 23.6% �6.�% ��.8% 9.3% 7.8%- Provisions to Average Receivables 0.�% �.2% 2.0% �.4% 0.9% 0.8% 0.7%
Capital Adequacy
- Equity to Total Assets �4.4% ��.3% 9.�% 7.9% 7.3% 7.�% 7.0%- Equity to Gross Receivables 36.6% 29.7% 2�.4% �8.8% �7.6% �7.2% �7.3%
Constitution of Total Income
- Net Commission Income to Total Op Income 72.2% 95.5% �04.�% 90.6% 98.2% 96.4% 94.9%- Fees & Comm. to Total Op. Income �7.7% 9.7% 9.4% 9.7% 9.4% 8.6% 8.5%- Investment & Other Income to Total Op Income ��.6% �2.�% �0.�% �5.8% 4.2% 4.3% 4.4%
Operating Performance - Change in Fees and Commission 60.7% -27.2% 93.4% 75.0% 20.0% �5.0% �5.0% - Change in Investment Income -24.0% 42.4% 68.9% �70.4% -68.3% 27.6% �8.4% - Change in Other Income -�.2% -8.2% �3.�% 25.0% 25.0% 25.0% 25.0% RATIOS USED FOR VALUATION - Shares in Issue (mn) �00.0 �00.0 �00.0 �50.0 �50.0 �50.0 �50.0 - EPS (AED) �.0 �.2 3.4 4.0 5.0 6.3 7.0 - Book Value Per Share (AED) �3.3 �4.4 20.2 �7.7 20.2 22.7 25.� - Market Price Year End (AED) �6.9 29.3 99.� 5�.2 52.4 52.4 52.4 - Market Cap (AED mn) �,688.0 2,929.0 9,909.0 7,680.0 7,852.5 7,852.5 7,852.5 - P/E �6.8 23.8 28.7 �2.7 �0.6 8.3 7.5 - P/BV �.3 2.0 4.9 2.9 2.6 2.3 2.�
* Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 57
CBI, he headed the Domestic Banking Division in National Bank of Abu Dhabi for a period of five years.
• CBI recently unveiled its new corporate identity with a well-defined five-year plan is in place with huge investments being allocated to re-engineer and support the bank’s new structure, divisions and its new areas of business. By the year 20�0, the bank is committed to reaching an outstanding position within the banking industry in the UAE.
• CBI has initiated a strong expansionary plan to reach out to customers across the UAE by doubling its number of branches from 8 to 20 and more than 50 ATMs by 2008. Besides a new management team, the bank’s workforce has expanded to 400 with a contribution of 30% from the UAE Nationals. Currently the bank operate 2� ATMs.
• CBI intends to increase its share capital from the current AED404.7mn to AED�bn through a rights issue in 2006. The bank had plans to convert itself into a full-fledged Islamic bank. However, earlier this year the annual general meeting of the shareholders rejected the proposal.
Reuters Code:CBI.AD
Listing:Abu Dhabi Securities Market
CMP:AED 2.6� (As on �6th January, 2007)
Commercial Bank International
Key DataEPS (AED) *
BVPS (AED) *
P / E (x)
P / BV (x)
Avg. daily vol.
52 week Lo - Hi (AED)
Market Cap (AED mn)
Target Price (AED)
0.05
�.2
52.2
2.�
424,4�2
3.0/5.6
2,6�0.0
2.82
Source: Global Research* Projected (2006)
Background
• Commercial Bank International (CBI) was established as Bank of Arab Coast based out of Ras Al Khaimah. Later, it was put under the ambit of Central Bank of UAE and was later named Commercial Bank International.
• Recently, the bank has undergone restructuring and announced the appointment of Khamis Mohamed Buharoon as the Chief Executive Officer of the bank. Prior to his appointment in
Hold
Global Research - UAE Global Investment House
58 UAE Banking Sector Report January 2007
Table 1: Subsidiaries/Associates/AffiliatesCountry Holding
Takamul - UAE UAE �00.00% International Commercial Financial Brokerage UAE 97.00%
Source: Zawya
Table 2: Shareholding StructureCountry Holding
UAE investors UAE 77.00% Government of Ras Al Khaimah Government UAE 20.00% Kuwaiti investors Kuwait 3.00%
Source: Zawya
Recent Developments
- CBI announced its intention to utilize Silverlake software throughout its network of branches, Operations, Head Office departments, and subsidiaries. The introduction of Silverlake technology represents the largest-ever system upgrade of any banking institution in the country and CBI is the first in the region to employ the Silverlake model, which seamlessly integrates various aspects of the bank’s divisions and systems including Core Banking, Internet Banking, Trade Finance, Treasury, Card Management, CRM, Data Warehouse & MIS, Islamic Banking, Collection and Anti-money laundering.
- The Central Bank of the UAE has approved plans by Commercial Bank International (CBI) to establish an Islamic subsidiary. The subsidiary, set to be called Al-Dawlee International Bank, will be capitalized at AED400mn. CBI is taking a 40 per cent share while talks are under way with potential strategic partners – including Islamic banks from Malaysia, Qatar and Saudi Arabia and an investment company from Bahrain – each to invest 5 per cent.
- After their recent announcement of the lowest interest rate car loans - 3.75%, CBI made a loud entry into the personal loan market by introducing a loan repayment period of 200-months, the longest in the market. Over �6-year repayment period is also supported by a very competitive interest rate starting at 9.25% and additional features.
Analysis of Financial Performance – 2005
- CBI’s balance sheet size grew at a YoY growth of 26.8% in 2004 and 34.7% in 2005 as it reached AED5.23bn at the end of 2005. The contribution of loans and advances to total assets was 82% in 2003 which declined to 65% in 2005. The share of financial assets held for trading as a percentage of total assets increased from 2% in 2003 to 7% in 2005.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 59
Chart 1: Loan & Advances Profile Chart 2: Loans & Advances Profile
Source: CBI Source: CBI
- Term Loan and Overdraft constitute about 80% of the total loans and advances of the bank in last couple of years. However, the share of overdraft in the total loans increased to 45% in 2005 as compared to 40% reported in the previous year.
- Among the loans and advances, wholesale and retail trade sector accounted for 28.2% of total loans although its share has declined from 34.2% reported in 2003.
- The bank has a low exposure in personal loans category which accounted for only �0.6% of total loans in 2005. However, with the aggressive marketing and pricing on the personal loans products, we expect the exposure of the bank in this category to show strong growth in the next couple of years. The management has indicated that retail loans exposure will be increased to around 25% of the total loan book by 2007. Recently, the bank entered into the UAE banking services market with a cutting-edge car loan product offering that carries the lowest interest rate in the market at 3.75 percent.
Table 3: Loans & Advances by Economic Sector 2003 2004 2005Agriculture 0.4% 0.5% 0.5%Wholesale & Retail Trade 34.2% 32.2% 28.2%Construction 26.3% 2�.6% �8.5%Manufacturing 7.4% 8.2% 7.8%Transport & Communications 3.2% 2.9% 3.3%Financial Institutions 0.2% 0.5% 0.4%Services 20.0% 23.8% 27.3%Government 0.8% �.�% 3.�%Personal Loans 7.6% 9.3% �0.6%Others 0.0% 0.0% 0.2%
Source: CBI
Overdraft45%
Term Loans36%
Bills4%
Other16%
(2005)
Overdraft40%
Term Loans40%
Bills4%
Other16%
(2004)
Global Research - UAE Global Investment House
60 UAE Banking Sector Report January 2007
- Customer deposits recorded an yearly growth of 38.8% as it reached AED4.06bn in 2005. Around 3/4th of the customer deposits are high-cost time deposits. Deposit base as a percentage of total balance sheet decreased from 84.8% in 2003 to 77.7% in 2005.
Table 4: Customer Deposits- Profile 2003 2004 2005Current Account �8% �9% �7%Savings Account �% 2% 2%Time Deposits 74% 73% 74%Others 6% 6% 7%
Source: CBI
- Loans to deposit ratio of the bank declined from 96.7% in 2003 to 83.3% in 2005. The management intends to maintain 90 – 95% of loan to deposit ratio although the norm is �00% by the central bank.
- The net profit of the bank increased by a whopping 23�% in 2005 and reached AED237.3mn as compared to AED7�.7mn reported in the previous year. This can be mainly attributed to the strong growth in fee income and unrealized gains on financial assets held for trading which grew from AED70.7mn in 2004 to AED�65.�mn in 2005.
- The banks return on average assets recorded a strong increase to reach 5.2% in 2005 as compared to 2.�% recorded in the previous year.
- The interest income of the bank reported an yearly growth of 48.5% in 2005 as it aggregated to AED243.4mn. But the interest expenses recorded a larger increase of 9�.�% in the same period as it amounted to AED�08.2mn. The bank’s spread improved on the back of improved interest rate scenario and entry in high-margin products. CBI’s spreads increased to 4.0% in 2005 as compared to 3.5% reported in the previous year.
- The fee and commission income grew by 222.2% in 2005 as it increased from AED47.8mn in 2004 to AED�54.�mn in 2005. IPO commission and brokerage income got a boost from the strong capital market activities in 2005 and added substantially to the bottom-line of the bank
Chart 3: Fee & Commission Break-Up Chart 4: Fee & Commission Break-Up
Source: CBI
Guarantees 9%
Brokerage58%
Other15%
(2005)
IPO Commission9%
Letter for Credit9%
Guarantees22%
Letter for Credit26%
Brokerage17%
Other35%
(2004)
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 6�
- During 2005, operating expense (opex) increased by 23.�% as it amounted to AED75.4mn in 2005. The cost to average assets remained around 0.5% in the last couple of years.
- To fund the upcoming expansion plans, the bank is set to more than double its capital by March 2007. CBI paid a bonus share dividend for 2005 which raised the paid-up capital to AED408.7mn.
- The bank is now seeking to raise its capital to AED�bn through rights issue in three equal installments each in September, December and March 2007. The first tranche of the rights issue opened on September �7, 2006. Each share was priced at AED�0.
Analysis of Financial Performance – 9M-2006
- CBI assets reported YTD growth of 34.7% as it reached AED7.05bn at the end of 3Q-2006 from AED5.23bn reported at the end of 2005. Loans & Advances witnessed a matching YTD growth of 36.4% as its reached AED4.05bn at the end of Sep-06. We believe that the bank’s loans and advances will grow at a faster rate in 4Q-2006 and in coming years because of its aggressive marketing and pricing of retail loan products.
Table 5: CBI - Key Financial Data - 9M-2006
Source: CBI
- On the liabilities side, customer deposits continued to account for the major chunk of liabilities, constituting 68% of the total funding mix at the end of Sep-06. Customer deposits too recorded a lower YTD growth of �8.4% as it reached AED4.8�bn at the end of Sep-06.
- The bank increased its share capital by AED27�mn at the end of 3Q-2006 as it gave out first tranche of its rights issue.
Balance Sheet ‘AED mn’ 3Q2005 FY
2005 2Q2006 3Q2006
Growth- YoY
Growth - QoQ
Growth - YTD
Investments 260.8 35�.9 289.0 4�4.3 58.8% 43.3% �7.7%Loans and advances 2,999.2 2,965.8 3,573.2 4,046.8 34.9% �3.3% 36.4%Total Assets 4,451.5 5,232.0 6,087.0 7,046.4 58.3% 15.8% 34.7%Customer deposits 3,667.4 4,065.2 4,986.9 4,8�3.3 3�.2% -3.5% �8.4%Total Liabilities 3,860.3 4,557.4 5,475.7 6,��7.4 58.5% ��.7% 34.2%Share capital 299.� 299.� 478.6 478.6 60.0% 0.0% 60.0%Total shareholders’ equity 591.3 674.7 611.3 928.9 57.1% 52.0% 37.7%Total Liabilities and Shareholders’ Equity
4,451.5 5,232.0 6,087.0 7,046.4 58.3% 15.8% 34.7%
Global Research - UAE Global Investment House
62 UAE Banking Sector Report January 2007
Table 6: Quarterly Results - 3Q-2006
Source: CBI
- CBI reported a loss of AED�4.�mn for first nine month of 2006 as compared to a net profit of AED2�9.2mn reported in the corresponding period of the previous year. However, in 3Q-2006, CBI reported net profit of AED47.6mn as compared to AED67mn reported in 3Q-2005, registering a decline of 28.9%.
- The decline in profitability can be primarily attributed to around 50% decline its fee and commission income coupled with unrealized loss of AED�33.6mn in 9M-2006. This was the result of decline in the capital market activities due to the sell-off experienced in UAE markets in 2006.
- However, CBI has shown a sedate growth of �8% in its net interest income as it grew to reach AED��6.8mn in 9M-2006 as compared to AED98.9mn reported in the corresponding period of the previous year.
Outlook
CBI has charted aggressive action plans to revamp its existing business units and introduce new divisions to make banking solutions within everyone’s reach. CBI has a host of innovative ideas in the pipeline, and will soon be introducing customized products to suit customer needs extending towards real estate, Islamic banking and brokerage services. As part of its new expansion strategy in the conventional retail banking, the bank has plans to more than double its branch network from the current 8 to 20 in 2007 and increase the number of ATMs to 50. The bank also plans to open competitive Islamic products through its Islamic window.
CBI recently unveiled its new corporate identity with a well-defined five-year plan in place with huge investments being allocated to re-engineer and support the bank’s new structure, divisions and its new areas of business. By the year 20�0, the bank is committed to reaching an outstanding position within the banking industry in the UAE.
Valuation:
Based on the current market price of AED2.6�, on a one year forward basis, the stock is trading at 52.2x 2006F earnings and 2.�x 2006F book value. Based on the combination of DDM and Relative valuation method, we recommend a HOLD on the stock with a price target of AED2.82, an upside of 8.2% from current levels.
(AED mn) 9M-2005 9M-2006 % Change 3Q-2005 3Q-2006 % ChangeInterest Income 22�.8 253.6 �4.4% ���.2 90.2 -�8.9%Interest Expense (�22.9) (�36.9) ��.4% (75.3) (49.�) -34.9%Net Interest Income 98.9 116.8 18.0% 35.9 41.2 14.7%Fees & Commission Income �33.8 67.4 -49.6% 32.7 �4.4 -55.9%Unrealized Gains/(Loss) on revaluation and sale of financial assets held for trading
�94.3 (�33.6) - 86.3 �7.6 -79.6%
Other Operating Income 22.� ��.8 -46.7% (2.9) 5.5 -292.2%Operating Income 449.1 62.3 -86.1% 152.0 78.7 -48.2%General & Administrative Expenses (75.5) (84.6) �2.0% (39.2) (30.3) -22.7%Impairment Losses (Net) (�54.3) 8.3 -�05.3% (45.8) (0.8) -98.3%Group (Loss)/Profit 219.2 (14.1) - 67.0 47.6 -28.9%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 63
BA
LA
NC
E S
HE
ET
C
BI
Am
ount
in A
ED
mn
2003
2004
2005
2006
(F
)20
07 (
F)
2008
(F
)20
09 (
F)
Ass
ets:
Ban
k &
cas
h eq
uiva
lent
s
347
.�
459.
5
973
.2
�,2
46.4
�
,468
.7
�
,448
.7
�
,3�7
.4
Due
fro
m b
ank
3
2�.3
3�
4.4
3
74.5
749
.0
8
23.9
9
06.3
9
96.9
L
oans
& A
dvan
ces,
Net
2,5
08.8
2,80
7.4
3,3
84.4
4
,569
.0
5,7
��.2
6,8
53.5
7,8
8�.5
Fi
nanc
ial a
sset
s H
eld
for
Tra
ding
5�.
8
�0
3.2
3
5�.9
387
.�
4
25.8
4
68.4
5
�5.3
G
ross
Ass
ets
60.
4
6
4.8
66.
9
8
3.7
�
04.6
�
30.7
�
63.4
A
cc. D
ep
(�8
.9)
(23.
5)
(27
.8)
(
33.0
)
(39
.5)
(47
.6)
(57
.8)
Net
Ass
ets
4�.
5
4
�.2
39.
�
5
0.7
65.
�
83.�
�
05.7
O
ther
ass
ets
�0.
3
40
�.6
5
27.4
�
,�07
.6
�,3
84.5
�,7
30.7
2,�
63.4
L
ess
: pro
visi
on
(2
�8.7
)
(24
3.8)
(4
�8.6
)
(4��
.2)
(5
�4.0
)
(6�
6.8)
(
709.
3)T
otal
Ass
ets
3,0
62.1
3,88
3.5
5,2
32.0
7
,698
.6
9,3
65.3
1
0,87
3.8
12,
270.
8 L
iabi
litie
s:D
ue to
ban
ks a
nd F
Is
6.9
43.
8
�.2
2
39.8
263
.8
290
.�
3�9
.2
Cus
tom
er D
epos
its 2
,595
.4
2,
929.
6 4
,065
.2
5,�
62.9
6
,453
.6
7
,744
.3
8
,905
.9
Oth
er li
abili
ties
36.
6
4�
7.2
4
90.9
�
,227
.3
�,3
50.0
�,4
85.0
�,6
33.5
T
otal
Cur
rent
Lia
bilit
ies
2,6
38.9
3,39
0.7
4,5
57.4
6
,630
.0
8,0
67.4
9,5
�9.5
�
0,85
8.6
Min
ority
Int
eres
t
0.2
0
.5
2.
9
2.9
2.
9
2.9
2.9
O
wne
r’s
Equ
ity:
Paid
-up
Equ
ity C
apita
l
299
.�
299.
�
299
.�
8
28.0
�
,000
.0
�
,000
.0
�
,000
.0
Prop
osed
Bon
us S
hare
s
-
-
St
atut
ory
Res
erve
46.
3
5
3.5
77.
2
8
2.�
95.
7
�
�5.9
�
43.9
G
ener
al &
Leg
al R
eser
ve
6
�.7
67.
8 9�
.5
9
6.4
�
�0.0
�
30.2
�
58.2
R
etai
ned
Ear
ning
s
�
5.9
7�.
9
203
.9
59.
3
8
9.3
�05
.5
�07
.�
Tot
al S
hare
hold
er’s
Equ
ity
4
23.1
4
92.3
41
6
71.8
1
,065
.8
1,2
95.0
1,3
51.5
1,4
09.3
T
otal
Lia
bilit
ies
3,0
62.1
3,88
3.5
5,2
32.0
7
,698
.6
9,3
65.3
1
0,87
3.8
12,
270.
8
Global Research - UAE Global Investment House
64 UAE Banking Sector Report January 2007
OP
ER
AT
ING
ST
AT
EM
EN
T
CB
IA
mou
nt in
AE
D m
n20
0320
0420
0520
06 (
F)
2007
(F
)20
08 (
F)
2009
(F
)In
tere
st I
ncom
e �
58.9
�64
.0
2
43.4
34�
.6
4
35.6
528
.8
6
07.0
In
tere
st E
xpen
se (
50.�
)
(56
.6)
(�0
8.2)
(�7
7.6)
(2�
7.8)
(25
9.�)
(29
�.4)
Net
Int
eres
t In
com
e 1
08.8
107
.4
1
35.3
164
.0
2
17.8
269
.7
3
15.7
Fe
es &
Com
mis
sion
Inc
ome
3
6.�
47.8
�54
.�
92.4
��0
.9
�
33.�
�59
.8
Fore
ign
Exc
hang
e
4.
9
8
.0
7.8
9
.8
�2.2
�5
.3
�9.�
O
ther
ope
ratin
g In
com
e
0.
8
70
.7
2
03.0
(
���.
6)
39
.�
48.8
58
.6
Les
s : P
rovi
sion
s fo
r Im
pair
men
t/Rec
over
ies
(50
.9)
(�0
0.6)
(�8
5.�)
7.4
(
�02.
8) (
�02.
8)
(92
.5)
Non
-Int
eres
t Inc
ome
4
�.9
�
26.4
�6�
.9
�
02.2
�23
.�
�
48.4
�78
.8
Ope
rati
ng I
ncom
e 9
9.76
1
33.2
7 3
15.0
4 1
61.9
5 2
77.2
3 3
64.1
1 4
60.5
8 G
ener
al &
Adm
inis
trat
ion
Exp
ense
s (
�2.0
)
(�2
.4)
(
�6.5
)
(29
.7)
(
37.�
)
(42
.7)
(
46.9
)E
mpl
oyee
Cos
t (
42.3
)
(44
.2)
(
54.4
)
(76
.�)
(
95.�
) (
�09.
4) (
�20.
3)D
epre
ciat
ion
(
4.3)
(4.7
)
(4
.5)
(5.2
)
(6
.5)
(8.�
)
(�0
.�)
Ope
rati
ng E
xp.
(58
.5)
(
61.2
)
(75
.4)
(11
1.0)
(13
8.7)
(16
0.2)
(17
7.4)
Ope
rati
ng p
rofi
t
41.
3
72
.1
2
39.7
51
.0
1
38.5
204
.0
2
83.2
M
inor
ity I
nter
est
0.0
0.3
2
.4
2.4
2
.4
2.4
2
.4
Net
Pro
fit A
fter
Min
ority
Int
eres
t
4�.
2
7�
.7
2
37.3
48
.6
�
36.�
20�
.5
2
80.8
L
ess:
Inc
omeT
ax
-
-
-
-
-
-
-
N
et P
rofi
t at
trib
utab
le t
o sh
areh
olde
rs
41.
2
71
.7
2
37.3
48
.6
1
36.1
201
.5
2
80.8
P&
L A
ppro
pria
tion
Acc
ount
:
Op
Bal
ance
of R
eser
ves
�
7.3
�5.9
7�
.9
2
03.9
59
.3
89.3
�05
.5
Net
Pro
fit f
or th
e ye
ar
4�.
2
7�
.7
2
37.3
48
.6
�
36.�
20�
.5
2
80.8
T
rfr
to S
tatu
tory
Res
erve
(
4.�)
(7.2
)
(23
.7)
(4.9
)
(�3
.6)
(
20.2
)
(28
.�)
Trf
r to
Gen
eral
Res
erve
(
4.�)
(6.�
)
(23
.7)
(4.9
)
(�3
.6)
(
20.2
)
(28
.�)
Dir
ecto
r’s
Fee
(
2.0)
(2.0
)
(4
.0)
(4.0
)
(4
.0)
(4.0
)
(4
.0)
Acc
ount
ing
Polic
y C
hang
e
53
.8
-
-
-
-
-
D
onat
ion
(
0.3)
(0.5
)
-
-
-
-
-
Bon
us I
ssue
-
(
�79.
5)
-
-
-
Cas
h D
ivid
end
(32
.0)
(
53.8
)
(53
.8)
-
(74
.9)
(�4
�.�)
(2�
9.0)
C
l Bal
ance
of R
etai
ned
Ear
ning
s
�5.
9
7�
.9
2
03.9
59
.3
89.3
�05
.5
�
07.�
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 65
CA
SH F
LO
W S
TA
TE
ME
NT
C
BI
Am
ount
in A
ED
mn
2003
2004
2005
2006
(F)
2007
(F)
2008
(F)
2009
(F)
Ope
rati
ngO
pera
ting
Act
ivit
ies
7
2.2
10
3.9
2
81.0
4
2.4
241.
4
30
8.5
379.
4 N
et P
rofi
t
4�
.2
7
�.7
2
37.3
4
8.6
�36
.�
20�
.5
280
.8
Dep
reci
atio
n
4
.3
4.7
4.5
5
.2
6
.5
8
.�
�0.
� L
oss/
(gai
n) o
n In
vest
men
t Pro
pert
ies
(
�6.6
)
(70
.7)
(
�65.
�)
-
-
-
-
D
irec
tor
Fee
(2.0
)
-
(4
.0)
(4
.0)
(4
.0)
(4
.0)
Prov
isio
ns f
or I
mpa
irm
ent
45.2
98.
2
204
.3
(7
.4)
�02
.8
�02
.8
92.
5 W
orki
ng C
apit
al (
153.
4)
(43.
8)
388
.7
(66.
6)
(5
6.6)
(
118.
7)
(21
2.2)
Inc.
in R
eser
ves
with
Cen
tral
Ban
k
(25
.5)
(
22.4
)
(4
�.9)
--
--
Inc.
in D
epos
its w
ith F
Is
(30
.0)
�
0.0
40.
0
(37
4.5)
(74
.9)
(82
.4)
(90
.6)
Dec
/ (in
c) I
slam
ic F
inan
cing
& I
nves
ting
Ass
ets
(23
2.4)
(37
�.8)
(
579.
5)
(�,�
84.6
)
(�,�
42.2
)
(�,�
42.2
)
(�,0
28.0
) (
Incr
ease
) / D
ecre
ase
inT
radi
ng I
nv.
-
�
9.3
(83.
7)
-
-
-
-
(
Incr
ease
) / D
ecre
ase
in o
ther
ass
ets
2.9
(9�
.2)
(
�49.
6)
(58
0.2)
(
276.
9)
(34
6.�)
(
432.
7)In
c/(d
ec)
from
ban
ks &
oth
er f
inan
cial
inst
itutio
ns
(��
.3)
-
-
2
38.6
2
4.0
26.
4
2
9.0
Inc/
(dec
) of
dep
osits
fro
m c
usto
mer
s
�4�
.3
3
34.2
�,�3
5.6
�
,097
.6
�
,290
.7
�
,290
.7
�
,�6�
.6
Inc/
(dec
) ot
her
liabi
litie
s
�
.6
7
8.�
67.
7
7
36.4
�
22.7
�
35.0
�
48.5
T
otal
Ope
rati
ng(8
1.3)
60.1
669.
7(2
4.3)
184.
818
9.8
167.
3In
vest
ing
Cap
ex, N
et
(3
.6)
(4.4
)
(
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(�6
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(20
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(26
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(32
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e of
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ents
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)
-
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(38
.7)
(42
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(46
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ting
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)
(4
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(3.
7)
(
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)
(
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(
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-
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Global Research - UAE Global Investment House
66 UAE Banking Sector Report January 2007
FACT SHEET CBI
2003 2004 2005 2006F 2007F 2008F 2009FProfitability
- Return on Average Assets �.3% 2.�% 5.2% 0.8% �.6% 2.0% 2.4%- Return on Average Equity 9.7% �5.7% 40.8% 5.6% ��.5% �5.2% 20.3%- Net Interest Income/ Total Op. Income �09.0% 80.6% 42.9% �0�.3% 78.6% 74.�% 68.5%- Provisions/ Total Op. Income 5�.0% 75.5% 58.8% -4.6% 37.�% 28.2% 20.�%- Non-Commission income/ total Op. Income 42.0% 94.9% ��5.8% -5.8% 58.5% 54.2% 5�.6%- Dividend payout ratio 77.7% 75.�% 22.7% 0.0% 55.0% 70.0% 78.0%
Margins
- Net income/ Revenues 4�.3% 53.8% 75.3% 30.0% 49.�% 55.4% 6�.0%- Interest Expense to Interest Income 3�.5% 34.5% 44.4% 52.0% 50.0% 49.0% 48.0%- Interest Income to Interest Earning Assets 5.6% 5.5% 7.�% 7.5% 7.4% 7.4% 7.3%- Interest Expense to Interest Bearing Liabilities 3.9% 2.0% 3.�% 3.8% 3.6% 3.5% 3.4%- Net Spread �.8% 3.5% 4.0% 3.8% 3.8% 3.9% 3.9%- Net Interest Margin 3.8% 3.4% 3.6% 3.�% 3.3% 3.5% 3.6%
Efficiency
-Cost to Total Op Income �6.3% �2.8% 6.7% 2�.5% �5.7% �3.9% �2.4%- General & Administration Expense to Total Op Income
�2.0% 9.3% 5.2% �8.3% �3.4% ��.7% �0.2%
- Cost to Average Total Assets �.�% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% Liquidity
- Loans to Customer Deposits 96.7% 95.8% 83.3% 88.5% 88.5% 88.5% 88.5%- Customer Deposits to Equity 6�3% 595% 605% 484% 498% 573% 632%
Credit Quality
- Provisions to Total Operating Income 5�.0% 75.5% 58.8% -4.6% 37.�% 28.2% 20.�%- Provisions to Average Receivables 4.�% 3.8% 6.0% -0.2% 2.0% �.6% �.3%
Capital Adequacy
- Equity to Total Assets �3.8% �2.7% �2.8% �3.8% �3.8% �2.4% ��.5%- Equity to Gross Receivables �6.9% �7.5% �9.8% 23.3% 22.7% �9.7% �7.9%
Constitution of Total Income
- Net Interest Income to Total Op Income �09.0% 80.6% 42.9% �0�.3% 78.6% 74.�% 68.5%- Fees & Comm. to Total Op. Income 36.2% 35.9% 48.9% 57.�% 40.0% 36.6% 34.7%- Investment & Other Income to Total Op Income 5.8% 59.0% 66.9% -62.9% �8.5% �7.6% �6.9%
Operating Performance
- Change in Net Interest Income - 3.2% 48.5% 40.3% 27.5% 2�.4% �4.8%- Change in Fees and Commission - 32.4% 222.2% -40.0% 20.0% 20.0% 20.0%
RATIOS USED FOR VALUATION
- Shares in Issue (mn) 299.� 299.� 299.� 828.0 �,000.0 �,000.0 �,000.0 - EPS (AED) 0.� 0.2 0.8 0.� 0.� 0.2 0.3 - Book Value Per Share (AED) �.4 �.6 2.2 �.3 �.3 �.4 �.4 - Market Price Year End (AED) 2.60 2.82 5.64 2.72 2.6� 2.6� 2.6� - Market Cap (AED mn) 777.7 843.5 �,687.0 2,252.2 2,6�0.0 2,6�0.0 2,6�0.0 - P/E �8.9 ��.8 7.� 46.4 �9.2 �2.9 9.3 - P/BV �.8 �.7 2.5 2.� 2.0 �.9 �.9
* Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 67
• Emirates Bank Group comprises of EBI, eight operating subsidiaries and three associate companies, which are engaged in wide range of activates. The government of Dubai owns 77% of EBI, while the remaining 23% is widely held by mainly UAE shareholders.
• EBI is the second largest bank in the UAE in terms of asset size with a large branch network in the UAE, catering to various segments covering personal financial services, wealth management, commercial and corporate banking. Investment banking services is provided by its subsidiary, “Emirates Financial Services”. Islamic banking is provided by its fully owned Islamic bank.
• In August 2004, the bank commenced operations in the Kingdom of Saudi Arabia by opening a branch in Riyadh. In October 2004, Middle East Bank PJSC converted from a conventional bank to an Islamic Bank called Emirates Islamic Bank, a fully owned subsidiary of EBI. During 2004, the bank gradually reduced its shareholding in Union Properties from 6�.5% at 3� December 2003 to 48.9% at 3� December 2004. The company thus moved from being a subsidiary to an associate company of the bank.
Reuters Code:EBIL.DU
Listing:Dubai Financial Market
CMP:AED �2.�0 (As on �6th January, 2007)
Emirates Bank International
Key DataEPS (AED) *
BVPS (AED) *
P / E (x)
P / BV (x)
Avg. daily vol. (‘000)
52 week Lo - Hi
Market Cap (AED mn)
Target Price
0.78
3.9�
�5.6
3.�
�46,869
��.80 / �8.68
29,732
��.72
Source: Global Research* Projected (2006)
Background
• Emirates Bank International (EBI) was originally incorporated in Dubai as Union Bank of Middle East Ltd on 27 March, �977. EBI was founded by the Dubai government through the �985 merger of three Dubai-based banks. The bank experienced asset quality issues subsequently. In June �985, EBI was registered as a Public Joint Stock Company. Currently, the bank is listed on the Dubai Financial Market.
Hold
Global Research - UAE Global Investment House
68 UAE Banking Sector Report January 2007
Subsidiaries
• Emirates Financial Services (EFS) is the investment banking arm of the Emirates Bank, which focuses on developing the capital and debt markets in the UAE. It specializes in offering meticulously researched investment products and services to investors across the UAE and GCC states. Growing steadily in the areas of corporate finance, initial public offerings (IPOs), and fund management and distribution. EFS has launched a number of proprietary and third-party mutual funds in the UAE. Its international partners include several leading investment houses such as JP Morgan, Fidelity Investments, Forsyth Partners, Clerical Medical, ICICI, Credit Lyonnais, Alliance Capital Management, MFS International and Man Investment Products.
• Emirates Bank acquired a majority stake in National General Insurance Company Limited (NGI) in �995. EBI restructured NGI and the Company is now poised to be a leader in the UAE insurance industry. The company provides insurance products for Fire, Burglary, personal Accidents, Marine, Engineering, Public & Professional Liability; Workmen’s Compensation and Motor Vehicle Risks. Recently, the company has started providing insurance for health care insurance to its clients
• In �99�, the bank took over another troubled institution, Middle East Bank, which was then converted into an Islamic Bank in 2004, under the new name “Emirates Islamic Bank” (EIB), to provide high quality Islamic banking services across the UAE. EIB was established to capitalize on the growing needs for Islamic banking in UAE. EIB offers a range of Shari’a compliant products and services of Islamic finance.
Recent developments
• EBI and Standard Chartered Bank closed the US$2.25bn, �8 month term loan facility for Dubai Holding, which was oversubscribed by more than twice the amount. Forty five local, regional and international banks participated in this syndication for the funding of Dubai Holding’s acquisition of a 35% stake in Tunisia Telecom, through a consortium comprising of two of its subsidiaries.
• EIB signed a Memorandum of Understanding (MoU) with the Albaraka Banking Group towards strengthening their relationship and providing more integrated Islamic financial services. The partnership is in mutual interest for both banking institutions who are spearheading Islamic banking services in the United Arab Emirates and Bahrain respectively.
• Al Jaber Group signed an agreement mandating EBI to raise a US$400mn syndicated five-year term loan. The loan proceeds would be used primarily to restructure existing short-term debt of the group and to support its growth.
• EBI opened its representative office in Singapore during the month of November-06. This will allow EBI to position itself as the first bank in the United Arab Emirates banking industry to have a presence in Singapore. The focus of the Singapore representative office will be to identify business opportunities for EBI in the Asia Pacific region in the areas of trade finance and to facilitate the bank’s participations in syndicated conventional and Islamic banking transactions for Asian borrowers.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 69
Financial Performance – 2005
• EBI is the second largest bank in terms of balance sheet size (banks under review) and had a market share of �3.5% in 2005 (�3.0% in 2004). It is worth mentioning that the EBI has maintained the market share of around �3.0% since 2002 in such a competitive industry, which shows EBI’s focus to remain as the market leader. EBI has expanded in terms of branch network as well as opening up representative offices to make its presence in growing markets.
• The asset size increased from AED27.�9bn in 2002 to AED59.39bn in 2005, a CAGR growth of 29.7%. The bank’s share in total deposit base among the banks under review, remained at the same level of ��.�% in 2002 and at the end of 2005. However, during the same period, total customer deposits (including Islamic deposits) grew at a CAGR of 26.0% from AED�6.5�bn in 2002 to AED33.06bn in 2005.
• In the year 2005, total customer deposits grew by 60.0% to AED33.06bn as compared with AED20.66bn in the year 2004. As a result, the contribution of customer deposits to the total assets increased from 53.7% in 2004 to 55.7% at the end of 2005. It is worth noting that government and public sector entities contributed around 20.7% of the total deposits as compared with 42.2% in 2004. This indicates that the growth in the deposit base is not driven by the government or public entities but through the private sector and retail customers.
• The contribution of time deposits to total deposits declined from 57.2% in 2004 to 49.8% in 2005. Correspondingly, the share of demand, call and short notice increased from 33.7% in 2004 to 4�.0% in 2005. Savings deposits contribution declined from 8.3% in 2004 to 6.2% at the end of 2005.
Chart 1: Deposit Mix
Source: Company Reports
2002 2003 2004** 2005**
Demand, call & short notice Time Savings Others
22.3%
70.0%
7.3% 7.1%
69.2%
32.3% 33.7%
57.2%
8.3% 6.2%
49.8%
41.0%
Global Research - UAE Global Investment House
70 UAE Banking Sector Report January 2007
• Around 4�% of the total deposit base is in the form of current, call and short notice, which augurs well for the bank in improving the overall margins. The time deposits contributes around 49.8% of the total deposit base, however, it has declined from 70.0% in 2002. We believe that due to the increasing competition along with new players entering the UAE market, we expect to see banks increasing their deposit base through time deposits, which will be at a higher cost to the bank.
Chart 2: Funding Mix
Source: Company Reports
• On the funding side, we have seen banks diversifying through medium term borrowings in the past few years and EBI has been one of the pioneer banks to start the external funding in the region. EBI has increased external funding in the form of medium term borrowings, which has a maturity period of � to 5 years.
• Medium term borrowing has increased at a CAGR of 32.5% during the period 2002-2005. From the above chart, medium term borrowing contributed �3.2% of the total funding in the year 2005. Going forward, this trend will continue as external funding brings stable funds for a period of � to 5 years, in order to support loan growth with a longer duration.
Chart 3: Gross Loans* as a percentage of Total Funding**
Source: Company Reports*Gross Loans includes Islamic loans**Total funding is customer deposits plus medium term borrowing
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%2002 2003 2004 2005
Customer’s Deposit Islamic Customer Deposit Due to banks Medium term borrowing
76.3%
10.9%
12.7% 11.4%
7.6%
81.0% 62.7%
4.0%
15.4%
17.9%13.2%
18.5%
7.4%
60.9%
42,000
38,000
34,000
30,000
26,000
22,000
18,000
2002 2003 2004 2005
108%
106%
104%
102%
100%
Total Funding Gross Loans & advances Gross Loans as a % of Total funding
102.3%
106.2%
101.3%100.4%
In A
ED m
n
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 7�
• On the lending side, the bank’s gross loan book (including Islamic financing) grew at a CAGR of 26.6% from AED�9.7bn in 2002 to AED39.98bn in 2005. High oil prices, and surging capital markets in 2005 has resulted in strong demand for credit both from the corporate as well as the consumer segment.
Chart 4: Gross Loans by Economic Sectors
Source: Company Reports
• At the end of 2005, the gross loan book grew by 43.6% to AED39.98bn as compared to AED27.85bn in 2004. The strong growth on the lending front is in line with the management’s policy of spreading credit concentration over various economic segments. Three sectors namely services, government and personal segment accounted for almost 68% of the gross loans.
• During the period of 2002-2005, personal loans has increased at a CAGR of 44.4%. As a result, the contribution of personal loans to gross loans has increased from 23.�% in 2002 to 34.3% at end of 2005. Going forward, changing demographics and the increasing expatriate population is likely to boost the consumer lending segment. In our opinion, consumer lending is likely to be the key growth driver over the next two years for banking sector.
• The contribution of government lending has declined from 24.0% in 2002 to ��.5% in 2005, where as contribution of services sector lending has increased from �5.7% in 2002 to 22.3% in 2005.
Manufacturing8%
Soverign12%
Personal34%
Other3%
2005
Construction7%
Trade8%
Transport &communication
6%
Services22%
Manufacturing10%
Soverign12%
Personal30%
Other2%
2004
Construction8%
Trade9%
Transport &communication
7%
Services20%
Global Research - UAE Global Investment House
72 UAE Banking Sector Report January 2007
Chart 5: Asset Quality
Source: Company Reports
• During the last three years, the bank’s asset quality has improved significantly. Non-Performing Loans (NPLs) as a percentage of gross loans declined from 2.93% in 2002 to �.54% in 2005. Even in absolute terms, gross NPLs have declined from AED577.5mn in 2002 to AED574.8mn in 2005. It is worth noting that there has been a sharp improvement in asset quality despite the growth in personal lending. However due to the strict adherence and close monitoring has helped the bank improve its credit risk during this period.
Chart 6: Net Profit
Source: Company Reports
• During the period of 2002-2005, the bank’s net profit grew at a CAGR of 45.6%. During the same period, the most notable is the fees and commission income which grew at a CAGR of 5�.�%. Buoyancy in the capital market activity helped the bank to register strong profitability by way of enhanced fee income and gains on AFS portfolio.
40,000
35,000
30,000
25,000
20,000
15,000
3.2%
2.8%
2.4%
2.0%
1.6%
1.2%2002 2003 2004 2005
Gross Loans NPLs to Gross Loans
1.54%
2.09%
2.54%
2.93%
In A
ED m
n
1,900
1,400
900
400
65.0%
55.0%
45.0%
35.0%2002 2003 2004 2005
Net Profit (after minority) Profit Margin
In A
ED m
n
39.3%38.2%
44.1%
57.4%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 73
• From the core banking front, the bank is doing extremely well. The interest income has grown from AED�.20bn in 2004 to AED2.28bn in 2005, registering an increase of �89.9%. On the interest expense front, the bank has witnessed a huge increase in funding cost, which is line with the increasing interest environment in the country. Net interest income grew from AED87�.�mn in 2004 to AED�.�7bn in 2005, registering an increase of �43.4%.
Chart 7: Non-Interest Income
Source: Company Report
• The fees and commission income was one of main determinants for the growth in the overall profits due to the buoyant capital markets, which also resulted in a number of IPOs entering the market. However, it is unlikely for the banks to maintain the same growth levels during the year 2006 and 2007. It should be noted that there is still growth from the core banking activities, as the demand for lending will continue to grow due to the current boom in real estate as well as upcoming development projects in UAE.
Chart 8: Margins
Source: Company Report, Global Research
1,200
1,000
800
600
400
200
105%
85%
65%
45%
25%
5%2002 2003 2004 2005
Fees & commission income Growth in Fees & commission income
21.4%8.6%
101.3%
57.8%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2.7%
2.6%
2.5%
2.4%
2.3%
2.2%
2.1%
2.0%2005200420032002
2.2% 2.2%
2.4%
2.6%
Yield on interest earning assets Cost on interest bearing liabilities
Net interest margin
Global Research - UAE Global Investment House
74 UAE Banking Sector Report January 2007
• The bank’s yield on average earnings assets increased from 3.4% in 2002 to 4.9% in 2005. At the same time, the cost of interest bearing liabilities increased from �.5% in 2002 to 2.6% in 2005. However, with the general increase in interest rates, cost of funds for the bank has gone up in the past few years, but the bank was successful in passing over the increase to the customers, which resulted in overall increase in margins. The net interest margin for the bank also increased from 2.2% in 2002 to 2.6% in 2005.
• During the period 2002-05, operating costs increased at a CAGR of 2�.3% from AED433.3mn in 2002 to AED774.3mn in 2005. The cost to income ratio of the bank declined from 43.5% in 2002 to 34.6% in 2005. However, it is still higher when compared to the average industry ratio.
Chart 9: Return Ratios
Source: Company Reports
• During the last three years, the bank’s net profit increased at a CAGR of 45.6%. As a result, the bank’s return ratios have increased during the same period. Return on average assets (ROAA) increased from 2.�% in 2002 to 2.9% in 2005. Also return on average equity (ROAE) increased from �2.5% in 2002 to 22.4% in 2005.
Chart 10: Capital Adequacy Ratio
Source: Company Reports
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%2002 2003 2004 2005
22.4%
12.4%12.5%
Return on average assets Return on average equity
23.0%
21.0%
19.0%
17.0%
15.0%2002 2003 2004 2005
116.3%
18.7%
21.2%
22.4%
Capital Adequacy Ratio (CAR)
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 75
• Although, EBI’s capital adequacy ratio has declined from 22.4% in 2002 to �6.3% in 2005, it is still well capitalized to support growth in risk-adjusted assets. The drop in CAR shows the optimum utilization of capital base by shifting asset mix over the last three years. Moreover, the bank is still well above the required CAR of �0% by the Central Bank of UAE.
Financial Performance – Nine Months Performace-2006
• EBI’s asset size increased by 34.5% as compared to 2005 to reach AED79.88bn at the end of third quarter of 2006. The bank reported a strong sequential growth of �0.3% in 3Q-2006.
• Customer deposits (including Islamic deposits) increased by 29.8% to AED42.925bn at end of sept-06 as compared with AED33.06bn at the end of year 2005. However, the contribution of customer deposits to the total assets declined from 55.7% at the end of 2005 to 53.7% at the end of sept-06.
• The Islamic deposits of the bank has shown strong growth in the first nine months of 2006, from AED3.59bn in 2005 to AED7.93bn, an increase of �20.6%. The growth in total liabilities was also driven by the growth in medium term borrowing, which increased from AED6.4�bn at the end of 2005 to AED�0.42bn at the end of sept-06.
Chart 11: Deposit Mix
Source: Company Reports
• The contribution of time deposits to total deposits increased from 76.7% in 2005 to 80.7�% at the end of sept-06. Correspondingly, the share of current and other deposits declined from 22.30% in 2005 to �5.�8% at the end of sept-06.
100%90%80%70%60%50%40%30%20%10%0%
2005 9M-06
Current and other accounts
Time Deposits
Savings accounts
Islamic Products
22.30%
1.03%
76.67%
2.87%
80.71%
1.25%
15.18%
Global Research - UAE Global Investment House
76 UAE Banking Sector Report January 2007
Chart 12: Gross Loans by Economic Sectors
Source: Company Reports
• On the lending side, loans and advances (including Islamic financing) increased by 42.3% to AED57.9�bn at the end of sept-06 as compared with AED40.70bn at the end of 2005. The healthy growth in the loan portfolio is a result of the bank’s focus on increasing its presence either through branch networks or through opening up of representative offices around the region.
• In the first nine months of 2006, personal loans increased by 43.2%. As a result, the contribution of personal loans to gross loans has increased from 33.7% in 2005 to 34.3% at end of 9M-06. The contribution of government lending increased from ��.63% in 2005 to �6.7% in 9M-06. The three sectors namely personal, government and services collectively contribute about 7�.08% to the total lending portfolio.
Chart 13: Core Income
Source: Company Reports
• EBI has continued to perform well in the core banking section, as the bank’s net interest income has grown by �2.7% to reach AED4�4.4mn in the 3Q-06 as compared with AED320.6mn during the same period in the corresponding year. At the end of first nine months, the bank’s net interest income was AED�.�8bn as compared with AED868.6mn, registering an increase of 35.9%. Going forward, the bank will continue to perform well due to the growing demand in the market as there are number of infrastructural projects in the pipeline.
Manufacturing8%
Soverign12%
Personal34%
Other1%
2005
Construction7%
Trade8%
Transport &communication
6%
Services22%
Manufacturing6%
Soverign17%
Personal35%
Other1%
2004
Construction7%
Trade8%
Transport &communication
6%
Services20%
370,000
360,000
350,000
340,000
330,000
320,000
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%3Q-062Q-061Q-06
Net interest income Growth in Nll
12.7%18.2%
44.5%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 77
Chart 14 : Efficiency Ratio
Source: Company Reports
• At the end of first nine months of 2006, operating expenses increased by 52.8% to AED796.4mn from AED52�.2mn during the same period corresponding year. The cost to income ratio of the bank has increased from 34.6% in 2005 to 4�.8% at the end of Sept-06.
Table 1: Nine Months Performance - 2006
Source: Global Research
• EBI reported net profit of AED�.37bn at the end of sept-06, registering an increase of �8.7% as compared to the corresponding period of the previous year. This was primarily due to the growth witnessed in both core income as well as fees and commission income. However, on a sequential basis, the bank saw a decline of �0.2% in net profit during the 3Q-2006 as compared to the corresponding quarter of the previous year.
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%3Q-062Q-061Q-062005
Cost to income ratio Cost to average assets
1.58% 1.73%
2.41%2.18%
3Q 3Q % 9M 9M % Amount in AED ‘000 2005 2006 Change 2005 2006 ChangeInterest Income 548,50� �,008,98� 84.0% �,46�,009 2,84�,208 94.5%Income from Islamic financing 56,799 ��8,�59 �08.0% 96,028 267,�37 �78.2%Interest Expense (270,674) (643,856) �37.9% (662,973) (�,794,222) �70.6%Distribution to depositors (�4,000) (68,877) 392.0% (25,440) (�33,949) 426.5%Net interest income 320,626 414,407 29.2% 868,624 1,180,174 35.9%Fees and commission income 283,772 274,488 -3.3% 723,592 92�,0�6 27.3%Property related income 269 59� ��9.7% �2,365 3,468 -72.0%Total Income 604,667 689,486 �4.0% �,604,58� 2,�04,658 3�.2%General & administration expenses (�9�,�97) (288,380) 50.8% (52�,285) (796,745) 52.8%Net recoveries on loans and receivables (5,�05) (48,�30) 842.8% (9,898) (83,87�) 747.4%Share of profit of associate companies 28,846 40,680 4�.0% 76,665 �4�,575 84.7%Group net profit before Minority interest 437,211 393,656 -10.0% 1,150,063 1,365,617 18.7%Minority Interest �,07� (33) -�03.�% 3�2 35 -88.8%Net Profit 438,282 393,623 -10.2% 1,150,375 1,365,652 18.7%
Global Research - UAE Global Investment House
78 UAE Banking Sector Report January 2007
Outlook
EBI is the second largest bank among the UAE banks (listed banks) in terms of total asset size. At end of Sept-06, EBI remained at the second position, after NBAD, which is the largest bank among the UAE banks. Although the competition is growing within the industry, but EBI has been able to maintain its position as the top three banks in the Emirates in terms of asset size.
According to the management, the growth driver for the bank will be corporate lending. As the bank has started concentrating on various sectors, it would like to limit exposures in each sectors, in order to achieve risk diversifications. The bank is very skeptical about the real estate sector, as there is no clear picture whether the current boom will continue going forward. Due to lower capital market activity, earnings growth is likely to slowdown especially the contribution from the fees and commission income.
The bank’s vision is to be amongst the top 5 banks in the GCC region, either through organic growth or inorganic growth. However, the bank has been concentrating and looking in to various business opportunities around the region. In November 2006, the bank opened a representative office in Singapore, which in line with the bank’s strategy for growth. By entering the Asian market, the bank will be able to capitalize on the opportunities in those market. Going forward, this will allow the banks to take part in the syndication loans in the Asian market.
The bank intends to have a 40:60 revenue mix in terms of retail to corporate lending in the Emirates. The bank has 38 branches and EIB, the Islamic arm of the bank has �6 branches. They plan to expand their branch network by adding another �6 branches through both the conventional and Islamic banking branches. The outlook for 2006-2007 is quite positive for the banks in UAE and the GCC region. Going forward, in our opinion the bank will be able to maintain its position as one of the leading banks in the UAE banking sector.
Valuation:
Based on the current market price of AED�2.�0, EBI stock is trading at a �8.2x 2005 earnings and 4.�x 2005 book value. On a one year forward basis, the stock is trading at �5.6x 2006F earnings and 3.�x 2006F book value. EBI will continue to enjoy the depositors’ confidence keeping in mind the image of being among the top three banks in the country. Based on the DDM valuation method, we recommend a HOLD on the stock with a price target of AED��.72, a downside of 3.�% from current levels.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 79
BA
LA
NC
E S
HE
ET
EM
IRA
TE
S B
AN
KA
mou
nt in
AE
D ‘
000
2003
2004
2005
2006
(F)
2007
(F)
2008
(F)
2009
(F)
Cas
h ba
lanc
es �
,308
,286
2
,570
,809
2
,067
,870
2
,2�7
,8�3
3
,799
,382
3
,649
,5�4
2
,526
,567
D
ue f
rom
ban
ks 2
,826
,668
4
,5�0
,074
7
,770
,730
4
,078
,945
4
,500
,462
5
,598
,299
6
,796
,668
Pr
oper
ty r
elat
ed r
ecei
vabl
es 2
89,3
33
-
-
-
-
-
-
Loa
n an
d ad
vanc
es to
cus
tom
ers
23,
540,
05�
27,
33�,
850
37,
273,
748
6�,
�94,
4�9
68,
652,
274
77,
479,
�54
87,
4�0,
7�0
Les
s: A
llow
ance
s fo
r im
pair
men
ts (
705,
85�)
(62
9,49
8) (
673,
750)
(74
9,96
8) (
793,
3�5)
(8�
7,92
�) (
883,
858)
Net
loan
s an
d ad
vanc
es to
cus
tom
ers
22,
834,
200
27,
4�2,
295
38,
567,
246
60,
444,
45�
67,
858,
959
76,
66�,
233
86,
526,
852
Net
Isl
amic
fin
anci
ng a
nd in
vest
men
t pro
ds -
4
2�,4
96
2,4
4�,3
5�
6,9
04,2
79
�0,
273,
622
�2,
289,
046
�5,
626,
794
Inve
stm
ents
sec
uriti
es 2
,295
,346
�
,347
,�74
3
,238
,937
3
,823
,252
4
,307
,�54
4
,563
,83�
5
,085
,824
In
vest
men
t in
asso
ciat
e co
mpa
nies
4�,
648
795
,093
�
,980
,239
2
,�02
,788
2
,�53
,577
2
,28�
,9�5
2
,542
,9�2
In
vest
men
ts p
rope
rtie
s �
,307
,049
�
72,4
55
�28
,729
�
�3,3
40
�33
,998
�
28,0
4�
�45
,526
D
evel
opm
ent p
rope
rtie
s 3
28,2
76
-
-
-
-
-
-
Gro
ss p
rope
rty
and
equi
pmen
t 4
63,3
80
4�7
,08�
5
�0,2
89
56�
,3�8
6
�7,4
50
666
,846
7
20,�
93
Les
s: D
epre
ciat
ion
(25
�,26
8) (
237,
850)
(26
7,40
4) (
280,
659)
(30
8,72
5) (
3�6,
752)
(34
2,09
2)N
et p
rope
rty
and
equi
pmen
t 2
�2,�
�2
�79
,23�
2
42,8
85
280
,659
3
08,7
25
350
,094
3
78,�
0�
Posi
tive
fair
val
ue o
f de
riva
tives
-
250
,423
8
90,3
93
890
,393
8
90,3
93
890
,393
8
90,3
93
Cus
tom
er a
ccep
tanc
es -
4
08,0
29
856
,448
-
-
-
-
O
ther
Ass
ets
427
,347
4
0�,5
79
�,2
08,0
39
2,2
02,9
99
2,2
3�,�
99
2,3
24,3
75
2,4
9�,2
05
Tot
al A
sset
s 3
1,87
0,26
5 3
8,46
8,65
8 5
9,39
2,86
7 8
3,05
8,91
9 9
6,45
7,47
1 10
8,73
6,74
1 12
3,01
0,84
1 C
usto
mer
’s D
epos
it 2
0,54
3,57
� �
9,42
4,0�
8 2
9,46
4,34
0 3
7,77
9,93
0 4
4,66
5,94
7 5
�,2�
6,45
2 5
8,2�
0,29
2 Is
lam
ic c
usto
mer
dep
osit
-
�,2
33,6
54
3,5
93,7
�6
9,2
05,7
05
��,
4�5,
�36
�4,
345,
008
�8,
457,
085
Due
to b
anks
�,9
�9,5
43
4,7
79,5
�9
8,9
5�,�
�8
�3,
096,
622
�3,
697,
062
�2,
838,
263
�2,
029,
479
Dep
osits
und
er r
epur
chas
e ag
reem
ent
355
,087
3
55,0
87
355
,087
3
55,0
87
355
,087
3
55,0
87
355
,087
M
ediu
m te
rm b
orro
win
g 2
,90�
,670
5
,564
,595
6
,409
,385
�
�,33
3,97
9 �
3,39
9,78
4 �
5,36
4,93
6 �
7,46
3,08
7 N
egat
ive
fair
val
ue o
f de
riva
tives
-
267
,0�6
9
23,5
78
923
,578
9
23,5
78
923
,578
9
23,5
78
Min
ority
inte
rest
554
,902
-
-
-
-
-
-
C
usto
mer
acc
epta
nces
-
408
,029
8
56,4
48
-
-
-
-
Oth
er L
iabi
litie
s 6
65,7
9�
6�6
,892
�
,088
,976
�
,258
,072
�
,487
,376
�
,705
,508
�
,938
,403
T
otal
Lia
bilit
ies
26,
940,
564
32,
648,
810
51,
642,
648
73,
952,
973
85,
943,
970
96,
748,
831
109,
377,
011
Ow
ner’
s E
quity
Shar
e ca
pita
l �
,�48
,0��
�
,435
,0�4
�
,793
,766
2
,33�
,896
2
,33�
,896
2
,33�
,896
2
,33�
,896
L
egal
and
sta
tuto
ry r
eser
ves
52�
,205
6
�9,2
05
792
,205
7
92,2
05
2,0
00,2
05
3,2
08,2
05
4,4
�6,2
05
Oth
er r
eser
ve 2
,602
,366
3
,�02
,366
3
,778
,6�4
4
,986
,6�4
4
,986
,6�4
4
,986
,6�4
4
,986
,6�4
C
umul
ativ
e ch
ange
s in
fai
r va
lue
-
�54
,575
6
47,�
35
647
,�35
6
47,�
35
647
,�35
6
47,�
35
Prop
osed
issu
e fo
r bo
nus
shar
es 2
87,0
03
-
-
-
-
-
-
Prop
osed
div
iden
ds 2
29,6
02
-
-
-
-
-
-
Ret
aine
d ea
rnin
gs �
4�,5
�4
505
,288
7
37,2
��
345
,035
5
42,9
96
807
,889
�
,244
,522
T
otal
Sha
reho
lder
’s7,
929,
701
5,81
6,44
87,
748,
931
9,10
2,88
510
,508
,845
11,9
81,7
3913
,626
371
Tot
al L
iabi
litie
s an
d E
quit
y31
,870
,265
38,4
68,6
5859
,392
,867
83,0
58,9
1996
,457
,471
108,
736,
741
123,
010,
841
Global Research - UAE Global Investment House
80 UAE Banking Sector Report January 2007
INC
OM
E S
TA
TE
ME
NT
E
MIR
AT
ES
BA
NK
Am
ount
in A
ED
‘00
020
0320
0420
0520
06(F
)20
07(F
)20
08(F
)20
09(F
)In
tere
st I
ncom
e 9
43,7
93
�,�
98,8
�9
2,2
06,4
24
3,7
05,5
47
4,2
83,8
58
4,9
45,�
53
5,5
49,6
32
Inco
me
from
Isl
amic
fin
anci
ng -
�
,85�
7
3,�6
2 3
69,7
62
652
,947
8
0�,5
23
�,0
76,4
60
Inte
rest
Exp
ense
(27
5,42
9) (
380,
444)
(�,
063,
36�)
(2,
460,
84�)
(2,
886,
483)
(3,
292,
386)
(3,
683,
�30)
Dis
trib
utio
n to
dep
osito
rs -
(
3,�4
5) (
44,2
29)
(�5
3,4�
8) (
208,
0�0)
(27
5,74
3) (
373,
249)
Net
inte
rest
inco
me
668
,364
8
17,0
81
1,1
71,9
96
1,4
61,0
49
1,8
42,3
11
2,1
78,5
47
2,5
69,7
13
Fees
and
com
mis
sion
inco
me
333
,556
6
7�,5
72
�,0
59,9
�9
�,2
27,8
48
�,4
06,9
77
�,5
36,4
94
�,6
6�,9
04
Prop
erty
rel
ated
inco
me
99,
430
��0
,496
8
,986
7
,3�7
8
,784
8
,678
9
,977
T
otal
Inc
ome
�,�
0�,3
50
�,5
99,�
49
2,2
40,9
0�
2,6
96,2
�4
3,2
58,0
73
3,7
23,7
�9
4,2
4�,5
93
Gen
eral
& a
dmin
istr
atio
n ex
pens
es (
493,
5�9)
(60
6,00
3) (
774,
327)
(99
3,90
4) (
�,�0
8,56
0) (
�,24
5,57
8) (
�,37
3,25
0)N
et r
ecov
erie
s on
loan
s an
d re
ceiv
able
s 2
8,05
4 �
30
(60
,525
) (
8�,7
09)
(85
,794
) (
92,0
57)
(96
,660
)Sh
are
of p
rofi
t of
asso
ciat
e co
mpa
nies
4,0
59
40,
377
322
,532
�
88,7
68
207
,645
2
28,4
09
25�
,250
G
roup
net
pro
fit f
or th
e ye
ar b
efor
e ta
x 6
39,9
44
�,0
33,6
53
�,7
28,5
8�
�,8
09,3
69
2,2
7�,3
64
2,6
�4,4
94
3,0
22,9
34
Min
ority
Int
eres
t (
3�,0
5�)
(6�
,526
) 3
,545
(
�,77
3) (
�,59
5) (
�,5�
5) (
�,28
8)N
et P
rofi
t 6
08,8
93
972
,127
1
,732
,126
1
,807
,596
2
,269
,769
2
,612
,978
3
,021
,646
P
&L
App
ropr
iati
on A
ccou
nt:
-
-
-
O
p B
alan
ce o
f Ret
aine
d E
arni
ngs
�26
,995
3
62,8
63
505
,288
7
37,2
��
345
,035
5
42,9
96
807
,889
N
et P
rofi
t for
the
year
608
,893
9
72,�
27
�,7
32,�
26
�,8
07,5
96
2,2
69,7
69
2,6
�2,9
78
3,0
2�,6
46
Trf
r to
lega
l res
erve
s (
362,
000)
(59
8,00
0) (
�,20
8,00
0) (
�,20
8,00
0) (
�,20
8,00
0) (
�,20
8,00
0) (
�,20
8,00
0)D
irec
tors
rem
uner
atio
n (
2,77
2) (
2,�0
0) (
5,20
0) (
5,20
0) (
5,20
0) (
5,20
0) (
5,20
0) C
ash
Div
iden
d (
229,
602)
(22
9,60
2) (
287,
003)
(44
8,44
2) (
858,
608)
(�,
�34,
884)
(�,
37�,
8�3)
Oth
er r
eser
ve -
-
-
-
-
-
-
B
onus
Iss
ue -
-
-
(
538,
�30)
-
-
-
C
l Bal
ance
of R
etai
ned
Ear
ning
s �
4�,5
�4
505
,288
7
37,2
��
345
,035
5
42,9
96
807
,889
�
,244
,522
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 8�
CA
SHF
LO
W S
TA
TE
ME
NT
EM
IRA
TE
S B
AN
K
Am
ount
in A
ED
‘00
020
0320
0420
0520
06(F
)20
07(F
)20
08(F
)20
09(F
)O
pera
ting
Aci
tivi
ties
Net
pro
fit f
or th
e ye
ar 6
08,8
93
972
,�27
�
,732
,�26
�
,807
,596
2
,269
,769
2
,6�2
,978
3
,02�
,646
A
djus
tmen
ts f
or n
on-c
ash
item
s:Im
pair
men
t allo
wan
ces
on lo
ans
and
adva
nces
63,
705
8�,
093
�07
,002
-
-
-
-
W
rite
bac
k of
pro
visi
on f
or lo
ans
and
adva
nces
(�9
,000
) -
-
-
-
-
-
Im
pair
men
t of
loan
s to
ban
ks 8
,476
�
2,80
0 -
-
-
-
-
D
epre
ciat
ion
on f
ixed
ass
ets
55,
268
44,
048
55,
30�
�3,
255
28,
066
8,0
27
25,
340
Exc
hang
e tr
ansl
atio
n ad
just
men
t -
-
-
-
-
-
-
L
oss/
(gai
n) o
n re
valu
atio
n of
inve
stm
ent p
rope
rty
25,
379
(36
,�89
) -
-
-
-
-
G
ain
on r
eval
uatio
n of
inve
stm
ent s
ecur
ities
(37
,24�
) -
-
-
-
-
-
(G
ain)
/loss
on
reva
luat
ion
of d
eriv
ativ
es (
�,35
7) -
-
-
-
-
-
Sh
are
of p
rofi
t of
asso
ciat
e co
mpa
nies
-
(40
,377
) (
322,
532)
-
-
-
-
Dir
ecto
r’s
fees
(2,
772)
-
(5,
200)
(5,
200)
(5,
200)
(5,
200)
Ope
ratin
g pr
ofit
befo
re c
hang
es 7
0�,3
5�
�,0
33,5
02
�,5
7�,8
97
�,8
�5,6
5�
2,2
92,6
34
2,6
�5,8
05
3,0
4�,7
86
Dec
reas
e/(i
ncre
ase)
in s
tatu
tory
res
erve
(24
6,�3
8) (
223,
0�0)
(4�
7,37
5) -
-
-
-
(I
ncre
ase)
/dec
reas
e in
due
from
ban
ks m
atur
ing
afte
r 3 m
onth
s 5
2�,4
00
337
,433
(
2�9,
087)
3,6
9�,7
85
(42
�,5�
7) (
�,09
7,83
7) (
�,�9
8,36
9)In
crea
se in
due
to b
anks
mat
urin
g af
ter
3 m
onth
s �
70,7
22
(25
8,44
2) (
24,2
5�)
4,�
45,5
04
600
,439
(
858,
799)
(80
8,78
3)N
et c
hang
e in
oth
er li
abili
ties/
othe
r as
sets
(35
,4�5
) 2
5,8�
9 (
322,
984)
(82
5,86
4) 2
0�,�
05
�24
,956
6
6,06
4 In
crea
se in
cus
tom
er’s
dep
osits
4,0
36,8
73
8�,
744
�2,
400,
384
�3,
927,
579
9,0
95,4
48
9,4
80,3
76
��,
�05,
9�6
Incr
ease
in I
slam
ic f
inan
cing
and
inve
stm
ent p
rodu
cts
-
(42
�,49
6) (
2,02
8,�2
2) (
4,46
2,92
8) (
3,36
9,34
3) (
2,0�
5,42
4) (
3,33
7,74
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ncre
ase)
in L
oans
and
adv
ance
s (
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8)In
crea
se in
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pert
y de
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pmen
t rec
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ble
(84
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) 2
89,3
33
-
-
-
-
-
Net
cas
h ge
nera
ted
from
ope
rati
ng a
ctiv
itie
s 1
,100
,324
(
3,30
1,97
4) (
293,
224)
(3,
585,
477)
984
,258
(
553,
197)
(99
6,75
2)In
vest
ing
Act
ivit
ies
Incr
ese
in tr
adin
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vest
men
t sec
uriti
es (
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30)
(40
,946
) (
2,26
�,8�
7) (
584,
3�5)
(48
3,90
3) (
256,
676)
(52
�,99
3)In
crea
se in
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stm
ent a
nd d
evel
opm
ent p
rope
rty
(�9
4,82
7) �
,462
,870
4
3,72
6 �
5,38
9 (
20,6
58)
5,9
57
(�7
,485
)In
vest
men
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asso
ciat
es -
-
-
(
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549)
(50
,789
) (
�28,
338)
(26
0,99
6)A
dditi
ons
to f
ixed
ass
ets
(net
) (
30,6
56)
(47
,037
) (
��8,
955)
(5�
,029
) (
56,�
32)
(49
,396
) (
53,3
48)
Net
cas
h (u
sed
in)
inve
stin
g ac
tivi
ties
(25
5,81
3) 1
,374
,887
(
2,33
7,04
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742,
504)
(61
1,48
1) (
428,
454)
(85
3,82
2)F
inan
cing
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ies
Incr
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in m
edui
m te
rm b
orro
win
g �
46,9
20
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25
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,790
4
,924
,594
2
,065
,805
�
,965
,�5�
2
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,�52
In
crea
se in
dep
osits
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er r
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chas
e ag
reem
ents
355
,087
-
-
-
-
-
-
In
crea
se in
min
ority
inte
rest
37,
249
(55
�,50
2) (
2,��
2) �
,773
�
,595
�
,5�5
�
,288
D
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ends
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d (
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003)
(44
8,44
2) (
858,
608)
(�,
�34,
884)
(�,
37�,
8�3)
Net
cas
h fr
om/(
used
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fina
ncin
g ac
tivi
ties
355
,574
1
,881
,821
5
55,6
75
4,4
77,9
24
1,2
08,7
92
831
,783
7
27,6
27
Incr
ease
in c
ash
and
cash
equ
ival
ents
�,2
00,0
85
(45
,266
) (
2,07
4,59
5) �
49,9
43
�,5
8�,5
68
(�4
9,86
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�,�2
2,94
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ash
and
cash
equ
ival
ents
at b
egin
ning
of
the
year
�,�
23,2
24
2,3
23,3
09
2,2
78,0
43
2,0
67,8
70
2,2
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Cas
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t th
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d of
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r 2
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,309
2
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,043
2
03,4
48
2,2
17,8
13
3,7
99,3
82
3,6
49,5
14
2,5
26,5
67
Global Research - UAE Global Investment House
82 UAE Banking Sector Report January 2007
FACT SHEET EMIRATES BANK
2003 2004 2005 2006 (F) 2007 (F) 2008 (F) 2009 (F)
Profitability - Return on Average Assets �.9% 2.5% 2.9% 2.2% 2.4% 2.4% 2.5% - Return on Average Equity �2.4% �6.7% 22.4% �9.9% 2�.6% 2�.8% 22.2% - Net interest income / Op. Income �04.4% 79.0% 67.8% 80.7% 8�.�% 83.3% 85.0% - Non-interest income / Op. Income 72.7% 79.6% 77.0% 74.2% 67.7% 64.3% 60.4%
Margins - Net income / Revenues 64.5% 8�.�% 78.5% 48.8% 53.0% 52.8% 54.4% - Operating profit / Revenues 67.8% 86.2% 78.3% 48.8% 53.0% 52.9% 54.5% - Interest Expense to Interest Income 4�.2% 46.6% 90.7% �68.4% �56.7% �5�.�% �43.3% - Yield on interest earning assets 3.2% 3.5% 4.9% 5.5% 4.9% 4.9% 4.9% - Investment Income to Investment Assets �4.5% 49.9% 32.7% 32.�% 32.7% 33.7% 32.7% - Cost of interest bearing liabilities �.�% �.3% 2.6% 4.0% 3.7% 3.7% 3.6% - Net Spread 2.0% 2.2% 2.2% �.5% �.2% �.3% �.3% - Net Interest Margin 2.2% 2.4% 2.6% 2.2% 2.�% 2.2% 2.3%
Efficiency -Cost / Total Income 44.8% 37.9% 34.6% 32.9% 30.3% 29.8% 28.7% - Staff Expense / Total Income 44.8% 37.9% 34.6% 36.9% 34.0% 33.4% 32.4% - Cost to Average Total Assets 2.�% 2.8% 3.5% 2.5% 2.5% 2.5% 2.6%
Liquidity - Loans to Interest Earning Assets 8�.6% 83.2% 79.5% 89.8% 90.2% 89.9% 89.6% - Net Loans to Customer Deposits ���.2% �34.7% �24.�% �43.3% �39.3% �35.7% �33.2% - Customer Deposits to Equity 4�6.7% 333.9% 380.2% 4�5.0% 425.0% 427.5% 427.2%
Credit Quality - Provisions to Gross Loans 3.00% 2.30% �.8�% �.23% �.�6% �.06% �.0�% - NPLs to Gross Loans 2.54% 2.09% �.54% �.03% �.06% �.08% �.�0% - NPL Coverage ��8.0% ��0.0% ��7.2% ��8.6% �09.�% 97.8% 9�.9%
Capital Adequacy - Equity to Total Assets �5.5% �5.�% �3.0% ��.0% �0.9% ��.0% ��.�% - Equity to Gross Loans 20.9% 2�.3% 20.8% �4.9% �5.3% �5.5% �5.6% - Capital Adequacy Ratio (CAR) 2�.2% �8.7% �6.3%
Ratios Used for Valuation - Par value per share (AED) 2.5 2.5 2.5 �.0 �.0 �.0 �.0 - Shares in issue (000’s) 459,204 574,006 7�7,506 2,33�,896 2,33�,896 2,33�,896 2,33�,896 - EPS (AED) �.33 �.69 2.4� - - - - - EPS (AED) - Adjusted for Split 0.53 0.68 0.97 0.78 0.97 �.�2 �.30 - Book value per share (AED) �0.7 �0.� �0.8 - - - - - Book value per share (AED) - Adjusted for Split 4.3 4.� 4.3 3.9 4.5 5.� 5.8 - Market price year end (AED) 5.�7 �2.44 �7.57 �2.�0 �2.�0 �2.�0 �2.�0 - P/E 9.7 �8.4 �8.2 �5.6 �2.4 �0.8 9.3 - P/BV �.2 3.� 4.� 3.� 2.7 2.4 2.� * Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 83
• The bank has presence in personal banking (accounts, fixed deposits, credit cards, personal banking, personal loans, etc.), corporate banking (project finance, real estate finance, corporate finance, industrial finance, trade finance and services, loan syndications, etc.), and treasury (foreign exchange, derivatives, portfolio management, local and international brokerage, etc.) segments.
Recent developments
• During September 2006, in order to further strengthen its retail products basket, the bank introduced the ultimate credit card designed specifically for women – the ‘ladies only’ Visa credit card. The specially tailored credit card gives women financial freedom plus a unique range of value-added benefits, discounts and offers across a selection of the UAE’s top shops and stores. The card also combines the security and convenience that are the hallmark of all Visa products.
• In April 2006, the bank completed the roll-out of an anti-money laundering (AML) system across its entire network. The implementation of this system strengthens the bank’s corporate governance strategy and demonstrates the bank’s commitment to compliance.
• A three-year syndicated loan facility launched by FGB during February 2006, was
oversubscribed by 67.6%, prompting the bank to increase the facility to US$750mn. The bank announced that a total of US$838mn in subscriptions and commitments had been
Reuters Code:FGB.AD
Listing:Abu Dhabi Securities Market
CMP:AED �2.8 (As on �6th January, 2007)
First Gulf Bank
Key DataEPS (AED)*
BVPS (AED)*
P / E (x)
P / BV (x)
Avg. daily vol. (‘000)
52 week Lo - Hi (AED)
Market Cap (AED mn)
Target Price (AED)
�.�
6.8
��.3
�.9
686.8
��.25 – �9.48
�5,937.5
�4.9
Source: Global Research* Projected (2006)
Background
• First Gulf Bank PJSC (FGB) was established in �979 and headquartered in the UAE capital Abu Dhabi. The bank provides financial services to various business and industrial sectors and has a wide network of branches across the Emirates.
• FGB currently has branch network consisting of fourteen branches in UAE. It has an ATM network of about 20 ATMs concentrated mostly in the Emirates of Abu Dhabi and Dubai.
Buy
Global Research - UAE Global Investment House
84 UAE Banking Sector Report January 2007
received from 32 Gulf and international banks, leading to the decision to increase the original funding of US$500mn by 50%.
Analysis of financial performance – 2005
FGB outperformed our earnings estimates for 2005 on the back of a sharp increase in net interest income and non-interest income. Variation in reported profits was ��0.0% against our estimate. Net interest income of the bank was higher by 87.�% due to strong capital market activity. Even non-interest income was higher than our estimate by 47.4%.
FGB’s balance sheet size grew at a healthy CAGR of 74.�% for the period 2002-05. The size of the bank increased from AED4,983.9mn in 2002 to AED26,282.5mn in 2005. The bank witnessed strong growth during the last two years due to conducive economic environment. Asset size grew by 76.9% and �05.4% in 2004 and 2005 respectively.
During the period 2002-05, customer deposits grew at a CAGR of 62.8% from AED4,009.3mn in 2002 to AED�7,3�3.6mn in 2005. Growth in resource mobilization during the last two years was particularly strong. Deposits grew by 69.9% and 73.5% in 2004 and 2005 respectively. The contribution of customer deposits to balance sheet size declined from 80.4% in 2002 to 65.9% in 2005 due to strong increase in equity by mid-year 2005.
The growth in current account deposits was particularly strong during the period 2002-05 at 67.8% (CAGR). Time deposits grew at a CAGR of 64.9% for the same period. Contribution of term deposits to total deposits increased from 83.3% in 2002 to 86.6% in 2005. The share of current account deposits to total deposits increased from 9.�% in 2002 to �0.0% in 2005. However, due to the small contribution of current account deposits, it did not have a meaningful impact on margins. The share of current account and savings deposits to total customer deposits declined marginally to �0.5% in 2005 as compared to �0.8% in 2002. A thrust towards increasing the low cost deposit base will help the bank to increase its margins. Chart 1 Deposit Mix
Source: Company Reports, Global Research
100%
96%
92%
8.8%
84%
8.0%2002 2003 2004 2005
1.7%
5.9%
9.1%
83.3% 83.0%
9.3%
7.2%
0.5% 0.5%
2.6%
14.3%
82.6% 86.6%
10.0%
2.9%
0.5%
Time deposits Current account Call & other deposits Saving account
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 85
Other source of external funding for the bank has been medium term loans. In 2004, FGB obtained a loan of US$�75mn from a syndicate comprising of several foreign banks. The loan is repayable in November 2007, accrues an interest at the rate of LIBOR + 40bps, payable semi-annually and is subject to various terms, covenants and conditions. The share of the medium term loan to balance sheet size in 2004 was 5.0%.
In 2006, FGB obtained another loan of US$750mn from a syndicate comprising of several foreign and local banks. The loan is repayable in full in March 2009 and carries interest at the rate of LIBOR + 30bps plus mandatory cost payable semi-annually and is subject to various terms, covenants and conditions.
FGB’s gross lending portfolio grew at a CAGR of 63.2% from AED3,223.4mn in 2002 to AED�4,0�8.9mn in 2005. The net loan book grew at a CAGR of 69.8% from AED2,780.9mn in 2002 to AED�3,603.8mn in 2005. Gross loan to deposit ratio of the bank increased marginally from 80.4% in 2002 to 8�.0% in 2005.
The composition of the asset side indicates that the bank has sufficient scope to increase its loan to deposits ratio. Net loans as a percentage of the total balance sheet declined from 55.8% in 2002 to 5�.8% in 2005. Correspondingly, the share of deposits with banks has increased from �7.0% in 2002 to 26.3% in 2005. As lot of construction, real estate, manufacturing and infrastructure projects are in the pipeline, the bank is comfortably placed in terms of increasing its deployment to higher yielding earning assets. This will further help the bank to increase its core earnings, thereby negating the impact of capital market income received during the last two years.
Growth in lending to Government (�93.3%), energy (92.9%), real estate (9�.5%) and services (82.9%) segments growth were higher than the growth in overall gross loans (63.2%) for the period 2002-05. Personal loan portfolio of the bank grew at a CAGR of 50.2% from AED489.5mn in 2002 to AED�,658.0mn in 2005. The share of personal loans to overall gross loan book declined from �5.2% in 2002 to ��.8% in 2005. Lending toward share financing grew at a CAGR of 50.5% from AED453.5mn in 2002 to AED�,545.5mn in 2005. The contribution of share financing to overall loan book declined from �4.�% in 2002 to ��.0% in 2005. Deployment towards construction activity grew at a CAGR of �6.2% from AED585.8mn in 2002 to AED9�9.0mn in 2005.
The top four segments contributed 64.8% of the total gross loan portfolio in 2002. These segments were construction (�8.2%) followed by trading (�7.3%) followed by personal (�5.2%) and share financing (�4.�%) segments. However, in 2005 the top four segments in terms of economic activity contributed 55.9% of the total. The key contributing segments were real estate (�5.4%), Government (�3.9%), services (�3.9%) and trading (�2.7%). Trading is the only segment which is amongst the top four during both the years i.e. 2002 and 2005.
Global Research - UAE Global Investment House
86 UAE Banking Sector Report January 2007
Chart 2: Loan Break-up (2002)
Source: Company Reports, Global Research
Chart 3: Loan Break-up (2005)
Source: Company Reports, Global Research
Despite the strong growth in loan book during the period 2002-05, the bank’s asset quality in absolute terms improved significantly. Gross non-performing loans (NPLs) declined from AED508.0mn in 2002 to AED342.7mn in 2005. Even in percentage terms, asset quality of the bank has improved. NPLs to gross loans declined from �5.8% in 2002 to 2.4% in 2005. The coverage ratio of the bank increased from 87.�% in 2002 to �2�.�% in 2005.
9.5%
14.1%
18.2%
2.4%
9.9%
15.2%
2002
17.3%
5.6%
4.2%3.6%
11.0%
5.5% 15.4%
13.9%
12.7%
2005
13.9%
9.3%
3.5%1.9%
11.8%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 87
Chart 4: Asset Quality
Source: Company Reports, Global Research
The banks’ core income (net interest income) grew at a CAGR of 97.7% from AED��3.9mn in 2002 to AED879.7mn in 2005. Interest income of the bank increased from AED�53.4mn in 2002 to AED�,892.2mn in 2005, a CAGR growth of �3�.0%. Interest expended grew at a CAGR of �94.7% from AED39.6mn in 2002 to AED�,0�2.5mn in 2005.
However, during the last two years there was a lot of activity in the capital market. Buoyancy in the stock market coupled with lots of IPO’s boosted bank’s income. Interest earned related to subscription to IPO’s was AED�49.8mn in 2004 and AED992.8mn in 2005. Adjusted for this, interest income of the bank grew at a CAGR of 80.3% for the period 2002-05. Interest expense related to IPO subscription was AED89.3mn in 2004 and AED634.6mn in 2005. For the period 2002-05, adjusted interest expense of the bank grew at a CAGR of ��2.2%.
Adjusted for IPO related activities, the bank’s core income (adjusted net interest income) grew at a CAGR of 66.�% for the period under consideration. Adjusted core income grew from AED��3.9mn in 2002 to AED52�.4mn in 2005.
Chart 5: Core income
Source: Company Reports, Global Research
20.0%
15.0%
15.0%
10.0%
5.0%
0.0%2002 2003 2004 2005
140.0%
120.0%
100.0%
80.0%
60.0%
NPLs to gross loans Coverage
15.8% 6.1% 4.3% 2.4%
121.1%
109.5%90.8%
87.1%
550
450
350
250
150
50
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%2005200420032002
Net interest income adjusted for IPOs
Growth in adjusted net interest income
AED m
n
30.1%
113.9 175.6
54.2%
39.7%
245.2 521.4
112.6%
Global Research - UAE Global Investment House
88 UAE Banking Sector Report January 2007
Non-interest income… Key earnings driver
During the last three years, non-commission income grew at a CAGR of �20.6% from AED50.7mn in 2002 to AED543.9mn in 2005. Due to the buoyancy in the capital market, the bank witnessed strong growth from investment income. The key contributor in non-interest income has been changes in fair value of investments and gain on disposal of investments. These two contributed almost 50% of the total non-interest income in 2005 as compared to around 20% in 2002.
Fees and commission on credit cards grew at a CAGR of 3�3.8% for the period under consideration. The penetration level of credit cards is low in UAE, and this offers tremendous growth opportunities for the bank. Increasing penetration levels of credit cards is likely to generate stable source of fee income. However the contribution of credit card fee income to total non-commission income is just 3.0% of the total.
Due to the buoyant capital markets during the last two years, broking business was strong. Broking income increased from AED5.2mn in 2004 to AED56.6mn in 2005. Going forward, we expect broking income is likely to contribute more to the overall non-interest income stream.
As a percentage of total, equity brokerage income contributed �0.4%. With the deepening of the capital market by way of increasing breadth and depth of the market, we believe, broking income is likely to be a key contributor to the total non-interest income stream.
The share of commission and fee income to total declined from 47.6% in 2002 to 22.4% in 2005. In order to shore up its fee income revenue stream, the bank is trying to increase its cross sell ratio by offering innovative products. By doing this, the business activity of the bank is likely to get a further fillip resulting in enhanced fee and commission income.
Table 1: Composition of Non-interest income
AED mn 2002 2003 2004 2005CAGR
2002-05Changes in fair value of invt. carried at fair value through income statement
7.3 22.� 49.9 207.5 204.9%
Gain on disposal of investments 2.6 0.5 0.� 63.9 �90.5%Other investment income �.7 �.4 2.0 2.0 5.7%Total investment income 11.6 24.0 52.0 273.4 186.6%Commission income �6.5 30.8 43.6 54.7 49.0%Fee income 7.6 �4.7 28.7 67.0 �06.6%Fee income related to IPO services - - 24.2 �7.6 NA Equity brokerage income - - 5.2 56.6 NA Forex and derivative income 8.9 ��.9 �8.2 29.2 48.4%Fees and commissions on credit cards 0.2 4.2 9.8 �6.4 3�3.8%Other income 5.7 7.4 7.3 29.0 7�.5%Total non-interest income 50.7 93.0 188.9 543.9 120.6%
Source: Company Reports, Global Research
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 89
Margins… Driven By IPO Related Income
The net interest margins of the bank increased from 2.7% in 2002 to 4.7% in 2005. However, this includes the income from IPO subscription. Adjusted for this, net interest margin of the bank increased from 2.7% in 2002 to 2.8% in 2005. Yield on interest earning assets increased from 3.6% in 2002 to �0.�% in 2005. Adjusted yield on interest earning assets increased by �20bps from 3.6% in 2002 to 4.8% in 2005. On the funding side, cost of funds increased from �.�% in 2002 to 7.3% in 2005. Adjusted cost of funds increased by �6�bps from �.�% in 2002 to 2.7% in 2005.
Improving efficiency ratios
Cost to income ratio of the bank declined from 46.�% in 2002 to �6.4% in 2005. During the period 2002-05, operating overheads grew at a CAGR of 45.5% from AED75.8mn in 2002 to AED233.5mn in 2005. On the other hand, strong growth in core income coupled with robust growth in non-interest income resulted in income growth of �05.3% (CAGR) for the period under consideration.
In order to gauge operating efficiency and to remove the impact of capital market activity, operating expense (opex) to average assets is likely to give a better picture. Opex to average assets declined from �.8% in 2002 to �.2% in 2005. In our opinion, the operating efficiency of the bank has improved as is evident from the decline in operating overheads to average assets.
Chart 6: Cost Structure
Source: Company Reports, Global Research
Core earnings to lead growth…
Net profit of the bank grew at a CAGR of �35.7% for the period 2002-05. Profits increased from AED80.6mn in 2002 to AED�,055.7mn in 2005. This was on the back of robust growth in net interest income and non-interest income, which grew at a CAGR of 97.7% and �20.6% respectively during the last three years.
50.0%
40.0%
30.0%
20.0%
10.0%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%2005200420032002
46.1%
1.8%
1.9%
42.3% 28.2%
1.4%
1.2%
16.4%
Opex to average assetsCost to income
Global Research - UAE Global Investment House
90 UAE Banking Sector Report January 2007
Return ratios namely return on average equity (ROAE) and return on average assets (ROAA) increased due to the strong growth in profitability of the bank during the last three years. ROAE increased from �3.3% in 2002 to 22.8% in 2005. Correspondingly, ROAA increased from �.9% in 2002 to 5.4% in 2005. Due to the conversion of convertible bonds and a rights issue in 2005, the bank’s capital adequacy ratio increased from �6.�% in 2004 to 37.6% in 2005. The bank’s total capital grew at a CAGR of �25.7% during the last three years as against a growth in risk-adjusted assets (both on and off-balance sheet) of 68.3%.
The bank is comfortably capitalized to support strong growth in risk-adjusted assets over the next two to three years. Efficient utilization of capital is likely to deliver robust growth in core earnings as there are a lot of projects in the pipeline.
Chart 7: Return Ratios
Source: Company Reports, Global Research
30.0%
25.0%
20.0%
15.0%
10.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%2005200420032002
13.3%
1.9%2.0%
17.2%
2.4%
20.1% 22.8%
5.4%
ROAE ROAA
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 9�
Analysis of Nine-Month Performance 2006
• FGB’s balance sheet size grew by 44.6% y-o-y from AED25.0bn in 3Q2005 to AED36.�bn in 3Q2006. Sequentially, asset size increased by 7.0% from AED33.8bn in 2Q2006 to AED36.�bn in 3Q2006. During the year 2006, the bank has witnessed strong growth in core banking operations as is evident from the 37.5% year-to-date growth in balance sheet size.
• On the funding side, the bank’s customer deposits witnessed strong growth year-to-date. Yearly growth in customer deposits was 43.0% from AED�6.�bn in 3Q2005 to AED22.9bn in 3Q2006. On a q-o-q basis, deposits increased by �3.0% from AED20.3bn in 2Q2006 to QED22.9bn in 3Q2006.
• The credit portfolio of the bank increased by 96.9% on a yearly basis. Sequentially, net loan book increased from AED�9.7bn in 2Q2006 to AED22.3bn in 3Q2006, a growth of �3.4%. Year-to-date, net loans registered strong growth of 64.3%.
• Investments of the bank increased from AED�.7bn in 3Q2005 to AED4.0bn in 3Q2006, registering a growth of �32.9% y-o-y. Year-to-date, the growth in the investment book stood at 40.9%. However, on a sequential basis, the investment book declined by 7.0% from AED4.3bn in 2Q2006 to AED4.0bn in 3Q2006.
Table 2: Key Balance Sheet ItemsAED mn 3Q2005 2005 2Q2006 3Q2006 y-o-y q-o-q y-t-dInvestments �,73�.0 2,862.2 4,335.8 4,03�.5 �32.9% -7.0% 40.9%Net Loans ��,35�.7 �3,603.8 �9,7�2.7 22,346.3 96.9% �3.4% 64.3%Customer Deposits �6,067.2 �7,3�3.6 20,339.0 22,974.8 43.0% �3.0% 32.7%Balance Sheet Size 24,99�.6 26,282.5 33,778.3 36,�34.3 44.6% 7.0% 37.5%
Source: Company Report, Global Research
• Net profit of the bank increased from AED7�5.2mn in 9M2005 to AED�,�4�.4mn in 9M2006, a growth of 59.6% on the back of strong growth in net interest income (6�.0%) and non-interest income (56.6%).
• During the nine month period for 2006, there were three extraordinary items, which helped in strong growth in non-interest income.
• Firstly during 2Q2006, the bank realized gain on revaluation of investment property to the tune of AED45.2mn.
• Secondly, effective �st April 2006, FGB sold 43.75% of its 80% shareholding in First Gulf Financial Services LLC. Accordingly, it ceased consolidating accounts of its subsidiary from that date and the remaining 45% investment in FGFS was thereafter accounted for using the equity method of accounting applicable to investment in associates. By selling its stake in the subsidiary, the bank realized a gain of AED97.5mn.
Global Research - UAE Global Investment House
92 UAE Banking Sector Report January 2007
• Thirdly, during 3Q2006, the bank received a Government Grant by way of an investment property representing a plot of land granted by the Government of Abu Dhabi. The fair value of the grant was recorded as part of other income to the extent of AED�64.6mn.
Table 3: Income StatementAmount AED mn 3Q2005 3Q2006 % 9M2005 9M2006 %Interest income 439.4 6�8.3 40.7% �,383.6 �,8�4.3 3�.�%Income from Islamic financing - 5.0 - - 226.5 -Interest expense (2�2.2) (373.2) 75.8% (806.9) (�,0�3.7) 25.6%Islamic financing expense - (3.0) - - (98.5) -Net interest income 227.14 247.14 8.8% 576.70 928.59 61.0%Investment income 52.4 23.5 -55.�% �76.7 �8.3 -89.7%Commission income �3.3 �9.0 43.6% 4�.� 54.7 32.9%Fee income 25.� 35.0 39.2% 6�.6 93.8 52.3%Brokerage and fund mngt. Fee income ��.9 5.8 -5�.3% 50.� 28.7 -42.7%Foreign exchange income 5.9 �4.3 �43.4% �6.9 3�.7 88.0%Fees and commission on credit cards - �3.� - 6.6 26.2 299.5%Government Grant - �64.6 - - �64.6 NAGain on revaluation of invt. Property - - - - 45.2 NAGain on sale of invt in subsidiary - - - - 97.5 NAOther income �2.8 �2.2 -4.7% 26.9 34.0 26.7%Total non-interest income 121.4 287.6 137.0% 379.9 594.7 56.6%Provision for loan losses (39.8) (40.8) 2.5% (78.2) (��3.9) 45.5%Operating income 308.7 494.0 60.0% 878.4 �,409.5 60.5%General and administrative expenses (58.2) (99.8) 7�.4% (�63.20) (268.05) 64.2%Profit for the period 250.5 394.2 57.3% 715.2 1,141.4 59.6%
Source: Company Report, Global Research
• Provision for loan losses for 9M2006 stood at AED��3.9mn as compared to AED78.2mn for 9M2005, a growth of 45.5%. Operating overheads too registered an increase of 64.2% for the period under consideration. The strong increase in overheads is primarily due to support strong growth in business volumes.
• Net profit of the bank increased by 57.3% from AED250.5mn in 3Q2005 to AED394.2mn in 3Q2006. This in on the back of a sharp increase in non-interest income, which registered a growth of �37.0% in 3Q2006 as compared to the same quarter last year.
• Core income (as defined as net interest income) for the third quarter of 2006 stood at AED247.�mn as against AED227.�mn in 3Q2005, a growth of 8.8%. However, non-interest income increased from AED�2�.4mn in 3Q2005 to AED287.6mn in 3Q2006, a growth of �37.0%. During the third quarter of 2006, the bank received a Government Grant (as explained earlier) to the tune of AED�64.6mn.
• Provision for loan losses for 3Q2005 stood at AED39.8mn as compared to AED40.8mn in 3Q2006, a marginal growth of 2.5%. However, operating costs increased substantially from AED58.2mn in 3Q2005 to AED99.8mn in 3Q2006, registering a growth of 7�.4%. In order to support business growth, operating expenses of the bank are witnessing an increasing trend.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 93
• Due to the strong capital market activity in �Q2006, the bank witnessed a sharp increase in net interest income as compared to �Q2005. However, for 2Q2006 and 3Q2006, the net interest income of the bank is from core banking operations. Chart 8: Quarterly Core Income
Source: Company Report, Global Research
• FGB’s cost to income ratio during the last 6 quarters has been in the range of �4 – �9%. As at 3Q2006, the bank’s cost to income ratio stood at �8.7%. Opex (Operating expense) to average assets of the bank as at 3Q2006 stood at 0.9%.
Chart 9: Quarterly Cost Structure
Source: Company Report, Global Research
500.0
400.0
300.0
200.0
100.0
-
600.0%
400.0%
200.0%
0.0%
-200.0%3Q20062Q20061Q20064Q20053Q20052Q20051Q2005
Net interest income Growth in NII
AED
mn
74.1
37.8%
275.4
382.3%
2522.%
132.4%
227.1 303.0 451.5
509.1%
-16.5%
229.9 247.1
8.8%
30.0%
20.0%
10.0%
1.6%
1.2%
0.8%
0.4%
0.0%3Q 20062Q 20061Q 20064Q 20053Q 20052Q 20051Q 2005
Cost to income ratio Opex to average assets
0.4%14.1%
16.7%
15.1%16.5%
0.6%17.6%
0.9%
18.7%
0.2%
1.2%
1.0%
0.7%
25.6%
Global Research - UAE Global Investment House
94 UAE Banking Sector Report January 2007
Outlook
• Till 2000, the bank had a strong focus on corporate lending. Since 200�, new retail products like treasury and investments were launched. FGB was the first bank to issue convertible bonds. Currently, the strategy is to put core banking solutions in place and hive-off non-banking businesses into its subsidiaries.
• During the last three years, the credit deployment to consumer, construction & real estate and manufacturing segments was particularly strong. Corporate segments contributes half of overall revenues. Revenues from the consumer segment, the share is 35% and balance is from treasury operations. The bank is targeting the high net-worth individuals to shore-up its wealth management business segment.
• A number of real estate friendly regulations is likely to give a further fillip to the real estate sector. The bank is getting the business of housing finance from Department of Finance. Currently, the housing finance portfolio of the bank is around AED3bn.
• Changing demographics and the increasing expatriate population is likely to boost the consumer lending segment. Going forward, consumer lending is likely to be the key growth driver over the next two years.
• Branch expansion is going to be in the domestic segment. In 2005, the total number of branches of the bank were ��. Number of ATMs as at end 2005 stood at 20. In the current fiscal, more branches are likely to be opened. The bank’s emphasis on increasing its alternative delivery channels i.e. ATM network will help reduce transaction cost and thereby increase operating efficiency.
• As at end 2005, the bank’s employee strength was 575 employees. The Emiratisation ratio of the bank stood at 33% in 2005. In order to improve the cross-sell ratio, the bank has been hiring direct sales agents, which are being outsourced.
• As at end of first half 2006, the bank’s CAR was around 27%. Given the high CAR, the bank has sufficient cushion to support strong growth in risk-adjusted assets. This is likely to further drive core revenues and thereby enhance earnings growth.
Valuation:
Based on the current market price of AED�2.8, the stock is trading at ��.3x 2006E earnings and �.9x 2006E book value. The stock is trading at 9.0x 2007E earnings and �.7x 2007E book value. Based on strong fundamentals, improving asset quality and comfortable capital adequacy to support growth, we upgrade the stock to BUY from HOLD. We recommend a BUY on the stock with a target price of AED�4.9 (upside �6.9%).
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 95
Bal
ance
She
etF
GB
AE
D m
n20
0320
0420
0520
06F
2007
F20
08F
2009
FA
sset
sC
ash
bala
nces
2
�.4
53.
5 5
5.9
67.
8 7
3.2
77.
4 9
2.4
Bal
ance
s w
ith C
entr
al B
ank
�94
.8
�,2
32.0
2
,297
.�
4,2
49.6
4
,942
.2
5,3
�7.8
5
,434
.8
Dep
osit
with
ban
ks 5
44.8
3
,497
.5
6,8
99.5
�
2,07
4.�
�5,
273.
7 �
8,36
6.6
22,
085.
9 L
oans
& A
dvan
ces
(net
) 5
,056
.8
6,5
32.�
�
3,60
3.8
25,
35�.
3 3
�,9�
4.7
39,
530.
5 4
6,37
4.�
Non
-tra
ding
inve
stm
ents
�,2
35.6
�
,089
.2
2,8
62.2
4
,293
.4
4,9
65.�
5
,645
.7
6,3
�0.3
O
ther
ass
ets
5�.
4 2
09.3
3
45.3
5
�7.9
6
3�.8
7
58.2
8
94.6
Pr
oper
ty &
Equ
ipm
ent
�28
.8
�83
.2
2�8
.8
323
.9
373
.5
424
.�
472
.8
Tot
al A
sset
s 7
,233
.6
12,
796.
8 2
6,28
2.5
46,
877.
9 5
8,17
4.3
70,
120.
4 8
1,66
4.9
Lia
bilit
ies
Due
to b
anks
488
.4
257
.5
�82
.4
29�
.9
394
.0
472
.8
576
.8
Cus
tom
er d
epos
its 5
,87�
.0
9,9
77.2
�
7,3�
3.6
33,
76�.
4 4
4,�9
3.7
54,
579.
3 6
7,�3
2.5
Med
ium
term
loan
-
642
.8
642
.8
3,3
97.5
2
,754
.8
2,7
54.8
-
O
ther
Lia
bilit
ies
94.
3 �
42.4
3
05.0
4
57.5
5
7�.9
6
86.2
8
30.3
T
otal
Lia
bilit
ies
6,4
53.8
1
1,01
9.9
18,
443.
7 3
7,90
8.3
47,
914.
3 5
8,49
3.0
68,
539.
6 Sh
areh
olde
rs’
Equ
ity
Paid
-up
equi
ty c
apita
l 3
89.4
3
89.4
�
,000
.0
�,2
50.0
�
,250
.0
�,2
50.0
�
,250
.0
Prop
osed
bon
us s
hare
s -
�
9.5
250
.0
-
-
-
-
Spec
ial r
eser
ves
6�.
� 8
5.6
�9�
.�
332
.2
5�0
.�
625
.0
625
.0
Leg
al r
eser
ves
90.
5 �
�4.9
5
,305
.�
5,3
05.�
5
,305
.�
5,3
05.�
5
,305
.�
Gen
eral
res
erve
20.
0 2
0.0
�20
.0
�20
.0
�20
.0
�20
.0
�20
.0
Cum
ulat
ive
chan
ges
in f
air
valu
es -
-
�
09.0
�
09.0
�
09.0
�
09.0
�
09.0
R
etai
ned
earn
ings
�09
.3
�99
.0
528
.�
�,3
09.4
2
,2��
.7
3,2
53.7
4
,496
.6
Fair
val
uatio
n re
serv
e 7
0.7
70.
7 7
0.7
70.
8 7
�.0
7�.
� 7
�.3
Man
dato
ry c
onve
rtib
le b
onds
-
800
.0
-
-
-
-
-
Min
ority
Int
eres
t -
-
�
4.6
-
-
-
-
Prop
osed
div
iden
ds 3
8.9
77.
9 2
50.0
4
72.9
6
83.0
8
93.4
�
,�48
.2
Tot
al S
hare
hold
ers’
Equ
ity
779
.8
1,7
76.9
7
,838
.7
8,9
69.6
1
0,25
9.9
11,
627.
3 1
3,12
5.3
Tot
al L
iabi
litie
s &
Sha
reho
lder
s’ E
quit
y 7
,233
.6
12,
796.
8 2
6,28
2.5
46,
877.
9 5
8,17
4.3
70,
120.
4 8
1,66
4.9
Global Research - UAE Global Investment House
96 UAE Banking Sector Report January 2007
Inco
me
Stat
emen
tF
GB
AE
D m
n20
0320
0420
05 2
006F
2
007F
2
008F
2
009F
In
tere
st in
com
e 2
22.8
4
82.8
�
,892
.2
2,8
2�.4
3
,854
.6
4,4
93.6
5
,334
.7
Inte
rest
exp
ense
(47
.2)
(�7
7.0)
(�,
0�2.
5) (
�,57
2.9)
(2,
085.
0) (
2,4�
7.5)
(2,
9�7.
�)N
et in
tere
st in
com
e 1
75.6
3
05.8
8
79.7
1
,248
.5
1,7
69.7
2
,076
.1
2,4
17.6
N
et c
omm
issi
on in
com
e 4
9.7
�06
.3
�55
.7
225
.8
3�6
.�
39�
.9
470
.3
Inve
stm
ent s
ecur
ities
inco
me
24.
0 5
2.0
273
.4
�66
.8
�03
.6
�07
.8
�08
.0
Oth
er o
pera
ting
inco
me
�9.
3 3
0.6
��4
.8
300
.�
2�0
.5
244
.2
278
.4
Tot
al N
on-i
nter
est
inco
me
93.
0 1
88.9
5
43.9
6
92.7
6
30.2
7
43.9
8
56.7
L
oan
loss
pro
visi
ons
(33
.9)
(��
0.0)
(�2
2.8)
(�6
8.6)
(�7
9.7)
(22
6.9)
(24
7.6)
Ope
ratin
g in
com
e 2
34.6
3
84.7
�
,300
.7
�,7
72.6
2
,220
.�
2,5
93.�
3
,026
.8
Staf
f co
sts
(67
.3)
(83
.4)
(�3
8.3)
(22
4.5)
(27
8.2)
(33
8.8)
(40
5.6)
Oth
er o
pera
ting
expe
nses
(39
.9)
(48
.6)
(80
.3)
(�2
0.4)
(�4
2.0)
(�6
4.8)
(�8
7.8)
Dep
reci
atio
n (
6.5)
(7.
7) (
�5.0
) (
�6.6
) (
20.9
) (
23.5
) (
26.4
)T
otal
ope
ratin
g ex
pens
es (
��3.
7) (
�39.
7) (
233.
5) (
36�.
5) (
44�.
2) (
527.
�) (
6�9.
8)N
et P
rofi
t �
20.9
2
44.9
�
,067
.2
�,4
��.2
�
,779
.0
2,0
66.0
2
,407
.0
Atti
buta
ble
to:
Min
ority
inte
rest
-
-
��.
5 -
-
-
-
N
et P
rofi
t 1
20.9
2
44.9
1
,055
.7
1,4
11.2
1
,779
.0
2,0
66.0
2
,407
.0
P&
L A
ppro
pria
tion
Acc
ount
:O
peni
ng B
alan
ce 5
3.7
109
.3
199
.0
528
.1
1,3
09.4
2
,211
.7
3,2
53.7
N
et P
rofi
t for
the
year
�20
.9
244
.9
�,0
55.7
�
,4��
.2
�,7
79.0
2
,066
.0
2,4
07.0
T
rans
fer
to le
gal r
eser
ves
(�2
.�)
(24
.5)
(�0
5.6)
(�4
�.�)
(�7
7.9)
(��
4.9)
-
Tra
nsfe
r to
sta
tuto
ry r
eser
ves
(�2
.�)
(24
.5)
-
-
-
-
-
Tra
nsfe
r to
gen
eral
res
erve
s -
-
(
�00.
0) -
-
-
-
B
oard
of
dire
ctor
s re
mun
erat
ion
(2.
2) (
2.8)
(�5
.8)
(�5
.8)
(�5
.8)
(�5
.8)
(�5
.8)
Cas
h D
ivid
end
(38
.9)
(77
.9)
(25
0.0)
(47
2.9)
(68
3.0)
(89
3.4)
(�,
�48.
2)In
tere
st o
n m
anda
tory
con
vert
ible
bon
ds -
(
6.�)
(5.
�) -
-
-
-
St
ock
Div
iden
ds -
(
�9.5
) (
250.
0) -
-
-
-
C
losi
ng B
alan
ce 1
09.3
1
99.0
5
28.1
1
,309
.4
2,2
11.7
3
,253
.7
4,4
96.6
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 97
Cas
h F
low
Sta
tem
ent
FG
B
AE
D m
n20
0320
0420
0520
06F
2007
F20
08F
2009
FO
pera
ting
Ope
ratin
g A
ctiv
ities
�
33.3
3
�0.4
9
30.9
�
,4�3
.7
�,8
60.2
2
,�92
.8
2,5
57.�
N
et p
rofi
t �
20.9
2
44.9
�
,067
.2
�,4
��.2
�
,779
.0
2,0
66.0
2
,407
.0
Dep
reci
atio
n 6
.5
7.7
�
5.0
�6.
6 2
0.9
23.
5 2
6.4
Inve
stm
ent s
ecur
ities
inco
me
-
-
-
(�6
6.8)
(�0
3.6)
(�0
7.8)
(�0
8.0)
Impa
irm
ent o
f lo
ans
& a
dvan
ces
33.
9 �
�0.0
�
22.8
�
68.6
�
79.7
2
26.9
2
47.6
G
ain
on s
ale
of f
ixed
ass
ets
(3.
3) -
(
0.0)
-
-
-
-
Gai
n on
sal
e of
trad
ing
inve
stm
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-
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-
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-
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ash
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5.�
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end
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2 7
7.4
92.
4
Global Research - UAE Global Investment House
98 UAE Banking Sector Report January 2007
FACT SHEETFGB
2003 2004 2005 2006F 2007F 2008F 2009FProfitability
- Return on Average Assets 2.0% 2.4% 5.4% 3.9% 3.4% 3.2% 3.2%- Return on Average Equity �7.2% 20.�% 22.8% �7.6% �9.7% 20.3% 2�.2%- Net interest income / Op. Income after Provisions for Loan Losses 60.4% 50.9% 58.2% 60.9% 7�.6% 7�.3% 7�.7%- Non-interest income / Op. Income after Provisions for Loan Losses 39.6% 49.�% 4�.8% 39.�% 28.4% 28.7% 28.3%
Margins- Net income / Revenues 54.3% 50.7% 55.8% 50.0% 46.2% 46.0% 45.�%- Operating profit / Revenues 54.3% 50.7% 56.4% 50.0% 46.2% 46.0% 45.�%- Interest Expense to Interest Income 2�.2% 36.7% 53.5% 55.7% 54.�% 53.8% 54.7%- Interest Income to Interest Earning Assets 3.7% 5.0% �0.�% 8.0% 7.6% 7.2% 7.2%- Adj. Interest Income to Interest Earning Assets 3.7% 3.4% 4.8% 8.0% 7.6% 7.2% 7.2%- Investment Income to Investment Assets 8.8% �6.�% 46.6% �7.0% 8.0% 7.0% 6.0%- Interest Expense to Interest Bearing Liabilities 0.9% 2.�% 7.3% 6.�% 5.3% 4.9% 4.8%- Adj. Interest Expense to Interest Bearing Liabilities 0.9% �.�% 2.7% 6.�% 5.3% 4.9% 4.8%- Net Spread 2.8% 2.9% 2.8% �.9% 2.3% 2.4% 2.5%- Adj. Net Spread 2.8% 2.4% 2.�% �.9% 2.3% 2.4% 2.5%- Net Interest Margin 2.9% 3.2% 4.7% 3.5% 3.5% 3.3% 3.3%- Adj. Net Interest Margin 2.9% 2.5% 2.8% 3.5% 3.5% 3.3% 3.3%
Efficiency-Cost / Op. Income after Provisions for Loan Losses 48.5% 36.3% �8.0% 20.4% �9.9% 20.3% 20.5%- Staff Expense / Op. Income after Provisions for Loan Losses 28.7% 2�.7% �0.6% �2.7% �2.5% �3.�% �3.4%- Cost to Average Total Assets �.9% �.4% �.2% �.0% 0.8% 0.8% 0.8%
Liquidity- Loans to Interest Earning Assets 75.7% 55.8% 55.4% 57.2% 57.9% 59.4% 59.9%- Loans to Customer Deposits 9�.2% 68.7% 8�.0% 76.8% 73.9% 74.2% 70.9%- Customer Deposits to Equity 792.4% 587.2% 228.6% 397.4% 46�.5% 508.5% 560.5%- Due from Banks to Due to Banks ���.6% �358.5% 3782.4% 4�37.0% 3876.5% 3884.6% 3828.8%
Credit Quality- Provisions to Average Gross Loans 0.8% �.8% �.2% 0.8% 0.6% 0.6% 0.6%- Non Performing Loans (AED ‘000) 328,867 298,352 342,724 456,029 545,320 660,243 773,7�7 - Loan Loss Reserve (AED ‘000) 298,59� 326,63� 4�5,�40 583,7�8 763,447 990,364 �,237,947 - NPLs to Gross Loans 6.�% 4.3% 2.4% �.8% �.7% �.6% �.6%- NPLs to (Equity + Loan Loss Reserve) 3�.6% �4.7% 4.3% 5.0% 5.3% 5.6% 5.9%- Loan Loss Reserve to Gross Loans 5.6% 4.8% 3.0% 2.3% 2.3% 2.4% 2.6%- NPL Coverage 90.8% �09.5% �2�.�% �28.0% �40.0% �50.0% �60.0%
Capital Adequacy- Equity to Total Assets �0.2% �3.3% 28.8% �8.�% �6.5% �5.3% �4.7%- Equity to Gross Loans �3.8% 24.8% 54.0% 32.8% 29.3% 26.5% 25.2%
Constitution of Total Income- Net commission income / Op. Income after Provisions for Loan Losses 2�.2% 27.6% �2.0% �2.7% �4.2% �5.�% �5.5%- Investment securities income / Op. Income after Provisions for Loan Losses �0.2% �3.5% 2�.0% 9.4% 4.7% 4.2% 3.6%- Other operating income / Op. Income after Provisions for Loan Losses 8.2% 8.0% 8.8% �6.9% 9.5% 9.4% 9.2%
Operating Performance- Change in Net Interest Income after Provisions for Loan Losses 34.0% 38.2% 286.7% 42.7% 47.2% �6.3% �7.4%- Change in Other Income 3�.5% 58.5% 275.0% �6�.3% -29.8% �6.0% �4.0%
Ratios Used for Valuation- Shares in Issue (‘000) 389,376 389,376 �,000,000 �,250,000 �,250,000 �,250,000 �,250,000 - EPS (AED) 0.3 0.6 �.� �.� �.4 �.7 �.9 - Book Value Per Share (AED) �.9 4.4 7.6 6.8 7.7 8.6 9.6 - Market Price Year End (AED) * 8.2 �7.3 �7.3 �2.2 �2.8 �2.8 �2.8 - P/E (x) 26.4 27.5 �6.4 �0.8 9.0 7.7 6.6 - P/BV (x) 4.3 4.0 2.3 �.8 �.7 �.5 �.3 - Dividend yield (%) �.2 �.4 2.9 3.� 4.3 5.6 7.2 - Dividend pay-out ratio (%) 32.2 3�.8 23.7 33.5 38.4 43.2 47.7
* Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report 99
• The bank provides an array of products and services that include various deposit products, Credit Cards, Consumer Lending, Trade Finance, Project Finance, Electronic Funds Transfer at Point-of-Sales, Automated Teller Machines, Call Center, Treasury, Correspondent Banking, Online Banking and GSM banking, all founded on the most contemporary technology and service excellence.
Recent Developments
• In January 2007, Moody’s Investors Service assigned an A3 rating to the upcoming subordinated notes to be issued by the bank. The floating rate subordinated notes due 20�7 are part of a US$2bn EMTN programme, assigned an A2 rating for senior notes and an A3 rating for subordinated notes. The A2 senior debt rating is at the same level as the A2 foreign currency deposit rating already assigned to Mashreqbank. All ratings carry stable outlooks. Moody’s existing ratings for the bank, of A2/Prime-� for long- and short-term foreign currency deposits and C- for financial strength, reflect the bank’s growing franchise value within the UAE, its good financial fundamentals and its growing importance and significance to the financial system in the UAE and in particular to the economy of Dubai.
• In August 2006, the bank announced its plans to launch an independent Islamic finance subsidiary by appointing its Shariah Board, to be called “BADR AL ISLAMI”. BADR AL ISLAMI will offer full range of Islamic financial services, retail, corporate and investment banking with an initial capital of AED500mn. The subsidiary will be led by
Reuters Code:MASB.DU
Listing:Dubai Financial Market
CMP:AED 270 (As on �6th January, 2007)
Mashreq Bank
Key DataEPS (AED)*
BVPS (AED)*
P / E (x)
P / BV (x)
Avg. daily vol.(‘000)
52 week Lo / Hi (AED)
Market Cap (AED mn)
Target Price (AED)
�6.4
82.6
�6.5
3.3
5.6
260.0 – 327.5
23,387.3
257.7
Source: Global Research* Projected (2006)
Background
• Mashreqbank psc is one of the leading banks in the United Arab Emirates (UAE), with total assets as at 3�st December, 2005, of AED45.7bn (US$�2.5bn), making it the largest private bank in the UAE. It is the second oldest commercial bank in the UAE having originally been established as Bank of Oman Ltd. in �967 in Dubai.
Hold
Global Research - UAE Global Investment House
�00 UAE Banking Sector Report January 2007
a fully independent management team, having the most experienced individuals in the fields of Islamic banking from around the region.
Analysis of financial performance – 2005
Mashreq Bank outperformed our earnings estimate for 2005 by a margin (49.3%) on the back of a sharp increase in non-interest income. Customer deposits was higher by �5.6% as compared to our estimate of AED25.96bn for 2005. Correspondingly, balance sheet size was higher by �4.2% as against our forecast of AED40.�bn.
Gross loans and net loans was higher by �.4% and 3.3% respectively as against our projections. Variation in profits was 49.3%, primarily due to strong increase in non-interest income. Within that, investment income was particularly strong, which resulted in strong growth in profits for the bank.
Customer deposits grew at a CAGR of 2�.5% during the last three years from AED�6.7bn in 2002 to AED30.0bn in 2005. Within deposits, current account and other deposits increased from AED2.4bn in 2002 to AED5.�bn in 2005, a CAGR of 28.3%. The contribution of current account and other deposits to overall deposits increased from �4.5% in 2002 to �7.�% in 2005.
Savings account deposits declined by 4.6% for the period under review from AED46�.9mn in 2002 to AED40�.6mn in 2005. Share of savings deposits to total deposits declined from 2.8% in 2002 to �.3% in 2005. Time deposits registered a 2�.0% CAGR during the last three years from AED�3.8bn in 2002 to AED24.5bn in 2005. Proportion of time deposits to the total deposit base declined from 82.7% in 2002 to 8�.6% in 2005.
Chart 1: Deposit Mix
Source: Company Reports, Global Research
Gross loans of the bank grew at a CAGR of �8.4% from AED�3.9bn in 2002 to AED23.�bn in 2005. With reforms in the regulatory regime expected and government plans to accelerate privatization, the buoyancy on the lending front is likely to remain strong. On the other hand, Government spending on infrastructure projects and growth in the real estate market kept the construction sector buoyant.
100%
90%
80%
70%2002 2003 2004 2005
Time deposits Current & other accounts Savings
82.7% 83.3%
14.5%14.5%
2.8% 2.2% 2.0%
16.9%
81.1% 81.6%
17.1%
1.3%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �0�
Consumer lending and trade segments witnessed strong growth during the last three years. Personal loan portfolio of the bank increased from AED4.7bn in 2002 to AED6.5bn in 2005. The share of personal loans to overall gross loan book declined from 33.9% in 2002 to 28.0% in 2005. Deployment to the trade sector increased from AED3.�bn in 2002 to AED5.8bn in 2005. Contribution of the trade sector to the total gross loan portfolio increased from 22.�% in 2002 to 24.9% in 2005.
Chart 2: Loan Break-Up (2005) Chart 3: Loan Break-Up (2002)
Source: Company Reports, Global Research Source: Company Reports, Global Research
Gross loans to deposit ratio (LDR) of the bank declined from 83.3% in 2002 to 77.0% in 2005. During the same period, customer deposits grew at a CAGR of 2�.5% and gross lending book grew at a CAGR of �8.4%. The LDR as at end 2005 stood at 77.0%, leaving enough headroom to increase thrust towards loan deployment.
Chart 4: Loans to deposit
Source: Company Reports, Global Research
Manufacturing13.6%
Banks & Fls.0.5%
Personal33.9%
Other7.0%
2002
Construction7.1%
Trade22.1%
Transport &communication
3.8%
Services11.4%
Government/Public sector
7.02%
Manufacturing9.6%
Banks & Fls.14.7%
Personal28.0%
Other1.4%
2005
Construction8.1%
Trade24.9%
Transport &communication
2.8%
Services9.0%
Government/Public sector
1.6%
35.0
30.0
25.0
20.0
15.0
10.02002 2003 2004 2004
Gross Loans Customer Deposits Gross Loans to Deposits
AED
mn
83.3%
16.7
13.915.4
18.8
82.1%
87.3%
21.1
18.4
23.1
30.0
77.0%
100.0%
95.0%
90.0%
85.0%
80.0%
75.0%
70.0%
Global Research - UAE Global Investment House
�02 UAE Banking Sector Report January 2007
Non-Performing Loans
Despite �8.4% growth in gross lending book during the last three years, non-performing loans (NPLs) of the bank witnessed a sharp improvement. NPLs declined from AED�.4bn in 2002 to AED0.4bn in 2005, a decline of almost 34.7% during the period under consideration. Lending growth has been strong for the bank, however, the growth was not at the cost of compromising asset quality. We view this positive as in case of an economic downturn, due to the prudent and strict policies and procedures adopted coupled with higher provisions, the bank will be able to absorb the shock of deteriorating asset quality.
Chart 5: Asset Quality
Source: Company Reports, Global Research
NPLs to gross loans declined from 9.9% in 2002 to �.7% in 2005. During the same period, lending portfolio grew at a CAGR of �8.4% and NPL’s declined by 34.7%. NPL coverage ratio of the bank improved from 97.4% in 2002 to 2�6.6% in 2005. Control strategies covering credit, market, liquidity and operational risks have helped the bank to monitor and control incremental slippage. The overall coverage ratio as at end 2005 was 2�6.6%, a comforting signal to cover higher delinquency going forward in case that happens.
Chart 6: NPLs / Gross Loans
Source: Company Reports, Global Research
25.0
20.0
15.0
10.0
5.0
0.0
1.8
1.4
1.0
0.8
0.22002 2003 2004 2005
13.9
NPLs
15.4
18.4
23.1
0.4
0.50.6
1.4
Gross Loans
AED
mn
Lending portfolio (gross) of the bankgrew at a CAGR OF 18.4% during thelast three years. NPLs during the period
under review declined by 34.7%
12.0%
8.0%
4.0%
0.0%
240.0%
200.0%
160.0%
120.0%
80.0%2005200420032002
9.9%
97.4%
3.7%
117.6%2.5%
178.3%
216.6%
1.7%
NPLs to Gross Loans Coverage
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �03
Non-interest income
During the last three years, non-interest income of the bank grew at a CAGR of 56.�% from AED560.9mn in 2002 to AED2,�32.3mn in 2005. Within non-interest income, investment income witnessed strong growth of 202.9% CAGR for the period under review. Investment income increased from AED40.�mn in 2002 to AED�,��5.2mn in 2005. Net commission income grew at a CAGR of 22.9% from AED�69.0mn in 2002 to AED3�3.3mn in 2005. Other operating income classified within non-interest income increased from AED35�.8mn in 2002 to AED703.8mn in 2005, CAGR of 26.0%.
The major contribution to the unprecedented growth in non-interest income was investment income reflecting mainly in the net realized investment gains on trading and available for sales portfolio. Broking and asset management businesses also performed well giving a further fillip to fee and commission income. The year 2005 was a record year for the bank’s subsidiary, Oman Insurance Company, which contributed handsomely to non-interest income including investment income.
Table 1: Composition Of Non-Interest Income
Amount UAE mn 2004 2005
Net commission income 245.7 313.3
Investment securities income 152.1 1,115.2
Net realized investment gain �04.6 �,026.4
FV adj. of trading investments 24.0 58.8
Dividend income 23.5 30.0
Other operating income 458.2 703.8
FV adj. of investment properties �5.5 39.7
Income from investment property 4.4 2.9
Credit card related fee income 8�.6 �08.5
Fees and charges on banking services �58.8 262.0
Foreign exchange gains 62.� 90.2
Insurance underwriting profit 94.0 �43.3
Loss on sale of property and equipment (�.8) (2.5)
Rental income from properties 4.� 5.�
Others 39.4 54.5
Total Non-Interest Income 856.0 2,132.3 Source: Company Reports
Margins
Net interest margins of the bank improved marginally from 3.06% in 2002 to 3.�3% in 2005. However, on a year-on-year, margins declined from 3.38% in 2004. Increasing interest rates coupled with stiff competition on the lending side has resulted in margins squeeze, which is a trend witnessed by the sector in general. Yield on interest earning assets increased from 4.87% in 2002 to 6.50% in 2005. On the funding side, cost of interest bearing liabilities increased from 2.08% in 2002 to 3.4�% in 2005.
Global Research - UAE Global Investment House
�04 UAE Banking Sector Report January 2007
Chart 7: Margins
Source: Company Reports, Global Research
Operating efficiency
Operating costs increased from AED497.2mn in 2002 to AED776.9mn in 2005, CAGR of �6.0%. On the other hand, total income (net interest income plus non-interest income) grew at a CAGR of 36.0% from AED�.2bn in 2002 to AED3.�bn in 2005. The cost to income ratio of the bank declined from 40.2% in 2002 to 25.0% in 2005. Despite the focus of the bank on recruiting talent and increasing headcount to support business growth, manpower costs increased from AED285.5mn in 2002 to AED499.�mn in 2005, CAGR of 20.5%. Staff costs as a percentage of income however declined from 23.�% in 2002 to �6.�% in 2005.
In order to increase market penetration, the bank opened �2 new branches in 2005 taking the total number of branch network to 46 branches and 4 Customer Service Units across the UAE. An additional 37 ATMs were also commissioned to bring the bank’s total ATM count to �48, which is one of the highest in the UAE.
In order to gauge operational efficiency and remove the impact of strong capital market activity, operating expenses (opex) to average assets ratio is a better indicator. Opex to average assets for the bank declined from 2.�4% in 2002 to 2.00% in 2005, suggesting improving efficiency, thereby contributing to enhanced bottom line.
Chart 8: Cost Structure
Source: Company Reports, Global Research
7.5%
5.5%
3.5%
1.5%
3.7%
3.5%
3.3%
3.1%
2.9%
2.7%2005200420032002
Yield on interest earning assets Cost of interest bearning liabilities Net Interest Margin
4.9% 2.1%
3.1%
3.3%
4.8%1.8%
5.6% 2.4%
3.4%
3.1%
3.4%6.5%
45.0%
35.0%
25.0%
15.0%2002 2003 2004 2005
2.2%
2.1%
2.0%
1.9%
2.1%
40.2%
2.1%
36.3%
2.0%
33.1%
2.0%
25.0%
Cost to Income ratio Opex to average assets
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �05
Comfortable CAR to support loan growth
The bank’s Capital Adequacy Ratio (CAR) as at end 2005 stood at �9.7% as against �7.9% in 2004. In order to derive the risk factor for both on-balance sheet assets and off-balance sheet items, we have calculated the same by dividing the risk-adjusted balance sheet assets to the overall balance sheet size for the respective years and for off-balance sheet items, risk-weighted off-balance sheet items are divided by the total off-balance sheet items.
The risk factor for on-balance sheet assets has ranged between 60 – 64% and for off-balance sheet items, the risk factor has ranged between 45 – 53%. Given the loan to deposit ratio of 77.0% as at end 2005, coupled with low NPL ratio of �.7% and coverage of 2�6.6%, the bank has sufficient capital to support strong asset growth. Reforms in the regulatory regime, government thrust to accelerate privatization, government spending on infrastructure projects and growth in the real estate market, all of which suggesting strong asset growth going forward.
Chart 9: Capital Adequacy Ratio
Source: Company Reports, Global Research
Improving Return Ratios
Profit for the bank witnessed strong momentum during the last three years. Net profit after minority interest increased from AED504.9mn in 2002 to AED�,739.4mn in 2005, a CAGR of 5�.0% for the period under review. Strong growth in profits is backed by �3.0% growth in net interest income and 56.�% growth in non-interest income.
Return ratios namely return on average equity (ROAE) and return on average assets (ROAA) improved during the period 2002-05. ROAE increased from �6.9% in 2002 to 28.7% in 2005. Similarly, ROAA increased from 2.2% in 2002 to 4.5% in 2005.
21.0%
20.0%
19.0%
18.0%
17.0%
75.0%
65.0%
55.0%
45.0%
35.0%
25.0%2005200420032002
CAR On-balance sheet risk factor Off-balance sheet risk factor
45.1%47.8%
53.0% 46.1%
60.2%62.6%
63.8%62.6%
Risk factor for on-balance sheet assets is calculated by dividing the risk-adjustedbalance sheet assets to the owerall balance sheet size for the respective years. With
respect to the risk factor for off-balance sheet items. risk-weighted off-balance sheetitems are divided by the total off-balance sheet items in order to arrive risk factor.
19.7%17.9%18.4%17.9%
Global Research - UAE Global Investment House
�06 UAE Banking Sector Report January 2007
Chart 10: Return Ratios
Source: Company Reports, Global Research
Analysis of Nine-Month Performance 2006
• Mashreq Bank’s business momentum continued in the nine-month period for the year 2006. Balance sheet size increased by 2�.5% y-o-y from AED42.�bn in 3Q2005 to AED5�.2bn in 3Q2006. Sequentially, asset size increased by 8.9% and the year-to-date growth has been ��.8%.
• Customer deposits continued to register impressive growth as deposits increased from AED25.9bn in 3Q2005 to AED3�.2bn in 3Q2006, a y-o-y growth of 20.7%. On a q-o-q basis, the growth in deposit mobilized stood at �2.5% and y-t-d the growth has been 4.0%.
• Net loan book of the bank increased from AED2�.9bn in 3Q2005 to AED27.6bn (including AED0.8mn Islamic Finance and Investments) in 3Q2006, y-o-y growth of 26.0%. Sequentially, the loan book grew by 7.3% and y-t-d, the growth in the lending portfolio stood at 20.4%. Net loan to customer deposits of the bank increased from 74.2% as at end 2005 to the current 85.9% as at end September 2006.
• Investment portfolio of the bank increased from AED9.7bn in 3Q2005 to AED�2.0bn in 3Q2006, y-o-y growth of 24.6%. However, the growth in the investment book is moderating and sequentially the growth is a modest 3.3% and year-to-date, the growth in investments in securities is 8.5%. We expect business momentum to remain buoyant due to lot of projects in the pipeline, which will further drive loan growth.
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
4.0%
3.0%
2.0%2005200420032002
ROAE ROAA
15.8%
2.2%
16.3%
2.4%
17.0%
2.6%
28.7%
4.5%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �07
Table 2: Key Balance Sheet ItemsAmount AED mn 3Q2005 2005 2Q2006 3Q2006 y-o-y q-o-q y-t-dInvestment in securities 9,656.7 ��,090.� ��,643.9 �2,028.0 24.6% 3.3% 8.5%Net Loans 2�,903.2 22,269.4 24,987.7 26,805.� 22.4% 7.3% 20.4%Customer Deposits 25,858.5 30,004.8 27,756.7 3�,2�6.9 20.7% �2.5% 4.0%Balance Sheet Size 42,�07.2 45,742.5 46,968.2 5�,�49.4 2�.5% 8.9% ��.8%
Source: Company Reports
• Net profit after minority interest for the nine-month period ending September 2006 increased by 2.0% from AED�,09�.8mn in 9M2005 to AED�,��3.4mn in 9M2006.
• Net interest income and income from Islamic products net of distribution to depositors increased by AED83.�mn from AED723.8mn in 9M2005 to AED806.8mn in 9M2006, a growth of ��.5%.
• Non-interest income declined by AED350.4mn from AED�,490.2mn in 9M2005 to AED�,�39.9mn in 9M2006, down by 23.5%. Within non-interest income, net commission income declined by 6.�% from AED2�2.0mn in 9M2005 to AED�99.0mn in 9M2006. However, the decline in other income was more pronounced at 26.4% from AED�,278.2mn in 9M2005 to AED940.9mn in 9M2006.
• On a quarterly basis, the bank has done well in terms of profits after minority interest, which increased from AED4�5.2mn in 3Q2005 to AED453.7mn in 3Q2006, a growth of 9.3% for 3Q2006 as compared to the same quarter of the previous year. This is on the back of �2.2% growth in core income.
• Core income i.e. net interest income and income from Islamic products net of distribution to depositors increased from AED247.0mn in 3Q2005 to AED277.2mn in 3Q2006, a growth of �2.2%.
• Non-interest income increased from AED430.5mn in 3Q2005 to AED50�.�mn in 3Q2006, a growth of �6.4%. Net commission income increased by �2.3% and other income grew by �7.2% for the quarter ended September 2006 as compared to the same quarter of the previous year.
• General and administrative expenses increased from AED�76.9mn in 3Q2005 to AED250.7mn in 3Q2006, a growth of 4�.7%, which is in-line with the growth in business. Loan loss provisions increased by �7.8% for 3Q2006 as compared to the same quarter of the previous year.
Global Research - UAE Global Investment House
�08 UAE Banking Sector Report January 2007
Table 3: Income Statement
Source: Company reports
Outlook
• Changing demographics and the increasing expatriate population is likely to boost the consumer lending segment. Going forward, consumer lending is likely to be the key growth driver over the next two years.
• Industrial and construction sectors are likely to be the key growth drivers. Tourism, hotels and resorts are being promoted, which is likely to give a further fillip to loan growth.
• In order to shore up its fee-based income stream, the bank is taking various measures to increase its cross-sell ratio. Fee income is likely to be the key thrust area. Clearing agent, asset management, broking, corporate advisory, IPO financing and insurance are likely to be the key focus areas. Credit cards (a part of retail lending) is likely to witness strong growth over the next two years, which will give a further fillip to fee-income.
• Currently the bank has 47 branches and 4 Customer Services Units in UAE and 4 in Doha. Another 3 branches are likely to be opened in UAE and � branch in Bahrain in the near future. Currently, the bank has �75 ATMs.
Valuation:
Based on the current market price of AED270.0, the stock is trading at �6.5x 2006E earnings and 3.3x 2006E book value. Based on 2007E, the stock is trading at �3.4x earnings and 2.9x book value. The estimated fair value works out to AED257.7 based on DDM and peer group valuation method, which is lower by 4.6%. Hence, we reiterate our earlier rating and recommend a HOLD on the stock.
Amount AED mn 3Q2005 3Q2006 % 9M2005 9M2006 %Interest income 52�.5 72�.0 38.3% �,43�.6 2,05�.4 43.3%Income from Islamic Financing & Investment Products
- ��.� - - 20.8 -
Total Interest Income 521.5 732.1 40.4% 1,431.6 2,072.2 44.7%Interest expense (274.6) (445.7) 62.3% (707.8) (�,246.3) 76.�%Distribution to depositors - Islamic Financing - (9.3) - - (�9.�) -Total Interest Expense (274.6) (455.0) 65.7% (707.8) (1,265.4) 78.8%Net interest income & inc. from Islamic prod. net of distn. to depositors
247.0 277.2 12.2% 723.8 806.8 11.5%
Net commission income 7�.9 80.7 �2.3% 2�2.0 �99.0 -6.�%Other income 358.6 420.5 �7.2% �,278.2 940.9 -26.4%Total Operating Income 677.4 778.3 14.9% 2,214.0 1,946.7 -12.1%General and administrative expenses (�76.9) (250.7) 4�.7% (5�3.5) (708.9) 38.�%Allowance for loans & advances & other financial assets
(42.8) (50.4) �7.8% (379.�) (�0�.0) -73.4%
Income before taxes and minority interest 457.7 477.� 4.2% �,32�.4 �,�36.8 -�4.0%Income taxes (�.8) (�.4) -24.8% (��.9) (3.9) -67.4%Net income before minority interest 455.9 475.8 4.4% 1,309.5 1,133.0 -13.5%Minority interest (40.7) (22.�) -45.8% (2�7.7) (�9.6) -9�.0%Net income for the period 415.2 453.7 9.3% 1,091.8 1,113.4 2.0%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �09
Bal
ance
She
etM
ashr
eq B
ank
AE
D m
n20
0320
0420
0520
06E
2007
E20
08E
2009
EA
sset
sC
ash
Bal
ance
s �
26.9
�
33.0
�
88.2
�
95.0
�
98.6
2
03.6
2
08.�
B
alan
ces
with
Cen
tral
Ban
k 2
,356
.9
2,9
25.5
3
,8�6
.8
4,0
93.7
4
,�36
.7
3,3
47.9
2
,622
.9
Dep
osits
and
bal
ance
s du
e fr
om b
anks
4,9
05.2
4
,649
.5
7,0
66.5
6
,252
.0
5,2
53.8
4
,057
.6
2,9
06.0
L
oans
and
adv
ance
s �
4,73
8.6
�7,
606.
2 2
2,26
9.4
28,
470.
5 3
3,5�
2.9
38,
770.
8 4
4,09
0.2
Inte
rest
rec
eiva
ble
and
othe
r as
sets
537
.9
835
.0
893
.5
�,0
27.6
�
,�30
.3
�,�
86.9
�
,246
.2
Inve
stm
ent i
n se
curi
ties
3,2
58.8
5
,480
.0
��,
090.
� �
2,3�
4.8
�4,
324.
� �
6,52
3.3
�9,
�23.
4 In
vest
men
t pro
pert
y �
40.9
�
45.5
2
24.�
2
5�.0
2
66.�
2
79.4
2
90.5
Pr
oper
ty a
nd e
quip
men
t �
7�.5
�
74.2
�
93.8
2
53.2
2
85.5
3
05.9
3
�6.3
T
otal
ass
ets
26,
236.
6 3
1,94
8.8
45,
742.
5 5
2,85
7.7
59,
108.
0 6
4,67
5.4
70,
803.
6 L
iabi
litie
sC
usto
mer
dep
osits
�8,
763.
3 2
�,�0
7.�
30,
004.
8 3
4,50
5.5
38,
646.
2 4
2,5�
0.8
46,
76�.
9 D
epos
its a
nd b
alan
ces
due
to b
anks
2,2
86.0
3
,090
.4
3,5
00.2
4
,270
.3
4,6
97.3
4
,885
.2
5,0
80.6
In
sura
nce
and
life
assu
ranc
e fu
nds
�29
.2
�89
.�
260
.4
390
.7
546
.9
7��
.0
924
.3
Med
ium
term
flo
atin
g ra
te n
otes
-
�,�
0�.9
2
,295
.6
3,4
43.4
3
,443
.4
3,4
43.4
3
,443
.4
Lon
g-te
rm lo
ans
5�.
7 4
5.8
30.
7 2
8.8
27.
� 2
5.5
23.
9 In
tere
st p
ayab
le a
nd o
ther
liab
ilitie
s 8
00.3
�
,�59
.5
�,4
95.9
2
,�43
.8
2,8
5�.2
3
,33�
.5
4,�
42.5
T
otal
liab
iliti
es 2
2,03
0.4
26,
693.
8 3
7,58
7.6
44,
782.
5 5
0,21
2.1
54,
907.
4 6
0,37
6.7
Shar
ehol
ders
’ eq
uity
Shar
e ca
pita
l 7
�5.9
7
87.5
8
66.2
8
66.2
8
66.2
8
66.2
8
66.2
St
atut
ory
and
lega
l res
erve
s 3
7�.3
3
94.0
4
68.8
4
33.�
4
33.�
4
33.�
4
33.�
G
ener
al r
eser
ve 3
�2.0
3
�2.0
3
�2.0
3
�2.0
3
�2.0
3
�2.0
3
�2.0
C
umul
ativ
e tr
ansl
atio
n ad
just
men
t (
23.6
) (
9.8)
(�6
.0)
(�7
.6)
(�8
.5)
(�9
.4)
(20
.4)
Cum
ulat
ive
chan
ges
in f
air
valu
e 2
4�.6
5
�6.5
�
,467
.3
440
.2
449
.0
458
.0
467
.�
Ret
aine
d ea
rnin
gs 2
,372
.4
2,8
50.2
4
,�60
.4
5,�
�8.0
5
,900
.7
6,7
32.4
7
,349
.�
Equ
ity
attr
ibut
able
to
equi
ty h
olde
rs o
f th
e pa
rent
3,9
89.5
4
,850
.3
7,2
58.7
7
,151
.9
7,9
42.5
8
,782
.3
9,4
07.2
M
inor
ity
inte
rest
216
.6
404
.8
896
.1
923
.4
953
.4
985
.8
1,0
19.8
T
otal
sha
reho
lder
s’ e
quit
y 4
,206
.1
5,2
55.1
8
,154
.8
8,0
75.2
8
,895
.9
9,7
68.0
1
0,42
7.0
Tot
al li
abili
ties
and
sha
reho
lder
s’ e
quit
y 2
6,23
6.6
31,
948.
8 4
5,74
2.5
52,
857.
7 5
9,10
8.0
64,
675.
4 7
0,80
3.6
Global Research - UAE Global Investment House
��0 UAE Banking Sector Report January 2007
Inco
me
Stat
emen
tM
ashr
eq B
ank
AE
D m
n20
0320
0420
0520
06E
2007
E20
08E
2009
EIn
tere
st in
com
e �
,�09
.6
�,4
23.6
2
,024
.3
2,9
�6.8
3
,627
.3
4,2
72.5
4
,946
.9
Inte
rest
exp
ense
(35
9.9)
(55
8.6)
(�,
049.
8) (
�,8�
3.5)
(2,
298.
�) (
2,72
4.2)
(3,
�74.
4)N
et in
tere
st in
com
e 7
49.8
8
65.0
9
74.6
1
,103
.3
1,3
29.2
1
,548
.4
1,7
72.6
N
et c
omm
issi
on in
com
e �
90.8
2
45.7
3
�3.3
3
�9.6
3
38.8
3
65.9
4
02.5
In
vest
men
t sec
uriti
es in
com
e 8
4.5
�52
.�
�,�
�5.2
3
32.�
3
65.4
4
23.9
4
90.2
O
ther
ope
ratin
g in
com
e 4
03.5
4
58.2
7
03.8
8
58.6
�
,030
.3
�,2
�5.8
�
,4�0
.3
Tot
al n
on-i
nter
est
inco
me
678
.9
856
.0
2,1
32.3
1
,510
.3
1,7
34.5
2
,005
.6
2,3
03.0
Pr
ovis
ion
for
loan
loss
es (
�87.
8) (
3�2.
5) (
3��.
3) (
266.
�) (
279.
�) (
323.
7) (
346.
0)O
pera
ting
inco
me
�,2
40.9
�
,408
.6
2,7
95.5
2
,347
.6
2,7
84.6
3
,230
.2
3,7
29.6
St
aff
cost
s (
305.
9) (
346.
2) (
499.
�) (
592.
9) (
678.
7) (
762.
6) (
840.
7)D
epre
ciat
ion
(35
.8)
(35
.8)
(34
.4)
(40
.4)
(47
.4)
(49
.0)
(54
.4)
Oth
er o
pera
ting
expe
nses
(�7
6.9)
(�8
6.9)
(24
3.5)
(26
3.0)
(28
2.0)
(29
9.6)
(32
6.�)
Tot
al o
pera
ting
exp
ense
s (
518.
6) (
568.
9) (
776.
9) (
896.
2) (
1,00
8.1)
(1,
111.
2) (
1,22
1.1)
Prof
it on
sal
e of
ass
ets
net o
f w
rite
-off
s (
83.8
) (
�0.2
) -
-
-
-
-
P
rofi
t be
fore
tax
and
min
orit
y in
tere
st 6
38.5
8
29.5
2
,018
.7
1,4
51.3
1
,776
.5
2,1
19.0
2
,508
.4
Les
s: P
rovi
sion
for
tax
�.7
(
4.�)
(6.
6) (
5.8)
(7.
�) (
7.4)
(7.
5)N
et P
rofi
t be
fore
min
orit
y in
tere
st 6
40.1
8
25.4
2
,012
.1
1,4
45.5
1
,769
.4
2,1
11.6
2
,500
.9
Min
ority
inte
rest
(39
.4)
(74
.3)
(27
2.7)
(27
.3)
(30
.0)
(32
.4)
(34
.0)
Net
Pro
fit
600
.7
75�
.�
�,7
39.4
�
,4�8
.3
�,7
39.4
2
,079
.2
2,4
66.9
P
&L
App
ropr
iati
on A
ccou
nt:
Ope
ning
Bal
ance
1,7
62.3
2
,372
.4
2,8
50.2
4
,160
.4
5,1
18.0
5
,900
.7
6,7
32.4
N
et P
rofi
t for
the
year
600
.7
75�
.�
�,7
39.4
�
,4�8
.3
�,7
39.4
2
,079
.2
2,4
66.9
T
rans
fer
to S
tatu
tory
& le
gal r
eser
ves
(4.
6) (
22.7
) (
74.9
) 3
5.7
-
-
-
Cas
h D
ivid
end
(�7
9.0)
(�7
9.0)
(27
5.6)
(49
6.4)
(95
6.7)
(�,
247.
5) (
�,85
0.2)
Cha
nge
in a
ccou
ntin
g po
licy
�3.
9 -
-
-
-
-
-
St
ock
Div
iden
ds (
7�.6
) (
7�.6
) (
78.7
) -
-
-
-
C
losi
ng B
alan
ce 2
,372
.4
2,8
50.2
4
,160
.4
5,1
18.0
5
,900
.7
6,7
32.4
7
,349
.1
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report ���
Cas
h F
low
Sta
tem
ent
Mas
hreq
Ban
kA
ED
mn
2003
2004
2005
2006
E20
07E
2008
E20
09E
Ope
rati
ngO
pera
ting
Act
iviti
es
879
.4
�,�
93.3
2
,37�
.2
2,0
85.7
2
,462
.2
2,9
09.2
3
,392
.5
Net
pro
fit
600
.7
75�
.�
�,7
39.4
�
,4�8
.3
�,7
39.4
2
,079
.2
2,4
66.9
D
epre
ciat
ion
35.
8 3
5.8
34.
4 4
0.4
47.
4 4
9.0
54.
4 In
vest
men
t sec
uriti
es in
com
e -
-
-
3
32.�
3
65.4
4
23.9
4
90.2
Fa
ir v
alue
adj
ustm
ents
- tr
adin
g in
vest
men
t (
37.7
) (
24.0
) (
58.8
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-
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rex
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4.7
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.6
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ance
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.5
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ing
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ents
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-
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-
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77.
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0 3
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0 W
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ng C
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(78
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4,7
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(
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.3
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(25
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nces
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3,34
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804
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s 2
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unds
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56.3
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2
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ther
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359
.2
336
.4
427
.�
247
.�
�89
.4
208
.4
Tot
al o
pera
ting
381
.1
1,1
14.4
7
,156
.3
1,5
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2
,467
.5
1,9
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,136
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stin
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men
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uriti
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-
-
(
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365.
4) (
423.
9) (
490.
2)A
dditi
ons
to f
ixed
ass
ets,
net
of
disp
osal
s (
38.8
) (
40.7
) (
58.8
) (
99.7
) (
79.8
) (
69.4
) (
64.8
)Sa
le o
f fi
xed
asse
ts 2
0.7
0.4
2
.3
-
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-
(Pur
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ale
of n
on-t
radi
ng in
vest
men
ts (
450.
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5) �
07.4
(
329.
0) (
286.
4) (
352.
0) (
43�.
0)C
hang
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trad
ing
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ritie
s 5
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(�,
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2.8)
(�,
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4.�)
(�,
838.
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2,�5
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its w
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anks
(34
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255
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(3,
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0) 8
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9
98.2
�
,�96
.2
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5�.6
C
hang
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with
cen
tral
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k 6
08.3
(
568.
7) (
89�.
2) (
276.
9) (
43.0
) 7
88.7
7
25.0
In
vest
men
t pro
pert
y -
-
-
(
26.9
) (
�5.�
) (
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) (
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)T
otal
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stin
g (
148.
1) (
2,02
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(8,
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1) (
2,17
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(1,
505.
5) (
711.
9) (
1,28
0.5)
Fin
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ngC
hang
es in
long
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m lo
ans
(5.
4) (
5.9)
(�5
.�)
(�.
8) (
�.7)
(�.
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nges
in m
ediu
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erm
loan
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,�0�
.9
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275.
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956.
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otal
fin
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220.
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17.0
9
03.0
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et c
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4
.5
Net
cas
h ba
lanc
es a
t beg
inni
ng �
�4.0
�
26.9
�
33.0
�
88.2
�
95.0
�
98.6
2
03.6
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et c
ash
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33.0
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�
95.0
�
98.6
2
03.6
2
08.�
Global Research - UAE Global Investment House
��2 UAE Banking Sector Report January 2007
FACT SHEETMashreq Bank
2003 2004 2005 2006E 2007E 2008E 2009EProfitability - Return on Average Assets 2.4% 2.6% 4.5% 2.9% 3.�% 3.4% 3.6% - Return on Average Equity �6.8% �7.0% 28.7% �9.7% 23.0% 24.9% 27.�% - Net interest income / Op. Income after Provisions for Loan Losses 45.3% 39.2% 23.7% 35.7% 37.7% 37.9% 38.3% - Non-interest income / Op. Income after Provisions for Loan Losses 54.7% 60.8% 76.3% 64.3% 62.3% 62.�% 6�.7%
Margins - Net income / Revenues 54.�% 52.8% 85.9% 48.6% 48.0% 48.7% 49.9% - Operating profit / Revenues 65.�% 59.0% 99.7% 49.8% 49.0% 49.6% 50.7% - Interest Expense to Interest Income 32.4% 39.2% 5�.9% 62.2% 63.4% 63.8% 64.2% - Yield on interest earning assets 4.8% 5.6% 6.5% 7.7% 8.4% 9.0% 9.7% - Investment Income to Investment Assets 4.�% 4.9% �5.6% 3.�% 3.0% 3.0% 3.0% - Cost of interest bearing liabilities �.8% 2.4% 3.4% 4.6% 5.�% 5.5% 5.9% - Net Spread 3.�% 3.2% 3.�% 3.�% 3.3% 3.5% 3.8% - Net Interest Margin 3.3% 3.4% 3.�% 2.9% 3.�% 3.3% 3.5%
Efficiency -Cost / Op. Income after Provisions for Loan Losses 4�.8% 40.4% 27.8% 38.2% 36.2% 34.4% 32.7% - Staff Expense / Op. Income after Provisions for Loan Losses 24.7% 24.6% �7.9% 25.3% 24.4% 23.6% 22.5% - Cost to Average Total Assets 2.�% 2.0% 2.0% �.8% �.8% �.8% �.8%
Liquidity - Loans to Interest Earning Assets 64.8% 67.2% 66.2% 72.�% 76.7% 82.2% 86.6% - Loans to Customer Deposits 82.�% 87.3% 77.0% 85.7% 90.3% 95.2% 98.7% - Customer Deposits to Equity 470.3% 435.2% 4�3.4% 482.5% 486.6% 484.�% 497.�% - Due from Banks to Due to Banks 2�4.6% �50.4% 20�.9% �46.4% ���.8% 83.�% 57.2%
Credit Quality - Provisions to Average Gross Loans �.3% �.8% �.5% �.0% 0.9% 0.9% 0.8% - Non Performing Loans (AED ‘000) 567,000 463,000 382,000 497,0�3 6�0,005 737,499 869,039 - Loan Loss Reserve (AED ‘000) 667,024 825,3�9 827,353 �,093,428 �,372,5�� �,696,247 2,042,240 - NPLs to Gross Loans 3.7% 2.5% �.7% �.7% �.7% �.8% �.9% - NPLs to (Equity + Loan Loss Reserve) �2.2% 8.2% 4.7% 6.0% 6.5% 7.0% 7.6% - Loan Loss Reserve to Gross Loans 4.3% 4.5% 3.6% 3.7% 3.9% 4.2% 4.4% - NPL Coverage ��7.6% �78.3% 2�6.6% 220.0% 225.0% 230.0% 235.0%
Capital Adequacy - Equity to Total Assets �5.2% �5.2% �5.9% �3.5% �3.4% �3.6% �3.3% - Equity to Gross Loans 25.9% 26.3% 3�.4% 24.2% 22.8% 2�.7% 20.4%
Constitution of Total Income - Net commission income / Op. Income after Provisions for Loan Losses �5.4% �7.4% ��.2% �3.6% �2.2% ��.3% �0.8% - Investment securities income / Op. Income after Provisions for Loan Losses 6.8% �0.8% 39.9% �4.�% �3.�% �3.�% �3.�% - Other operating income / Op. Income after Provisions for Loan Losses 32.5% 32.5% 25.2% 36.6% 37.0% 37.6% 37.8%
Operating Performance - Change in Net Interest Income after Provisions for Loan Losses �9.5% -�.7% 20.0% 26.2% 25.4% �6.6% �6.5% - Change in Other Income �4.7% �3.5% 53.6% 22.0% 20.0% �8.0% �6.0%
Ratios Used for Valuation - Shares in Issue (‘000) 7�,586.4 78,745.0 85,903.6 86,6�9.5 86,6�9.5 86,6�9.5 86,6�9.5 - EPS (AED) 7.6 9.5 20.2 �6.4 20.� 24.0 28.5 - Book Value Per Share (AED) 55.7 6�.6 84.5 82.6 9�.7 �0�.4 �08.6 - Market Price Year End (AED) * ��7.6 �50.0 268.0 270.0 270.0 270.0 270.0 - P/E (x) �5.4 �5.7 �3.2 �6.5 �3.4 ��.2 9.5 - P/BV (x) 2.� 2.4 3.2 3.3 2.9 2.7 2.5 * Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report ��3
remittances, bancassurance, etc.), corporate banking (project finance, trade finance, etc.), international banking (loan syndications, correspondent banking, etc.) and investment banking (structured products, corporate advisory, funds, treasury products, capital market services, etc.) segments.
• It has a strong customer franchise, particularly in the emirate of Abu Dhabi, where it is a prominent provider of retail and corporate banking services. The bank has substantial treasury operations and is a leading provider of investment banking services.
• NBAD is a main banker to the Abu Dhabi government, and government and public sector business constitutes a major portion of its balance sheet.
Recent Developments
• NBAD’s strong expansion strategy in the GCC region is substantiated as the bank opened its first branch in Kuwait in November 2006 with the objective to consolidate and strengthen its position as one of GCC’s major networks. NBAD was one of the four foreign banks granted license to operate in Kuwait last year. HSBC, BNP Paribas and Citibank are already operating in Kuwait.
Reuters Code:NBAD.AD
Listing:Abu Dhabi Securities Market
CMP:AED 22.9 (As on �6th January, 2007)
National Bank of Abu Dhabi
Key DataEPS (AED)*
BVPS (AED)*
P / E (x)
P / BV (x)
Avg. daily vol.(‘000)
52 week Lo / Hi (AED)
Market Cap (AED mn)
Target Price (AED)
�.7
6.6
�3.4
3.5
�34.8
�7.85 – 43.96
27,970.2
26.0
Source: Global Research* Projected (2006)
Background
• National Bank of Abu Dhabi (NBAD), founded by the government in �968, is one of the oldest banks in UAE. NBAD is today the biggest bank in the UAE, in terms of total assets, deposits and branch network.
• The bank has presence in personal banking (current accounts, saving accounts, elite banking, fixed deposit accounts, credit cards, personal installment loans, car loans,
Buy
Global Research - UAE Global Investment House
��4 UAE Banking Sector Report January 2007
• During September 2006, RAK Properties, the leading real estate developer in Ras Al Khaimah, signed an MoU with the bank, which will enable its customers to take advantage of the bank’s “Escan”| home financing plan. This strategic tie-up allows the bank to offer customers a chance to purchase residential and commercial units in RAK Properties.
• In August 2006, Fitch Ratings affirmed NBAD’s ratings at Issuer Default (IDR) ‘A+’ with Stable Outlook, Short-term ‘F�’, Individual ‘B/C’ and Support ‘�’. The IDR, Short-term and Individual ratings reflect the bank’s strong market position, its close links to the Abu Dhabi government, its business and geographic diversification and consistent profitability. The ratings also reflect risks inherent in the UAE operating environment and concentrations in the loan portfolio and deposit base.
Analysis of financial performance – 2005
NBAD outperformed on all the core banking parameters during the year 2005. Gross loan book of the bank was �5.8% higher than our estimate for the year to reach AED52.3bn. Adjusted for loan loss provisions, the net loan book was higher by �6.0% as compared to our estimates. Most noticeable, was the increase in deposit franchise, which was higher by 28.�% than our estimates at AED59.6bn. Balance sheet size was 26.3% higher than our estimate on the back of strong growth in funding base. Net profit was higher by 29.4% at AED2,580mn in 2005 as compared to our estimate of AED�,994.5mn. The variation in profits has been on the back of strong growth in core income and fees and commission income.
NBAD’s balance sheet size grew at a CAGR of 28.9% during the last three years. Asset size increased from AED39.0bn in 2002 to AED83.7bn in 2005. The contribution of net loans to total assets was 63.6% in 2002 which marginally declined to 6�.5% in 2005. The share of deposits with bank increased from �5.0% in 2002 to 2�.8% in 2005.
Government deposits continues to dominate
During the period 2002-05, customer deposits increased from AED29.6bn in 2002 to AED59.6bn in 2005, a growth of 26.3%. Deposit base as a percentage of total balance sheet declined from 75.8% in 2002 to 7�.2% in 2005. During the year 2005, the bank raised funds via medium term floating rate notes to the tune of AED3.�bn. The share of this funding to the overall balance sheet stood at 3.7% in 2005.
Notice and time deposits grew at a CAGR of 25.5% from AED23.4bn in 2002 to AED46.3bn in 2005. The contribution of notice and time deposits declined from 79.0% in 2002 to 77.7% in 2005. Current account deposits increased from AED5.0bn in 2002 to AED��.3bn in 2005, a growth of 3�.7%. The share of current account deposits increased from �6.7% in 2002 to �9.0% in 2005.
Government deposits contribute more than half of the total customer deposit base of the bank. These deposits increased from AED�5.6bn in 2002 to AED3�.4bn in 2005, a growth of 26.2%. As at end 2005, the share of government deposits stood at 52.8% of the total. However, in terms of retail deposits, the contribution has come down from 26.9% in 2002 to 2�.8% in 2005. Retail deposits grew at a CAGR of �7.8% for the period under review from AED7.9bn in 2002 to AED�3.0bn in 2005.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report ��5
Public sector deposits increased from AED3.�bn in 2002 to AED8.3bn in 2005, a growth of 39.�%. Contribution to total customer deposits increased from �0.4% in 2002 to �3.8% in 2005. On the corporate / private sector deposits, the share increased from �0.0% in 2002 to ��.6% in 2005. Corporate / private sector deposits increased from AED3.0bn in 2002 to AED6.9bn in 2005, a growth of 32.6%.
Chart 1: Deposit Mix
Source: Company Reports, Global Research
Consumer lending – Driver for loan growth
Gross loan portfolio of the bank increased from AED25.5bn in 2002 to AED52.3bn in 2005, a growth of 27.0%. Adjusted for provisions, the net loans book increased from AED24.8bn in 2002 to AED5�.5bn in 2005, a growth of 27.5% for the period under review. Contribution of net loans to total assets declined from 63.6% in 2002 to 6�.5% in 2005.
In terms of composition of gross loan portfolio, the contribution of Government business declined from 22.3% in 2002 to �5.8% in 2005. Government loans increased from AED5.8bn in 2002 to AED8.3bn in 2005, a growth of �2.85% for the last three years. The share of loans to the public sector grew at a CAGR of 35.7% from AED3.�bn in 2002 to AED7.7bn in 2005. Loans to public sector as a percentage of total gross loans increased from �2.0% in 2002 to �4.7% in 2005.
The thrust towards consumer lending during the last three years resulted in the share of retail loans to gross loans increase from �7.7% in 2002 to 2�.6% in 2005. The total retail loan book of the bank increased from AED4.5bn in 2002 to AED��.3bn in 2005, a growth of 35.8% for the last three years. Loans to private and corporate sector increased from AED��.4bn in 2002 to AED24.3bn in 2005, a growth of 28.8%. The contribution of private and corporate sector to overall gross loan book increased from 44.6% in 2002 to 46.5% in 2005.
Deposit mix and loan composition during the last three years indicate that the bank gets a significant amount of Government business. On the liabilities, almost 50% of the total deposit franchise is being contributed by way of Government deposits. On the lending side, the loans given to Government has declined and focus has shifted towards consumer lending, which we believe is positive.
100%
90%
80%
70%2002 2003 2004 2005
Notice and time deposits Current accountsSavings accounts Certificate of deposits
0.5%
3.8%
16.7%
79.0% 775.%
17.9%
4.0%
0.6% 0.5%
3.5%
22.2%
73.9%77.7%
19.0%
2.8%0.5%
Global Research - UAE Global Investment House
��6 UAE Banking Sector Report January 2007
Chart 2: Loan Break-Up
Source: Company Reports, Global Research
Gross loans to deposit ratio of the bank was in the range of 85% – 95% for the period 2002-05. During the last three years, customer deposits of the bank grew at a CAGR of 26.3% as against growth in gross loans by 27.0%. The loan to deposit ratio increased from 86.2% in 2002 to 87.8% in 2005. For 2003 and 2004 the ratio was 94.7% and 93.3% respectively.
Chart 3: Loans to deposit
Source: Company Reports, Global Research
Non-Performing Loans
Asset growth during the last three years was particularly strong for NBAD. Despite that, asset quality of the bank is under control. Gross non-performing loans (NPLs) increased marginally from AED78�.8mn in 2002 to AED806.�mn in 2005. The lending book (gross) increased from AED25.5bn in 2002 to AED52.3bn in 2005.
Banks
Public Sectors
Government
Retail Sector
Corporate/Private sector
1.4%2.2%1.8%
3.0%
14.7%14.3%
13.8%12.0%
15.8%21.2%
21.7%22.6%
21.6%16.4%16.4%
17.7%
46.5%45.9%46.3%
44.6%
2002 2003 2004 2005
70,000
60,000
50,000
40,000
30,000
20,000
105.0%
95.0%
85.0%
75.0%2005200420032002
Gross Loans & Advances Customer deposits Loans to deposits ratio
86.2%
94.7% 93.3%
87.8%
59,573
52,316
38,74836,142
31,42829,76429,59425,516
Customer deposits grew at a CAGR of 26.3%during the last three years.Gross loan book grewat a CAGR of 27.0% for the period under view.
AED
mn
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report ��7
Chart 4: Asset Quality
Source: Company Reports, Global Research
Gross NPLs as a percentage of gross loans declined from 3.�% in 2002 to �.5% in 2005. The coverage ratio of the bank increased from 88.6% in 2002 to �05.2% in 2005. In case of an economic downturn, the bank is well positioned to mitigate the risk of deteriorating asset quality as it has provided more than required. Provision charge for the year as a percentage of average gross loans has been 0.3%, 0.�%, 0.2% and 0.3% for 2002, 2003, 2004 and 2005 respectively. The lower charge for the year coupled with higher coverage ratio, further substantiates our view that the underlying asset quality is strong.
Chart 5: NPLs / Gross Loans
Source: Company Reports, Global Research
Non-interest income
Non-core income of the bank grew at a CAGR of 64.2% during the last three years from AED392.0mn in 2002 to AED�,734.6mn in 2005. Net fees and commission income increased from AED26�.8mn in 2002 to AED�,33�.4mn in 2005, a growth of 72.0%. The contribution of fee income to total non-interest income increased from 66.8% in 2002 to 76.8% in 2005. Strong capital market activity during the last two years contributed to the significant increase in fee income.
60,000.0
50,000.0
40,000.0
30,000.0
20,000.0
900.0
860.0
820.0
780.0
740.0200520042003
AE
D m
n
Gross Loans NPLs
25,516
29,764
36,142
52,316
806.1
776.0
803.2
781.8
AE
D m
n
4.0%
3.0%
2.0%
1.0%
115.0%
105.0%
95.0%
85.0%
75.0%2005200420032002
NPLs to gross loans Coverage
3.1%
88.6%
83.4%
2.7% 2.1%
92.0%
105.2%
1.5%
Global Research - UAE Global Investment House
��8 UAE Banking Sector Report January 2007
Investment gains on the trading portfolio increased from AED8.5mn in 2002 to AED249.4mn in 2005, a growth of 208.5% for the period under review. The contribution of these gains to total non-interest income in 2002 was just 2.2%, which increased to �4.4%. The buoyancy in the stock market is the reason for such strong growth in gains on trading investments.
The contribution of net fee income and capital gains on trading book in 2002 was 68.9%, which increased to 9�.�% in 2005. The strong capital market activity by way of subscription to IPOs and buoyancy in the stock market helped the bank to register strong growth during the last three years.
Chart 6: Non-interest income break-up - 2002
Source: Company Reports, Global Research
Chart 7: Non-interest income break-up - 2005
Source: Company Reports, Global Research
Margins
With the overall increase in interest rates, NBAD’s margins improved from 2.3% in 2002 to 2.5% in 2005. On the lending side, yield on interest earning assets increased by �49bps from 4.3% in 2002 to 5.8% in 2005. During the period under consideration, the share of consumer loans to total gross loans increased from �7.7% in 2002 to 2�.6% in 2005.
Non-trading & derivativegains 13.8%
Net less & comm.income 66.6%
Forex gains 13.4%
Non-trading & derivativegains 14.4%
Net less & comm.income 76.8%
Forex gains 7.1%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report ��9
Cost of funds increased from 2.�% in 2002 to 3.8% in 2005, an increase of �64bps during the period. In 2005, NBAD raised funds by way of Euro Medium Term Note (EMTN) program for US$5,000mn (AED�8,365mn) dated 5th December, 2006 with Barclays Capital. The first US$850mn FRN issue was jointly lead managed under this EMTN programme by Barclays Capital and CSFB which closed on �4th December 2006. Under this program, the bank issued the first tranche of US$850mn (AED3,�22mn) floating rate notes on �4th December 2005 due on �4th December 20�0 offered at 99.9�%. The notes bear an interest rate equal to 3 months LIBOR + 30bps per annum paid quarterly. These medium term floating rate notes constitute 3.7% of the total balance sheet size as at end 2005.
During the Extraordinary General Meeting held on 22nd November 2005, the issue of subordinated convertible notes (in part or in full), provided their total value shall not exceed AED2.5bn was approved. The notes were issued for AED2.5bn in a private placement on �5th March 2006 due on �5th March, 20�6. The notes bear an interest rate equal to 3 months EIBOR + 25bps paid quarterly.
Chart 8: Margins
Source: Company Reports, Global Research
Operating efficiency
During the last three years, operating expense (opex) increased at a CAGR of �8.�% from AED377.7mn in 2002 to AED622.3mn in 2005. Revenues as defined by net interest income plus non-interest income excluding provision on impaired loans increased from AED�.�bn in 2002 to AED3.4bn in 2005, CAGR of 45.5%. During the period under review, core income grew at a CAGR of 32.9% and non-interest income grew at a CAGR of 64.2%.
In order to smoothen out the effect of strong capital market related activities, opex as a percentage of average assets is likely to provide better picture in terms of gauging operating efficiency. Opex to average assets declined from �.�% in 2002 to 0.9% in 2005.
7.0%
5.0%
3.0%
1.0%
2.6%
2.4%
2.2%
2.0%2005200420032002
Yield on interest earning assets Cost of funds Net interest margin
2.1%
2.3%
4.3%4.0%
2.1%
1.8%
4.4%
2.3%
2.2%
5.8%
2.5%
3.8%
Global Research - UAE Global Investment House
�20 UAE Banking Sector Report January 2007
Chart 9: Cost Structure
Source: Company Reports, Global Research
Likely to boost capital base to support strong loan growth
The bank calculates capital adequacy ratio (CAR) in accordance with UAE Central Bank and Basel I Accord. The minimum CAR requirement as per UAE Central Bank is �0% and as per Basel I Accord is 8%.
As per UAE Central Bank guidelines, the bank’s capital base increased at a CAGR of 24.9% from AED3.6bn in 2002 to AED6.9bn in 2005. Risk-adjusted assets (both on and off-balance sheet) grew at a CAGR of 25.8% from AED22.8bn in 2002 to AED45.5bn in 2005. Within risk-weighted assets (RWAs), on balance sheet RWAs grew at a CAGR of 33.6% and off-balance sheet RWAs increased at a CAGR of 9.2% for the period 2002-05. The bank’s CAR in accordance with UAE Central Bank norms declined marginally from �5.6% in 2002 to �5.3% in 2005.
As per Basel I Accord, the bank’s capital base grew at a CAGR of 25.8% for the period under review. Capital base increased from AED3.6bn in 2002 to AED7.�bn in 2005. Both on and off-balance sheet RWAs grew from AED33.2bn in 2002 to AED62.2bn in 2005, CAGR of 23.3%. On and off-balance sheet RWAs grew at a CAGR of 28.5% and 7.6% respectively for the period 2002-05. The bank’s CAR as per Basel I Accord increased from �0.8% in 2002 to ��.4% in 2005.
Chart 10: Capital Adequacy Ratio
Source: Company Reports, Global Research
45.0%
35.0%
25.0%
15.0%
1.1%
1.0%
0.9%
0.8%2002 2003 2004 2005
Cost to income ratio Opex to average assets
34.1% 32.8% 28.2% 18.2%
0.89%
0.98%1.00%
1.06% Operating expense (Opex) to average assets removes theimpact of IPO and capital market related activities. Duringthe last three years. opex to average assets ratio declinedby 17bps.
24.0%
20.0%
16.0%
12.0%
8.0%
4.0%2002 2003 2004 2005
In accordance with UAE Central Bank In accordance with Basel-1 Accord
15.6%
10.8% 11.3%
16.4% 16.4%
11.1%
15.3%
11.4%
The minimum CAR as required bythe UAE Central Bank is 10% andas per Basel I Accord, the minimum
requirement is 8%.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �2�
Improving Return Ratios
On the back of strong growth in core income and non-interest income, the bank’s net profit grew at a CAGR of 58.0% from AED654.2mn in 2002 to AED2,580.2mn in 2005. The bank’s return ratios namely return on average equity and return on average assets witnessed significant improvement during the period under review. Return on average equity increased from �9.2% in 2002 to 43.9% in 2005. Correspondingly, return on average assets increased from �.8% in 2002 to 3.7% in 2005. According to the management these high return ratios are not sustainable and return on equity is likely to be around 25% in the medium term.
Chart 11: Return Ratios
Source: Company Reports, Global Research
Analysis of Nine-Month Performance 2006
• NBAD’s balance sheet size increased by �0.5% y-o-y from AED76.8bn in 3Q2005 to AED84.9bn in 3Q2006. On a q-o-q basis, its size increased by 4.9% from AED80.9bn in 2Q2005. However, on a year-to-date the balance sheet size increased by �.5%.
• Customer deposits registered strong growth on a yearly and sequential basis. However, on a year-to-date basis customer deposits registered a decline. Customer deposits increased by 7.7% y-o-y, �3.3% q-o-q and (3.8%) y-t-d. As at end September 2006, the banks’ customer deposits reached AED57.3bn, which is primarily due to decline in local stock market.
• Gross Loan book of the bank increased from AED48.5bn in 3Q2005 to AED56.0bn in 3Q2006, a growth of �5.5% y-o-y. Sequentially, gross loan portfolio increased by 5.0% from AED53.3bn in 2Q2006. Year-to-date, the growth in gross lending increased by 3.7%.
• Net Loans adjusted for interest suspended and loan loss provisions increased by �5.9% from AED46.0bn in 3Q2005 to AED53.4bn in 3Q2006. On q-o-q, net loan book increased by 5.�% and year-to-date the growth was 3.7%.
• Investment portfolio of the bank that includes both trading as well as non-trading, increased from AED9.95bn in 3Q2005 to AED�2.�bn in 3Q2006, a growth of 2�.3% y-o-y. However, the growth on q-o-q was rather modest at 2.3%. On a year-to-date, the growth in investment book registered an increase of 23.0%.
60.0%
45.0%
30.0%
15.0%2002 2003 2004 2005
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
3.7%
2.3%
1.9%1.8%
19.2% 21.1%
25.7%
43.9%
ROAE ROAA
Global Research - UAE Global Investment House
�22 UAE Banking Sector Report January 2007
Table 1: Key Balance Sheet ItemsAmount AED mn 3Q2005 2005 2Q2006 3Q2006 y-o-y q-o-q y-t-dInvestments(Trading & Non-Trading)
9,950.7 9,808.7 ��,792.3 �2,066.� 2�.3% 2.3% 23.0%
Gross Loans 48,495.0 54,000.6 53,342.3 56,00�.8 �5.5% 5.0% 3.7%Net Loans 46,038.5 5�,468.0 50,774.8 53,373.2 �5.9% 5.�% 3.7%Customer Deposits 53,208.4 59,572.8 50,569.2 57,29�.� 7.7% �3.3% -3.8%Balance Sheet Size 76,846.8 83,660.8 80,925.� 84,885.4 �0.5% 4.9% �.5%
Source: Company Report, Global Research
• Net profit for the bank declined from AED2.�bn in 9M2005 to AED�.6bn in 9M2006, a decline of 2�.2%. This is on the back of 47.�% decline in other operating income during the nine-month period.
• Net interest income increased from AED�.4bn in 9M2005 to AED�.5bn in 9M2006, registering a growth of 8.3% for the period under review. Other operating income declined during 9M2006 by 47.�% to AED722.9mn as compared to AED�,365.4mn in 9M2005. Lower other operating income is due to the lack of capital market activity, which otherwise has been a key contributor during the last couple of years.
Table 2: Income StatementAmount AED mn 3Q2005 3Q2006 % 9M2005 9M2006 %Interest income �,�33.9 �,334.6 �7.7% 3,240.5 3,904.4 20.5%Interest expense (680.9) (832.2) 22.2% (�,862.0) (2,4��.6) 29.5%Net interest income 453.0 502.4 10.9% 1,378.5 1,492.9 8.3%Other operating income 390.3 20�.5 -48.4% �,365.4 722.9 -47.�%Provision for loan losses 3.9 (8.8) -324.7% (�37.3) (37.5) -72.7%Operating income 847.2 695.2 -17.9% 2,606.5 2,178.3 -16.4%General and administrative expenses (�46.�) (�77.0) 2�.2% (486.8) (504.2) 3.6%Operating profit 701.1 518.2 -26.1% 2,119.7 1,674.2 -21.0%Overseas income tax expense (9.9) (�3.0) 3�.5% (42.0) (36.8) -�2.5%Net profit for the period 691.2 505.1 -26.9% 2,077.7 1,637.4 -21.2%
Source: Company Report, Global Research
• Despite a 72.7% decline in provision requirements for the nine month period and a marginal increase in operating overheads by 3.6%, operating profit declined by 2�.0% in 9M2006 as compared to the corresponding period of previous year.
• Net profit declined by 26.9% from AED69�.2mn in 3Q2005 to AED505.�mn in 3Q2006 on the back of lower stock market related other operating income. Net interest income of the bank increased from AED453.0mn in 3Q2005 to AED502.4mn in 3Q2006, a growth of �0.9%.
• Other operating income declined by 48.4% from AED390.3mn in 3Q2005 to AED20�.5mn in 3Q2006. Overhead expenses increased sharply during 3Q2006 as compared to the same quarter previous year. General and administrative expenses increased by 2�.2% from AED�46.�mn in 3Q2005 to AED�77.0mn in 3Q2006.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �23
Chart 12: Core Income (Quarterly)
Source: Company Report, Global Research
Outlook
• According to the management, industrial and construction sectors are likely to be the key growth drivers. Tourism, hotels and resorts are being promoted, which is likely to give a further fillip to loan growth. The bank is also focusing on the manufacturing sector. Within manufacturing, thrust towards iron, steel and cement segments are likely to be the key focus areas.
• On the consumer lending side, changing demographics coupled with easy norms for expatriates to buy/sell properties is likely to result in retail loan growth to be buoyant but still within the strict lending criteria/policies of the bank.
• Currently, the bank has around 0.2mn retail customers. In a move to shore up its cross-sell ratio and thereby help in operational efficiency, the bank is focusing on direct sales agents. The bank has two subsidiaries, one in broking business and the other in leasing. All these initiatives are likely to bolster fee-based income stream.
• With the objective to consolidate and strengthen its position in the GCC region, the bank recently opened a branch in Kuwait. Going forward, the bank intends to enter Qatar as a part of its expansion strategy.
• As at end December 2006, the bank has 65 branches and �63 ATMs. The number of ATMs are likely to double in the next twelve months. The bank’s thrust towards branch expansion and other alternative delivery channels is likely to help the bank increase its deposits franchise. A stable deposit franchise will support strong growth in loan book both from the corporate as well as the retail segment.
Valuation:
Based on the current market price of AED22.9, the stock is trading at �3.4x 2006E earnings and 3.5x 2006E book value. The stock is trading at �2.2x 2007E earnings and 3.2x 2007E book value. Strong fundamentals, improving asset quality and comfortable capital adequacy to support growth, we reiterate our earlier BUY recommendation on the stock with a target price of AED26.0 (upside �3.8%).
650.0
550.0
450.0
350.0
250.0
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%3Q 20062Q 20061Q 20064Q 20053Q 20052Q 20051Q 2005
Net interest income Growth in NII
91.7%
39.3%
88.2%
48.6%
72.6%
6.2%10.9%
502.4475.7514.7477.7453.0447.8
298.1
AED
mn
Global Research - UAE Global Investment House
�24 UAE Banking Sector Report January 2007
Bal
ance
She
etN
BA
DA
ED
mn
2003
2004
2005
2006
F20
07F
2008
F20
09F
Ass
ets
Cas
h B
alan
ces
307
.9
337
.2
383
.0
357
.7
362
.7
34�
.3
3�4
.7
Bal
ance
s w
ith C
entr
al B
anks
�,9
4�.8
2
,940
.3
2,2
50.6
2
,475
.7
2,5
25.2
2
,398
.9
2,4
46.9
D
epos
its w
ith b
anks
4
,384
.7
8,7
42.�
�
8,23
8.7
�5,
502.
9 �
4,88
2.8
�3,
9�5.
4 �
2,80
2.2
Tra
ding
Inv
estm
ents
�,6
32.3
4
04.0
3
94.6
4
73.5
5
58.7
6
48.�
7
00.0
L
oans
and
adv
ance
s (n
et)
29,
094.
0 3
5,42
8.5
5�,
468.
0 5
6,6�
9.0
63,
363.
7 7
2,�9
6.�
83,
730.
9 N
on-T
radi
ng I
nves
tmen
ts 5
,4�9
.3
6,5
70.4
9
,4�4
.2
��,
�50.
7 �
2,63
9.0
�4,
078.
3 �
5,40
6.0
Oth
er A
sset
s 4
79.3
�
,544
.3
�,�
23.2
�
,�79
.4
�,2
73.7
�
,40�
.�
�,5
69.2
Pr
emis
es &
Equ
ipm
ent
363
.5
364
.7
388
.4
4�6
.4
424
.4
443
.9
475
.0
Tot
al A
sset
s 4
3,62
2.7
56,
331.
4 8
3,66
0.8
88,
175.
4 9
6,03
0.2
105
,423
.3
117
,444
.9
Lia
bilit
ies
Due
to b
anks
6,7
25.9
7
,430
.8
�0,
052.
2 �
0,25
3.3
�0,
765.
9 �
�,4�
�.9
��,
925.
4 C
usto
mer
dep
osits
3�,
427.
9 3
8,74
8.3
59,
572.
8 6
0,76
4.3
66,
840.
7 7
4,86
�.6
85,
342.
2 M
ediu
m-t
erm
flo
atin
g ra
te n
otes
-
-
3,�
22.�
3
,353
.9
3,3
53.9
3
,�22
.�
3,�
22.�
Su
bord
inat
ed C
onve
rtib
le N
otes
-
-
-
2,5
00.0
2
,500
.0
2,5
00.0
2
,500
.0
Oth
er li
abili
ties
�,0
84.9
4
,967
.5
3,5
89.7
2
,333
.3
2,�
00.0
�
,995
.0
2,0
34.9
T
otal
Lia
bilit
ies
39,
238.
6 5
1,14
6.6
76,
336.
8 7
9,20
4.7
85,
560.
4 9
3,89
0.5
104
,924
.5
Shar
ehol
ders
’ E
quit
ySh
are
Cap
ital
94�
.6
94�
.6
94�
.6
�,2
24.�
�
,224
.�
�,2
24.�
�
,224
.�
Res
erve
s 3
,099
.7
3,8
59.7
5
,959
.7
5,8
88.�
6
,��9
.5
6,3
84.6
6
,69�
.6
Cum
ulat
ive
chan
ges
in f
air
valu
e (
2�.2
) (
27.7
) (
85.8
) (
�67.
�) (
�35.
�) (
97.9
) (
55.5
)Fo
reig
n cu
rren
cy tr
ansl
atio
n ad
just
men
t 5
.4
7.8
5
.6
6.5
7
.4
8.5
9
.8
Ret
aine
d E
arni
ngs
29.
0 2
6.8
�26
.2
�,�
75.8
�
,633
.6
�,8
93.0
�
,886
.9
Prop
osed
Div
iden
ds 3
29.6
3
76.6
3
76.6
8
43.4
�
,620
.2
2,�
20.4
2
,763
.4
Tot
al S
hare
hold
ers’
Equ
ity
4,3
84.0
5
,184
.8
7,3
24.0
8
,970
.7
10,
469.
8 1
1,53
2.8
12,
520.
4 T
otal
Lia
bilit
ies
& S
hare
hold
ers’
Equ
ity
43,
622.
7 5
6,33
1.4
83,
660.
8 8
8,17
5.4
96,
030.
2 1
05,4
23.3
1
17,4
44.9
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �25
Inco
me
Stat
emen
tN
BA
DA
ED
mn
2003
2004
2005
2006
F20
07F
2008
F20
09F
Inte
rest
Inc
ome
�,4
�8.3
�
,956
.5
3,8
52.0
5
,�90
.9
5,7
�8.5
6
,453
.4
7,2
98.3
In
tere
st E
xpen
se (
647.
7) (
946.
7) (
2,�7
5.4)
(3,
�69.
5) (
3,42
3.6)
(3,
840.
6) (
4,35
6.4)
Net
Int
eres
t In
com
e 7
70.7
1
,009
.8
1,6
76.6
2
,021
.4
2,2
94.8
2
,612
.7
2,9
41.9
N
et c
omm
issi
on in
com
e 3
27.9
5
26.3
�
,33�
.4
632
.4
77�
.5
925
.8
�,�
20.3
D
ivid
end
inco
me
2.3
�
.�
�.5
3
.2
�.9
2
.2
2.5
O
ther
ope
ratin
g in
com
e �
62.2
�
95.8
4
0�.8
3
2�.4
3
40.7
3
74.8
4
�9.8
T
otal
Non
-Int
eres
t In
com
e 4
92.3
7
23.3
1
,734
.6
957
.0
1,1
14.1
1
,302
.8
1,5
42.5
L
oan
Los
s Pr
ovis
ions
(�8
.9)
(8�
.4)
(�5
4.8)
(80
.6)
(�6
�.�)
(�9
�.0)
(22
�.6)
Ope
rati
ng I
ncom
e 1
,244
.1
1,6
51.7
3
,256
.4
2,8
97.9
3
,247
.8
3,7
24.5
4
,262
.7
Staf
f co
sts
(24
9.6)
(28
9.6)
(36
�.2)
(43
�.0)
(5�
6.6)
(59
4.0)
(64
4.5)
Oth
er e
xpen
ses
(2.
7) (
8.3)
(�4
.3)
(2�
.4)
(30
.0)
(37
.5)
(45
.0)
Oth
er o
pera
ting
expe
nses
(�2
0.�)
(�4
0.�)
(�9
4.7)
(22
5.8)
(26
6.5)
(3�
0.5)
(35
3.9)
Dep
reci
atio
n (
4�.7
) (
50.0
) (
52.�
) (
57.2
) (
60.8
) (
64.0
) (
70.�
)T
otal
Ope
ratin
g E
xpen
ses
(4�
4.�)
(48
7.9)
(62
2.3)
(73
5.5)
(87
3.9)
(�,
006.
0) (
�,��
3.5)
Ope
rati
ng P
rofi
t 8
30.0
1
,163
.8
2,6
34.2
2
,162
.5
2,3
73.9
2
,718
.5
3,1
49.2
O
vers
eas
Inco
me
Tax
Exp
ense
(24
.8)
(26
.4)
(53
.9)
(54
.�)
(59
.3)
(68
.0)
(78
.7)
Net
Pro
fit
805
.2
1,1
37.4
2
,580
.2
2,1
08.4
2
,314
.6
2,6
50.5
3
,070
.5
P&
L A
ppro
pria
tion
Acc
ount
:O
peni
ng B
alan
ce 3
1.3
29.
0 2
6.8
126
.2
1,1
75.8
1
,633
.6
1,8
93.0
N
et P
rofi
t for
the
year
805
.2
�,�
37.4
2
,580
.2
2,�
08.4
2
,3�4
.6
2,6
50.5
3
,070
.5
Tra
nsfe
r to
gen
eral
res
erve
s (
475.
0) (
760.
0) (
2,�0
0.0)
(2�
0.8)
(23
�.5)
(26
5.�)
(30
7.0)
Tra
nsfe
r to
spe
cial
res
erve
s -
-
-
-
-
-
-
T
rans
fer
of c
umul
ativ
e ch
ange
s in
fai
r va
lue
(0.
2) (
0.2)
-
-
-
-
-
Dir
ecto
rs’
rem
uner
atio
n (
2.9)
(2.
8) (
4.�)
(4.
6) (
5.�)
(5.
6) (
6.�)
Div
iden
d (
329.
6) (
376.
6) (
376.
6) (
843.
4) (
�,62
0.2)
(2,
�20.
4) (
2,76
3.4)
Clo
sing
Bal
ance
29.
0 2
6.8
126
.2
1,1
75.8
1
,633
.6
1,8
93.0
1
,886
.9
Global Research - UAE Global Investment House
�26 UAE Banking Sector Report January 2007
Cas
h F
low
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tem
ent
NB
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AE
D m
n20
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0520
06F
2007
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08F
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ng A
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,497
.7
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st 8
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,�63
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ion
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� In
vest
men
t sec
uriti
es in
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e -
-
-
(
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9) (
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ding
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ent
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7 2
.5
-
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-
-
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60.
8 �
37.9
�
95.0
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.0
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te-b
ack
of p
rovi
sion
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) (
55.5
) (
30.�
) -
-
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irec
tors
’ re
mun
erat
ion
-
-
-
(4.
6) (
5.�)
(5.
6) (
6.�)
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n on
sal
e of
trad
ing
inve
stm
ents
(59
.�)
�,2
29.0
�
0.5
-
-
-
-
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ign
curr
ency
adj
ustm
ents
-
-
-
0.8
�
.0
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�
.3
Tax
pai
d (
9.�)
(32
.4)
(45
.0)
(54
.�)
(59
.3)
(68
.0)
(78
.7)
Wor
king
Cap
ital
1
,397
.9
(87
1.0)
613
.0
(5,
151.
7) (
644.
3) (
589.
0) (
890.
4)O
pera
ting
prof
it be
fore
cha
nges
ope
ratin
g as
sets
& li
abili
ties
Dec
/ (in
c) in
loan
s an
d ad
vanc
es (
4,29
5.�)
(6,
4�7.
2) (
�6,2
�4.7
) (
5,23
�.6)
(6,
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9,02
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(��
,756
.3)
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/ (in
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due
s fr
om b
anks
& c
entr
al b
anks
�,2
92.3
�
5�.9
4
60.2
-
-
-
-
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er a
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s 2
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(
56.2
) (
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) (
�27.
4) (
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c/(d
ec)
in d
epos
its f
rom
ban
ks
2,5
45.2
(
4,80
2.9)
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7) 2
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5
�2.7
6
46.0
5
�3.5
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c/(d
ec)
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its f
rom
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tom
ers
�,8
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7
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5 �
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6 In
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ther
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3,9
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9.4)
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256.
4) (
233.
3) (
�05.
0) 3
9.9
Tot
al o
pera
ting
2,2
28.6
1
,626
.7
3,4
27.4
(
2,91
2.5)
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86.1
2
,309
.9
2,4
64.5
In
vest
ing
Inve
stm
ent s
ecur
ities
inco
me
-
-
-
3.2
�
.9
2.2
2
.5
Add
ition
s to
fix
ed a
sset
s, n
et o
f di
spos
als
(32
.4)
(5�
.2)
(75
.9)
(85
.2)
(68
.8)
(83
.5)
(�0
�.2)
(Pur
chas
e)/S
ale
of n
on-t
radi
ng in
vest
men
ts (
�,88
6.�)
(�,
2�6.
6) (
2,92
9.0)
(�,
8�7.
9) (
�,45
6.2)
(�,
402.
2) (
�,28
5.4)
Cha
nge
in tr
adin
g se
curi
ties
-
-
-
(78
.9)
(85
.2)
(89
.4)
(5�
.9)
Cha
nge
in d
epos
its w
ith b
anks
-
-
-
2,7
35.8
6
20.�
9
67.4
�
,��3
.2
Cha
nge
in d
epos
its w
ith c
entr
al b
ank
-
-
-
(22
5.�)
(49
.5)
�26
.3
(48
.0)
Tot
al in
vest
ing
(1,
918.
4) (
1,26
7.8)
(3,
004.
9) 5
32.0
(
1,03
7.7)
(47
9.3)
(37
0.7)
Fin
anci
ngC
hang
es in
sub
ordi
nate
d co
nver
tible
not
es -
-
-
2
,500
.0
-
-
-
Cha
nges
in m
ediu
m-t
erm
loan
s -
-
-
2
3�.8
-
(
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8) -
D
ivid
end
paid
to s
hare
hold
ers
(28
2.5)
(32
9.6)
(37
6.6)
(37
6.6)
(84
3.4)
(�,
620.
2) (
2,�2
0.4)
Tot
al f
inan
cing
(28
2.5)
(32
9.6)
(37
6.6)
2,3
55.2
(
843.
4) (
1,85
2.0)
(2,
120.
4)N
et c
hang
e in
cas
h ba
lanc
es 2
7.7
29.
3 4
5.9
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5.1
(
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) (
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)N
et c
ash
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nces
at b
egin
ning
280
.�
307
.9
337
.2
383
.0
357
.7
362
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Net
cas
h ba
lanc
es a
t end
307
.9
337
.2
383
.0
357
.7
362
.7
34�
.3
3�4
.7
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �27
FACT SHEETNBAD
2003 2004 2005 2006F 2007F 2008F 2009FProfitability - Return on Average Assets �.9% 2.3% 3.7% 2.5% 2.5% 2.6% 2.8% - Return on Average Equity 2�.�% 25.7% 43.9% 28.0% 27.3% 29.0% 32.0% - Net interest income / Op. Income after Provisions for Loan Losses 60.4% 56.2% 46.7% 67.0% 65.7% 65.0% 63.8% - Non-interest income / Op. Income after Provisions for Loan Losses 39.6% 43.8% 53.3% 33.0% 34.3% 35.0% 36.2%
Margins - Net income / Revenues 56.8% 58.�% 67.0% 40.6% 40.5% 4�.�% 42.�% - Operating profit / Revenues 58.5% 59.5% 68.4% 4�.7% 4�.5% 42.�% 43.�% - Interest Expense to Interest Income 45.7% 48.4% 56.5% 6�.�% 59.9% 59.5% 59.7% - Interest Income to Interest Earning Assets 4.0% 4.4% 5.8% 6.4% 6.5% 6.8% 6.9% - Investment Income to Investment Assets 0.0% 0.0% 0.�% 0.�% 0.�% 0.�% 0.�% - Interest Expense to Interest Bearing Liabilities �.8% 2.2% 3.8% 4.5% 4.6% 4.7% 4.7% - Net Spread 2.2% 2.�% 2.�% �.8% �.9% 2.�% 2.2% - Net Interest Margin 2.�% 2.3% 2.5% 2.5% 2.6% 2.7% 2.8%
Efficiency -Cost / Op. Income after Provisions for Loan Losses 33.3% 29.5% �9.�% 25.4% 26.9% 27.0% 26.�% - Staff Expense / Op. Income after Provisions for Loan Losses 20.�% �7.5% ��.�% �4.9% �5.9% �5.9% �5.�% - Cost to Average Total Assets �.0% �.0% 0.9% 0.9% 0.9% �.0% �.0%
Liquidity - Loans to Interest Earning Assets 80.2% 68.9% 65.6% 68.7% 70.8% 73.6% 76.5% - Loans to Customer Deposits 94.7% 93.3% 87.8% 94.7% 96.4% 98.2% 99.9% - Customer Deposits to Equity 775.�% 805.9% 857.5% 747.7% 755.3% 795.4% 874.7% - Due from Banks to Due to Banks 65.2% ��7.6% �8�.4% �5�.2% �38.2% �2�.9% �07.4%
Credit Quality - Provisions to Average Gross Loans 0.�% 0.2% 0.3% 0.�% 0.3% 0.3% 0.3% - Non Performing Loans (AED ‘000) 803,�94 775,978 806,�37 829,295 87�,955 985,373 �,��3,03� - Loan Loss Reserve (AED ‘000) 669,905 7�3,942 848,243 928,8�0 �,089,944 �,280,984 �,502,59� - NPLs to Gross Loans 2.7% 2.�% �.5% �.4% �.4% �.3% �.3% - NPLs to (Equity + Loan Loss Reserve) �7.0% �4.�% �0.3% 9.2% 8.8% 9.2% 9.9% - Loan Loss Reserve to Gross Loans 2.3% 2.0% �.6% �.6% �.7% �.7% �.8% - NPL Coverage 83.4% 92.0% �05.2% ��2.0% �25.0% �30.0% �35.0%
Capital Adequacy - Equity to Total Assets 9.3% 8.5% 8.3% 9.2% 9.2% 8.9% 8.3% - Equity to Gross Loans �3.6% �3.3% �3.3% �4.�% �3.7% �2.8% ��.4%
Constitution of Total Income - Net commission income / Op. Income after Provisions for Loan Losses 26.4% 3�.9% 40.9% 2�.8% 23.8% 24.9% 26.3% - Investment securities income / Op. Income after Provisions for Loan Losses 0.2% 0.�% 0.0% 0.�% 0.�% 0.�% 0.�% - Other operating income / Op. Income after Provisions for Loan Losses �3.0% ��.9% �2.3% ��.�% �0.5% �0.�% 9.8%
Operating Performance - Change in Net Interest Income after Provisions for Loan Losses �6.3% 23.5% 63.9% 27.5% 9.9% �3.5% �2.3% - Change in Other Income 27.0% 20.8% �05.2% -20.0% 6.0% �0.0% �2.0%
Ratios Used for Valuation - Shares in Issue (‘000) 94,�60 94,�60 94�,600 �,224,080 �,224,080 �,224,080 �,224,080 - EPS (AED) 8.6 �2.� 2.7 �.7 �.9 2.2 2.5 - Book Value Per Share (AED) 43.� 5�.� 7.4 6.6 7.2 7.7 8.0 - Market Price Year End (AED) * ��.7 20.8 20.8 20.7 23.0 23.0 23.0 - P/E (x) �.4 �.7 7.6 �2.2 �2.2 �0.6 9.2 - P/BV (x) 0.3 0.4 2.8 3.� 3.2 3.0 2.9 * Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
Global Research - UAE Global Investment House
�28 UAE Banking Sector Report January 2007
• It was registered in �994 under the Commercial Companies Law as a Public Joint Stock Company. NBD is today among the biggest banks in the UAE, in terms of total assets, deposits and branch network.
• The bank offers personal banking (current accounts, saving accounts, private banking, credit cards, personal loans, car loans, etc.), corporate banking, and investment banking (treasury products, funds, etc.) services.
• It has a strong franchise, particularly in the emirate of Dubai, where it is a prominent provider of retail banking services. Besides its branches, its alternative delivery channels include call centres, tele-banking, mobile banking and on-line banking.
Recent developments
• In December 2006, NBD announced partnership with HDFC Bank, one of India’s premier banks to help conduct their banking transactions in UAE and in India, in a seamless and cost-efficient manner. The partnership will offer a series of banking products and services such as joint account facilities, remittances, wealth management solutions, preferential pricing on home loans in India and others. NRI customers will also be able to avail comprehensive wealth management solutions including investment products and insurance, with advisory services to help them choose the right investment strategy to suit their personal financial profiles and needs.
Reuters Code:NBDD.DU
Listing:Dubai Financial Market
CMP:AED 9.0 (As on �6th January, 2007)
National Bank of Dubai
Key DataEPS (AED)*
BVPS (AED)*
P / E (x)
P / BV (x)
Avg. daily vol.(‘000)
52 week Lo / Hi (AED)
Market Cap (AED mn)
Target Price (AED)
0.8
4.2
��.7
2.2
206.3
8.67 – 20.23
��,67�.0
�0.�
Source: Global Research* Projected (2006)
Background
• The National Bank of Dubai (NBD) was established in �963 as The National Bank of Dubai Limited under a charter of the Ruler of Dubai, with one branch on the other side of the Dubai creek. The bank was intended to play a vital role in developing Dubai into a leading business hub of the region.
Buy
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �29
• In November 2006, the bank announced the launch of NBD Academy, a comprehensive training facility that primarily caters to the training and development of UAE Nationals in the area of banking and finance. The fully-equipped academy will provide a platform for UAE Nationals in both the Al Misha’al and Programme for Accelerated Learning to become leaders within their areas of expertise. Al Misha’al is the bank’s leading training programme that helps high school graduates to perform specialist roles in Retail Banking and Operations. PAL is NBD’s Graduate Trainee programme where fresh graduates go through a 2�-month training to gain the skills and knowledge to perform supervisory or managerial roles.
• In November 2006, NBD announced its plans to expand investment banking business in the Middle East, after receiving approval to operate as an authorised firm from the Dubai International Financial Centre through its �00% owned subsidiary NBD Investment Bank Limited. It will provide a full range of wholesale banking products, including investment banking, asset management and private equity. In the initial phase, the subsidiary will focus on the Gulf Region and in the second phase, operations will be expanded to include the greater Middle East, Turkey, India and China.
• NBD listed $500mn of Floating Rate Notes on the Dubai International Financial Exchange, in its second listing on the region’s international stock market in October 2006. The notes, which are due to mature in 20�6, were issued under the bank’s Euro Medium Term Notes program, which was increased from $�bn to $3bn in June 2006. Apart from the London Stock Exchange, the notes are also listed on the DIFX.
• In September 2006, National Financial Services (NFS), a subsidiary of the bank, announced the launch of its online trading service, which will allow NFS customers to buy and sell securities in Dubai Financial Market and Abu Dhabi Securities Market online.
Global Research - UAE Global Investment House
�30 UAE Banking Sector Report January 2007
National Bank of Dubai – Background
NBD was established in �963 as The National Bank of Dubai Limited under a charter of the Ruler of Dubai, with one branch on the other side of the Dubai creek. The bank was intended to play a vital role in developing Dubai into a leading business centre. It was registered in �994 under the Commercial Companies Law as a Public Joint Stock Company.
NBD is among the biggest banks in the UAE, in terms of total assets, deposits and branch network. The bank has been a consistent performer during the last few years. It has built a reputation of stability and strength much appreciated by both shareholders and customers. Recognizing its leading performance, the bank was awarded with the Dubai Quality Award for the year 2005.
The bank has a strong track record of over 40 years in managing corporate & financial institutions relationships in trade, manufacturing, construction, leisure, tourism, real estate and utilities sectors. The thrust has largely been within UAE, but it selectively provides finance to projects & businesses throughout the GCC. Many of the corporate banking customers use an array of the bank’s retail banking products to meet their employees banking needs.
Being a leader in corporate banking, the bank offers a wide array of diversified financial services. Its portfolio covers a wide range of services including transport, real estate, construction, manufacturing, tourism and service industries throughout the region. To cater to the consumer segment, the bank’s ‘Private Office’ provides private banking services, offering customer-tailored solutions to preserve and protect the personal wealth of its clients. Apart from providing with an array of exclusive service based products, secured facilities, credit cards, personal loans, auto loans and home loans, the bank also offers a variety of treasury products and services, advising customers on exchange markets and interest rate outlook.
The bank provides automated banking services, which consist of an internet service, a telebanking facility and an SMS based service. With a comprehensive card portfolio that provides an array of benefits, the bank has, over the years, built a wide ATM network as well as Point of Sale terminals in select locations throughout the UAE. Currently the bank has 40 branches and �53 ATMs.
NBD prides itself on service and customer satisfaction, and constantly strives to endorse the values of trust and integrity that it has always stood for. At the same time the bank believes in serving the changing needs of its clients with responsiveness and innovation. In this enterprise oriented business environment, the bank has established a very conservative approach with total dedication to sound banking practices, efficient service and a protective attitude towards depositors.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �3�
Analysis of financial performance – 2005
NBD’s balance sheet increased from AED35.2bn in 2002 to AED5�.4bn in 2005, registering a CAGR of �3.5% for the period 2002-05. On a y-o-y basis, the bank’s asset growth in 2005 was 27.7% as compared to 2004. The year 2005 was a year which saw exceptional activity in the capital market in the UAE. There was surplus liquidity in the system due to the oft repeated reason of high oil prices. The frequency of IPOs resulted in strong of capital market activities. However, NBD chose not to take advantage of this unusual level of IPO activity to build highly leveraged positions. Instead the bank preferred a strategy to deliver steady and sustainable earnings growth.
Strong deposit franchise
Core customer deposits continue to contribute to the overall balance sheet. Customer deposits increased from AED27.2bn in 2002 to AED37.�bn in 2005, CAGR of �0.9% for the period 2002-05. The share of deposit base to the total balance sheet declined from 77.2% in 2002 to 72.2% in 2005.
NBD issued US$750mn floating rate notes during 2005 under a US$�bn Euro Medium Term Note program. The maturity of these floating rate notes is December 20�0. In order to reduce the asset-liability mismatch so as to lend for long-term projects, the floating rates notes are gaining more prominence. This is a trend witnessed in the UAE banking sector as more and more banks are strengthening its funding base by way of short and medium-term borrowings. The contribution of these medium-term notes to the overall size was 5.4% in 2005.
Proportion of shareholders’ equity to the total balance sheet declined from �5.6% in 2002 to �0.7% in 2005. On the other hand, deposits from banks increased from AED2.2bn in 2002 to AED5.6bn in 2005, CAGR of 35.5% for the period under review. The share of due to banks increased from 6.4% in 2002 to �0.8% in 2005.
Chart 1: Liabilities & Shareholders’ Equity Break-Up
Source: Company Reports, Global Research
Total external funding, which includes customer deposits, due to banks and medium term notes increased from AED29.4bn in 2002 to AED45.4bn in 2005, registering a CAGR of �5.6%. Share of customer deposits to total external funding declined from 92.4% in 2002 to
100%
95%
90%
85%
80%
75%
70%2002 2003 2004 2005
Customer deposits Due to banks Shareholders funds
Medium term notes Other liabilities
77.2%
6.4%
15.6%
0.8%
15.4%
8.2%
75.4% 78.2%
7.5%
13.5%
0.9%1.0% 1.0%
5.4%
10.7%
10.8%
72.2%
Global Research - UAE Global Investment House
�32 UAE Banking Sector Report January 2007
8�.7% in 2005. During the year 2005, the bank raised funds by way of medium-term notes to the tune of AED2.8bn. The contribution of these medium-term notes to the total external funding base was 6.�% in 2005. Proportion of due to banks to the total funding increased from 7.6% in 2002 to �2.3% in 2005.
Chart 2: External Funding Mix
Source: Company Reports, Global Research
Increasing thrust towards lending
During the last few years, the bank’s asset mix continued to change with greater thrust towards loan book. Credit portfolio of the bank registered an impressive growth and now contributes almost 54% of the total assets. Reforms in the regulatory regime, Government thrust to accelerate privatization, Government spending on infrastructure projects and growth in the real estate market, all of which suggesting strong asset growth going forward. As lot of construction, real estate, manufacturing and infrastructure projects are in the pipeline, the bank is comfortably placed in terms of increasing its deployment to higher yielding earning assets. This will further help the bank to increase its core earnings.
Net loans of the bank grew at a CAGR of 44.6% during the last three years. The contribution of net loans to total assets increased from 26.3% in 2002 to 54.3% in 2005. Strong demand for funds both from the corporate as well as the consumer segment, have helped banks to channel funds from lower yielding to higher yielding assets.
Investment securities portfolio increased from AED�3.�bn in 2002 to AED�6.2bn in 2005, CAGR of 7.2%. The share of securities to the total balance sheet declined from 37.4% in 2002 to 3�.5% in 2005. Proportion of cash and balances with the Central Bank to total assets is maintained around 5% level, with the exception of �0.7% in 2004. The share of cash and balances with Central Bank as at end 2005 was 5.0% as compared to 5.5% in 2002. Contribution of due to banks to overall balance sheet declined considerably from 28.2% in 2002 to 6.9% in 2005, thereby helping in better utilization of funds and stronger growth in interest income by way of shifting asset mix.
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%2002 2003 2004 2005
6.1%
81.7%
12.3%
91.3%
8.7%
90.2%
9.8%
82.4%
7.6%
Due to banks Customer deposits Medium term notes
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �33
Chart 3: Asset Composition
Source: Company Reports, Global Research
Consumer Lending – Key Focus Segment
NBD’s loan portfolio is distributed across various sectors like consumer, construction & real estate, trading, transport, manufacturing and others. During the last three years, the credit deployment to consumer, construction & real estate and manufacturing segments was particularly strong. A number of real estate friendly regulations are likely to give a further fillip to the real estate sector. Changing demographics and the increasing expatriate population is likely to boost the consumer lending segment.
Net loan portfolio of the bank increased from AED9.2bn in 2002 to AED27.9bn in 2005, CAGR of 44.6% for the period 2002-05. During this period, consumer lending portfolio grew at a CAGR of 66.7% from AED�.2bn in 2002 to AED5.6bn in 2005. Correspondingly, the share of consumer lending to total net loans increased from �3.2% in 2002 to 20.2% in 2005. Construction and real estate sectors’ growth during the last three years was 54.8%. Deployment towards this segment increased from AED�.8bn in 2002 to AED6.5bn in 2005. Share of construction and real estate to total net loans increased from �9.0% in 2002 to 23.4% in 2005, the highest contributor to the overall net loan book of the bank.
Manufacturing sector too witnessed strong growth during the last three years from AED97�.5mn in 2002 to AED2,988.0mn in 2005, CAGR of 45.4%. Proportion of the manufacturing sector to the total net loan portfolio increased marginally from �0.5% in 2002 to �0.7% in 2005. The share of trade, transport and others to the total net loans as at end 2005 was �3.5%, 9.2% and 23.�% respectively.
100%
80%
60%
40%
20%2002 2003 2004 2005
54.3%
31.5%
6.9%
5.0%10.7%
10.4%
35.0%
41.3%33.0%
43.7%
15.5%
5.2%5.5%
28.2%
37.4%
26.3%
Loan % advances Securities Due from banks
Cash & balances with Central Bank Other assets Fixed assets
Global Research - UAE Global Investment House
�34 UAE Banking Sector Report January 2007
Chart 4: Loan Mix (Net)
Source: Company Reports, Global Research
Judiciously shifting asset mix
NBD has steadily increased its net loan to deposit ratio during the last three years as demand for corporate as well as consumer credit remained strong as discussed earlier. The net loan to deposit ratio of the bank increased from 34.0% in 2002 to 75.3% in 2005. Investments to customer deposit ratio declined from 48.4% in 2002 to 43.6% in 2005, a clear strategy shift tilting in favor of credit deployment. Cash and balances with Central Bank as a percentage of customer deposits hovered around 7.0%, with the exception of �3.7% in 2004.
Chart 5: Loan to deposits
Source: Company Reports, Global Research
Asset Quality – Showing No Signs Of Stress
The bank has focused on managing risks to ensure compliance within approved risk measures and controls which include market, credit and operational risk. NBD manages credit risk by setting limits for individual borrowers and groups of borrowers, products and for geographical and industry segments. It also monitors credit exposures and continually assesses the credit worthiness of counterparties.
100%
80%
60%
40%
20%
0%2002 2003 2004 2005
10.5%
16.2%
17.6%
23.2%
19.0%
13.2%10.0%
20.0%
21.0%
16.2%
17.6%
15.2% 15.5%
16.0%
17.8%
12.8%
23.2%
14.7% 20.2%
23.4%
23.1%
13.5%
9.2%
10.7%
Manufacturing Transport & services Trade
Other Construction & real estate Personal
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%2002 2003 2004 2005
34.0% 48.4%
7.1%
6.8%
43.7% 57.9% 52.8% 44.8%
13.7%
6.9%
43.6%75.3%
Loan to deposits Investment to deposits Cash & Bal. with Central Bank to deposits
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �35
In addition, the bank obtains security where appropriate, enters into master netting arrangements and collateral arrangements with counterparties and limits the duration of exposures. In order to manage credit concentration, the bank achieves through diversification of lending activities to avoid undue concentrations of risks with individuals or groups of customers in specific locations or businesses.
Chart 6: Asset Quality
Source: Company Reports, Global Research
Gross non-performing loans (NPLs) declined from AED423.4mn in 2002 to AED329.2mn in 2005. During this period the gross lending portfolio grew at a CAGR of 44.0% from AED9.4bn in 2002 to AED28.2bn in 2005. Gross NPLs to gross loans ratio declined from 4.5% in 2002 to �.2% in 2005. During the same period, the NPL coverage ratio of the bank improved from 86.2% in 2002 to �00.3% in 2005.
Chart 7: NPL Coverage
Source: Company Reports, Global Research
32.0
28.0
24.0
20.0
16.0
12.0
8.02002 2003 2004 2005
329.2
28.2
313.0
16.9289.4
11.9
9.4
423.4
NPLsGross Loans
AED
bn
450.0
400.0
350.0
300.0
250.0
200.0
AED
mn
5.0%
4.0%
3.0%
2.0%
1.0%2002 2003 2004 2005
110.0%
100.0%
90.0%
80.0%
70.0%
60.0%
4.5%
2.4%
1.9%
1.2%
100.3%
99.6%
91.3%
86.2%
CoverageNPL to gross loans
Global Research - UAE Global Investment House
�36 UAE Banking Sector Report January 2007
Core earnings to lead growth…
The year 2005 was a year which saw exceptional activity in the capital market in the UAE. There was surplus liquidity in the system due to the oft repeated reason of high oil prices. The frequency of IPOs resulted in strong capital market activities. However, NBD chose not to indulge in unusual level of IPO activity to build highly leveraged positions. Instead the bank preferred a strategy to deliver steady and sustainable earnings growth.
Core earnings i.e. net interest income of the bank increased from AED744.2mn in 2002 to AED�,020.0mn in 2005, CAGR of ��.�% for the period under review. The bank’s thrust towards prudently increasing its lending book and shifting asset mix in favor of high-yielding assets has paid off well.
As the bank preferred to focus on core banking activities rather than building leveraged positions due to the buoyancy in the capital markets, has resulted in core earnings to drive profit growth. In the context of the overall banking sector, most of the banks witnessed strong capital market activities and thereby resulting in strong revenues from these activities.
Chart 8: Core income
Source: Company Reports, Global Research
Fees and commission income driving non-interest income growth
Overall non-interest income increased from AED230.0mn in 2002 to AED62�.0mn in 2005, registering a CAGR of 39.2%. Fees and commission income increased from AED�34.2mn in 2002 to AED283.5mn in 2005, CAGR of 28.3%. The share of fees and commission income to total non-interest income declined from 58.3% in 2002 to 45.7% in 2005. However for the years 2003 and 2004, the contribution was 3�.7% and 28.0% respectively.
Income by way of gain on disposal of available for sale (AFS) securities increased from AED3�.3mn in 2002 to AED�29.�mn in 2005, CAGR of 60.4%. The contribution of capital gains on AFS securities to the total increased from �3.6% in 2002 to 20.8% in 2005. Most noticeable is the contribution in 2003 and 2004, which was 50.0% and 56.�% respectively.
1,050.0
980.0
910.0
840.0
770.0
700.0
35.0%
25.0%
15.0%
5.0%
-5.0%
15.0%2002 2003 2004 2005
Net interest income NII Growth
744.2
843.8
815.2
1,020.0
25.1%
-3.4%
13.4%
29.8%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �37
Chart 9: Non-Interest Income Break-Up
Source: Company Reports, Global Research
Margins…
NBD’s margins improved by 6bps from 2.48% in 2002 to 2.54% in 2005. On the lending side, yield on interest earning assets increased by 93bps from 3.8% in 2002 to 4.8% in 2005. Cost of funds increased by 8�bps from �.4% in 2002 to 2.2% in 2005. During the year 2005 the bank issued US$750mn floating rate notes under a US$�bn Euro Medium Term Note program. The maturity of these floating rate notes is December 20�0.
Chart 10: Net Interest Margins
Source: Company Reports, Global Research
Efficiency Ratios
Operating expenses increased from AED367.8mn in 2002 to AED53�.6mn in 2005, CAGR of �3.�%. On the other hand, total income (net interest income plus non-interest income) grew from AED974.2mn in 2002 to AED�,64�.0mn in 2005, CAGR of �9.0%.
Business (customer deposits plus gross loan book), increased from AED36.6bn in 2002 to AED65.3bn in 2005, CAGR of 2�.3%. Income growth during the last three years has been in line with the growth in business. However, in order to support growth in business, overhead costs have not increased in sync, thereby resulting in the bank’s cost to income ratio to decline by 536bps from 37.6% in 2002 to 32.4% in 2005.
6.5%
4.5%
2.5%
0.5%2002 2003 2004 2005
2.80%
2.60%
2.40%
2.20%
1.4%3.8%
2.48%
2.67%
3.5%
0.9%
3.5%
1.1%
2.48%
2.54%
2.2%
Yield on interest earning assets Cost of interest bearing liabilities Net interest margin
4.8%
100%
80%
60%
40%
20%2002 2003 2004 2005
OthersGains on foreign currencies
Gains from trading securitiesGains from disposal of available for sale securitiesFees & commission income
58.3%
13.6%
6.3%
15.0%
6.7% 3.6%
7.7%
7.0%
50.0%
31.7%28.0% 45.7%
20.8%
56.1%
19.1%
7.3%4.9%
9.6%
4.8%3.8%
Global Research - UAE Global Investment House
�38 UAE Banking Sector Report January 2007
Operating expense (opex) to average assets increased marginally by 8bps from �.08% in 2002 to �.�6% in 2005. Despite the increase by 8bps, we believe the opex to average assets ratio is still lower compared to peers and the bank has managed to achieve operational efficiency for the period under consideration. The increase in expense ratios reflects the necessary investment in technology, manpower and distribution channels, in support of the on-going and new business initiatives.
Chart 11: Cost Structure
Source: Company Reports, Global Research
Net profit of the bank grew at a CAGR of 24.7% for the period 2002-05. Profits increased from AED568.8mn in 2002 to AED�,�02.8mn in 2005. This was on the back of robust growth in gains on disposal of AFS securities, which grew at a CAGR of 60.4%. Other non-interest income grew at a CAGR of 35.3% during the last three years from AED�98.7mn in 2002 to AED49�.9mn in 2005.
Return ratios namely return on average equity (ROAE) and return on average assets (ROAA) increased due to the strong growth in profitability of the bank during the last three years. ROAE increased from �2.2% in 2002 to 22.6% in 2005. Correspondingly, ROAA increased from �.7% in 2002 to 2.4% in 2005.
Chart 12: Return Ratios
Source: Company Reports, Global Research
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
1.5%
1.4%
1.3%
1.2%
1.1%
1.0%
0.9%
0.8%2002 2003 2004 2005
1.1%
37.8%
36.2%
1.4%
1.1%
29.2%
32.4%
1.2%
Cost to income Opex to average assets
30.0%
25.0%
20.0%
15.0%
10.0%
3.0%
2.5%
2.0%
1.5%
1.0%200520042003
ROAAROAE
12.2%
16.3%
2.3%
1.7%
2.4%
19.3%
22.6%
2.4%
2002
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �39
Analysis of Nine-Month Performance 2006
• NBD’s business momentum continued in the nine-month period for the year 2006. Balance sheet size increased by 27.7% y-o-y from AED49.7bn in 3Q2005 to AED63.5bn in 3Q2006. Sequentially, asset size increased by 8.0% and the year-to-date growth has been 23.5%.
• Customer deposits continued to register impressive growth as deposits increased from AED36.5bn in 3Q2005 to AED45.2bn in 3Q2006, a y-o-y growth of 23.9%. On a q-o-q basis, the growth in deposit mobilized stood at 6.4% and y-t-d the growth has been 2�.8%.
• As mentioned earlier, the bank has increased thrust towards shifting its asset base in favor of advance book. This has been on the back of strong demand for funds from the corporate as well as the consumer segments. Net loan book of the bank increased from AED25.7bn in 3Q2005 to AED38.7bn in 3Q2006, y-o-y growth of 50.4%. Sequentially, the loan book grew by 9.5% and y-t-d, the growth in the lending portfolio stood at 38.6%.
• Investment portfolio of the bank increased from AED�5.2bn in 3Q2005 to AED�7.5bn in 3Q2006, y-o-y growth of �5.�%. However, the growth in the investment book is moderating and sequentially the growth is a modest 3.5% and year-to-date, the growth in investments in securities is 8.3%. We expect business momentum to remain buoyant due to lot of projects in the pipeline, which will further drive loan growth.
Table 1: Key Balance Sheet ItemsAmount AED mn 3Q2005 2005 2Q2006 3Q2006 y-o-y q-o-q y-t-dSecurities �5,227.7 �6,�84.2 �6,939.0 �7,524.� �5.�% 3.5% 8.3%Net Loans 25,744.3 27,936.7 35,366.7 38,720.7 50.4% 9.5% 38.6%Customer Deposits 36,460.7 37,09�.5 42,466.� 45,�70.3 23.9% 6.4% 2�.8%Balance Sheet Size 49,72�.8 5�,408.3 58,790.3 63,476.3 27.7% 8.0% 23.5%
Source: Company Reports
• Credit deployment to consumer, construction & real estate and manufacturing segments was particularly strong during the last three years. Year to date, loan growth has remained strong as well on the back of continued thrust on the above mentioned economic sectors. The bank capitalized on these opportunities as is evident from the rising net loan to deposit ratio. As at end September 2005, this ratio stood at 70.6%, which increased to 75.3% by end 2005. The loan to deposit ratio increased further to 83.3% in 2Q2006 and to 85.7% as at end September 2006.
• Cash and balances with the Central Bank declined from AED3.4bn in 3Q2005 to AED3.3bn in 3Q2006, a y-o-y decline by 3.8%. On a sequential basis, the decline is more pronounced as cash and balance with Central Bank declined by �4.4%. However, year to date these balances registered 27.5% growth. These balances as a percentage of customer deposits declined from 9.3% in 3Q2005 to 7.2% in 3Q2006. As discussed earlier, the bank has managed to maintain its cash and balances with Central Bank to customer deposit ratio around 7.0%.
Global Research - UAE Global Investment House
�40 UAE Banking Sector Report January 2007
• Investment portfolio as proportion of customer deposits too decelined from 4�.8% in 3Q2005 to 38.8% in 3Q2006. As at year-end 2005, this ratio was 43.6% and for 2Q2006 it was 39.9%. There is a clear shift of business strategy by way of reducing cash and balance with Central Bank and lower incremental investments in securities towards higher loan deployment.
Chart 13: Loan to Deposits (Quarterly)
Source: Company reports, Global Research
• Net profit for the nine-month period ending September 2006 declined by �2.5% from AED864.0mn in 9M2005 to AED755.7mn in 9M2006. Net interest income increased by 2�.2% from AED743.2mn in 9M2005 to AED90�.0mn in 9M2006.
• Non-interest income declined by �4.8% from AED473.4mn in 9M2005 to AED403.�mn in 9M2006. Within non-interest income, the bank registered a loss on the AFS securities to the tune of AED27.0mn in 9M2006 as compared to a gain on these investments of AED�27.2mn in 9M2005. However, other non-interest income increased from AED346.2mn in 9M2005 to AED430.2mn in 9M2006, an increase of 24.2%.
Table 2: Income StatementAmount AED mn 3Q2005 3Q2006 % 9M2005 9M2006 %Interest income 498.2 858.6 72.3% �,330.6 2,277.3 7�.2%Interest expense (248.3) (550.7) �2�.8% (587.4) (�,376.4) �34.3%Net interest income 249.9 307.9 23.2% 743.2 901.0 21.2%Gain / (Loss) from disposal of available for sale securities
6.0 (0.7) -���.5% �27.2 (27.0) -�2�.3%
Other income ���.4 �5�.3 35.8% 346.2 430.2 24.2%Provision for loan losses (4.5) (24.5) 444.9% 9.5 (47.6) -60�.6%Operating income 362.8 434.0 19.6% 1,226.1 1,256.4 2.5%General and administrative expenses
(�35.9) (�82.5) 34.3% (362.�) (500.7) 38.3%
Net profit 226.9 251.5 10.8% 864.0 755.7 -12.5%Source: Company Reports
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
13.0%
11.0%
9.0%
7.0%
5.0%
3.0%
70.6%
2005
Net Loans to customer deposits
3Q2006
Investment securities to customer deposits
Cash & Bal. with Central Bank to customer deposits
9.3%
41.8%
75.3%
6.9%
43.6%
8.9%
83.3%
39.9%
85.7%
7.2%
38.8%
3Q2005 2Q2006
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �4�
• Profit of the bank increased from AED226.9mn in 3Q2005 to AED25�.5mn in 3Q2006, registering a growth of �0.8% on back of strong growth in net interest income. However, profit growth was modest due to higher provision for loan losses and operating costs.
• Core income i.e. net interest income increased from AED249.9mn in 3Q2005 to AED307.9mn in 3Q2006, a growth of 23.2%. Going forward, we expect core revenues to drive growth in profits.
Chart 14: Core Earnings To Lead Growth
Source: Company Reports, Global Research
• Non-interest income increased from AED��7.4mn in 3Q2005 to AED�50.6mn in 3Q2006, a growth of 28.3%. The bank booked a loss on its AFS portfolio to the tune of AED0.7mn in 3Q2006 as against a gain on these investments of AED6.0mn in 3Q2005. However, the growth in other non-interest income increased from AED���.4mn in 3Q2005 to AED�5�.3mn in 3Q2006, a growth of 35.8%.
• General and administrative expenses increased from AED�35.9mn in 3Q2005 to AED�82.5mn in 3Q2006, a growth of 34.3%. Correspondingly, the bank’s cost to income as at 3Q2006 stood at 39.8%. The increase in overhead expenses and thereby higher cost ratio reflects the bank’s strategy to invest in technology, manpower and distribution channels, to support on-going and new business initiatives. Loan loss provisions increased by a whopping 444.9% from AED4.5mn in 3Q2005 to AED24.5mn in 3Q2006.
Chart 15: Efficiency Ratios (Quarterly)
Source: Company Reports, Global Research
360.0
320.0
280.0
240.0
200.01Q2005 2Q2005 3Q2005 4Q2005 1Q2006 2Q2006 3Q2006
Net interest income Net profit
211.6
291.4281.7
245.7
249.9
226.9
276.8
238.8
296.5
257.0
296.6
247.2
307.9
251.5
During the last six quarters, core revenues driving earningsgrowth as reported profit is lower than the net interest income.Unlike the first two quarters of 2005. where profit was strongon the back of higher gains from disposal of AFS securities
and other non-interest income.
Gains on disposal ofAFS securities and
strong other income.key contributors to
net profit.
AED
mn
200.0
180.0
160.0
140.0
120.0
100.0
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%3Q20062Q20061Q20064Q20053Q20052Q20051Q2005
Operating expense Cost to income ratio
27.2%
26.1%
37.0%
39.9%
36.2%
39.0%
39.8%
110.8115.5 135.9 169.5 154.4 163.8 182.5
AED
mn
Global Research - UAE Global Investment House
�42 UAE Banking Sector Report January 2007
Outlook
• During the last three years, the credit deployment to consumer, construction & real estate and manufacturing segments was particularly strong. In terms of commercial baking, last 3 years have been buoyant and the bank also has a good franchise in terms of deposits especially government deposits.
• In retail banking, the bank wants to establish itself in the mass affluent market. It has tied up with the major developers for mortgages. A number of real estate friendly regulations is likely to give a further fillip to the real estate sector. Changing demographics and the increasing expatriate population is likely to boost the consumer lending segment.
• The bank is targeting the high net-worth individuals to shore-up its wealth management business segment. The bank established private banking under the brand name, «The Private Office».
• In order to reduce the risk of asset-liability mismatches, the bank undertook an MTN program of around US$3bn at the rate of LIBOR + 38 bps. The inaugural program in December 2005 for US$500mn was oversubscribed by 3 times.
• With the objective to consolidate and strengthen its position in the GCC region, the bank is looking to set up branches in the GCC countries. Currently the bank has a network of 40 branches and �63 ATMs. The bank is looking favorably at Qatar and other GCC markets. The bank has a representative office in Iran, London and Jersey. The bank’s emphasis on increasing its alternative delivery channels i.e. ATM network (almost 4 ATMs per branch) will help reduce transaction cost and thereby increase operating efficiency.
• The bank has an investment banking subsidiary which is registered with DIFC. National Financial Services is the bank’s broking subsidiary. The bank has license for establishing an Islamic Finance Company, which can take only corporate deposits.
Valuation:
Based on the current market price of AED9.0, the stock is trading at ��.7x 2006E earnings and 2.2x 2006E book value. On 2007E, the stock is trading at �0.0x earnings and 2.0x book value. Based on our valuation methods, we initiate coverage on the stock with a BUY recommendation with a price target of AED�0.�, higher by ��.8% from current levels.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �43
Bal
ance
She
etN
BD
AE
D m
n 20
0320
0420
0520
06E
2007
E20
08E
2009
EA
sset
s C
ash
and
Bal
ance
s w
ith C
entr
al B
ank
�,8
36.0
4
,308
.�
2,5
49.4
2
,657
.8
2,3
22.8
2
,734
.9
3,�
40.5
D
ue f
rom
ban
ks 5
,532
.0
4,�
7�.2
3
,529
.�
4,4
��.3
5
,293
.6
6,2
46.4
7
,245
.9
Secu
ritie
s �
5,56
8.5
�4,
�0�.
� �
6,�8
4.2
�8,
450.
0 2
�,2�
7.5
24,
�87.
9 2
7,09
0.5
Loa
ns a
nd a
dvan
ces
��,
744.
3 �
6,6�
9.9
27,
936.
7 3
9,69
7.4
49,
�79.
6 5
9,94
7.3
7�,
839.
7 Fi
xed
asse
ts 4
44.9
4
05.�
3
94.�
4
4�.4
4
85.5
5
29.2
5
7�.6
O
ther
ass
ets
497
.7
662
.0
8�4
.8
945
.2
�,0
77.5
�
,206
.8
�,3
27.5
T
otal
ass
ets
35,
623.
4 4
0,26
7.3
51,
408.
3 6
6,60
3.0
79,
576.
5 9
4,85
2.7
111
,215
.6
Lia
bilit
ies
& E
quit
yL
iabi
litie
sD
ue to
ban
ks 2
,904
.9
3,0
06.9
5
,574
.7
7,0
24.2
8
,429
.0
�0,
283.
4 �
2,34
0.�
Cus
tom
er d
epos
its 2
6,87
�.3
3�,
477.
3 3
7,09
�.5
48,
960.
8 5
9,73
2.2
72,
276.
0 8
5,64
7.0
Med
ium
term
not
es -
-
2
,754
.4
2,7
54.4
2
,754
.4
2,7
54.4
2
,754
.4
Oth
er s
hort
term
bor
row
ings
-
-
-
�,3
79.5
�
,379
.5
�,3
79.5
�
,379
.5
Oth
er li
abili
ties
363
.3
345
.4
490
.0
578
.2
670
.7
77�
.3
879
.3
Tot
al li
abili
ties
30,
139.
5 3
4,82
9.6
45,
910.
6 6
0,69
7.0
72,
965.
8 8
7,46
4.5
103
,000
.2
Equ
ity
Shar
e ca
pita
l �
,080
.6
�,0
80.6
�
,296
.8
�,2
96.8
�
,296
.8
�,2
96.8
�
,296
.8
Leg
al r
eser
ve 5
40.3
5
40.3
6
48.4
6
48.4
6
48.4
6
48.4
6
48.4
Sp
ecia
l res
erve
540
.3
540
.3
648
.4
648
.4
648
.4
648
.4
648
.4
Res
erve
for
gen
eral
ban
king
ris
ks 3
00.0
3
00.0
3
00.0
3
00.0
3
00.0
3
00.0
3
00.0
G
ener
al r
eser
ve �
,769
.�
�,7
69.�
�
,769
.�
�,7
69.�
�
,769
.�
�,7
69.�
�
,769
.�
Ret
aine
d ea
rnin
gs 2
37.4
5
�2.7
6
58.5
�
,�53
.3
�,6
73.9
2
,224
.0
2,8
7�.6
Pr
opos
ed c
ash
divi
dend
648
.4
648
.4
5�8
.7
500
.7
643
.7
834
.�
980
.4
Cum
ulat
ive
chan
ges
in f
air
valu
es 3
67.8
4
6.2
(34
2.2)
(4�
0.7)
(36
9.6)
(33
2.6)
(29
9.4)
Tot
al s
hare
hold
ers’
fun
ds 5
,483
.9
5,4
37.7
5
,497
.7
5,9
06.0
6
,610
.7
7,3
88.2
8
,215
.4
Tot
al li
abili
ties
and
sha
reho
lder
s’ f
unds
35,
623.
4 4
0,26
7.3
51,
408.
3 6
6,60
3.0
79,
576.
5 9
4,85
2.7
111
,215
.6
Global Research - UAE Global Investment House
�44 UAE Banking Sector Report January 2007
Inco
me
Stat
emen
NB
DA
ED
mn
2003
2004
2005
2006
E20
07E
2008
E20
09E
Inte
rest
inco
me
�,�
��.5
�
,�67
.3
�,9
�6.0
3
,306
.5
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57.6
5
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74.8
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tere
st e
xpen
se (
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6) (
352.
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896.
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2,06
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3,28
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(4,
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et in
tere
st in
com
e 8
43.8
8
15.2
1
,020
.0
1,2
42.8
1
,531
.3
1,8
52.9
2
,205
.5
Gai
n fr
om d
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sal o
f av
aila
ble
for
sale
sec
uriti
es 2
64.4
3
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�
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(
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) 2
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4 6
7.7
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er in
com
e 2
64.2
2
40.9
4
9�.9
5
47.0
5
72.6
6
29.9
7
39.4
Pr
ovis
ion
for
loan
loss
es (
70.9
) (
37.8
) (
6.6)
(78
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(�2
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(�5
�.4)
(2�
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ratin
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e �
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26.7
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,634
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�,6
65.6
2
,00�
.0
2,3
79.7
2
,794
.6
Gen
eral
and
adm
inis
trat
ive
expe
nses
(49
6.6)
(39
9.0)
(53
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(66
4.�)
(83
0.6)
(98
9.6)
(�,
�60.
5)Pr
ovis
ion
for
tax
-
-
-
-
-
-
-
Net
pro
fit
804
.9
927
.8
1,1
02.8
1
,001
.5
1,1
70.4
1
,390
.2
1,6
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L A
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237
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f IA
S 39
-
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-
-
-
-
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et P
rofi
t for
the
year
804
.9
927
.8
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,00�
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�,�
70.4
�
,390
.2
�,6
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rans
fer
to le
gal r
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ves
-
-
(�0
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-
-
-
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cial
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-
(
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-
-
-
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onus
sha
re tr
ansf
er -
-
(
2�6.
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-
-
-
Po
rtio
n of
rea
lized
loss
on
AFS
inve
stm
ents
3.6
-
-
-
-
-
-
B
oard
of
dire
ctor
s re
mun
erat
ion
(3.
0) (
3.0)
(6.
0) (
6.0)
(6.
0) (
6.0)
(6.
0)C
ash
Div
iden
d (
648.
4) (
648.
4) (
5�8.
7) (
500.
7) (
643.
7) (
834.
�) (
980.
4)C
losi
ng B
alan
ce 2
37.4
5
12.7
6
58.5
1
,153
.3
1,6
73.9
2
,224
.0
2,8
71.6
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �45
Cas
h F
low
Sta
tem
ent
NB
DA
ED
mn
2003
2004
2005
2006
E20
07E
2008
E20
09E
Ope
rati
ng A
ctiv
itie
sN
et p
rofi
t for
the
year
8
04.9
9
27.8
�
,�02
.8
�,0
0�.5
�
,�70
.4
�,3
90.2
�
,634
.�
Adj
ustm
ents
for
:D
epre
ciat
ion
6�.
8 6
7.5
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0 9
7.�
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.7
�27
.0
�42
.9
Prov
isio
n fo
r cr
edit
loss
es
29.
5 3
7.8
6.6
7
8.�
�24
.�
�5�
.4
2�8
.0
Am
ortis
atio
n of
pre
miu
m/d
isco
unt o
n se
curi
ties
8.5
8
.4
23.
2 -
-
-
-
O
pera
ting
prof
it be
fore
cha
nges
in o
pera
ting
asse
ts a
nd li
abili
ties
904
.7
�,0
4�.4
�
,203
.6
�,�
76.6
�
,406
.2
�,6
68.6
�
,995
.0
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osits
with
UA
E C
entr
al B
ank
50.
0 (
250.
0) 2
50.0
-
-
-
-
D
ue f
rom
ban
ks
4,3
30.6
�
,6�0
.9
40�
.�
882
.3
882
.3
952
.8
999
.4
Tra
ding
sec
uriti
es (
incl
udin
g m
anag
ed f
unds
) 2
29.2
(
45�.
5) (
623.
9) -
-
-
-
L
oans
and
adv
ance
s (
2,53
3.9)
(4,
9�3.
3) (
��,3
47.8
) (
�2,3
92.3
) (
��,4
44.4
) (
�2,9
�7.9
) (
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2�.8
)O
ther
ass
ets
(�8
.4)
(�4
5.3)
(�9
3.7)
(�3
0.4)
(�3
2.3)
(�2
9.3)
(�2
0.7)
Cus
tom
ers’
dep
osits
(
287.
2) 4
,606
.0
5,6
�4.2
�
�,86
9.3
�0,
77�.
4 �
2,54
3.8
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37�.
� D
ue to
ban
ks
665
.7
�02
.�
2,5
67.8
�
,449
.4
�,4
04.8
�
,854
.4
2,0
56.7
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ther
liab
ilitie
s 8
7.5
(�7
.9)
�4�
.6
88.
2 9
2.5
�00
.6
�08
.0
Net
cas
h us
ed in
ope
rati
ng a
ctiv
itie
s 3
,428
.3
1,5
82.3
(
1,98
7.1)
2,9
43.1
2
,980
.4
4,0
73.0
4
,187
.6
Inve
stin
g A
ctiv
ities
Secu
ritie
s av
aila
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for
sale
(
2,56
7.�)
�,5
0�.4
(
�,87
8.6)
(2,
265.
8) (
2,76
7.5)
(2,
970.
4) (
2,90
2.6)
Hel
d to
mat
urity
sec
uriti
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(47
5.6)
67.
5 6
4.�
-
-
-
-
Add
ition
s to
fix
ed a
sset
s, n
et o
f di
spos
als
(37
.6)
(27
.7)
(60
.0)
(47
.3)
(44
.�)
(43
.7)
(42
.3)
Net
cas
h (u
sed
in)
from
inve
stin
g ac
tivi
ties
(
3,08
0.3)
1,5
41.1
(
1,87
4.5)
(2,
313.
1) (
2,81
1.6)
(3,
014.
1) (
2,94
4.9)
Fin
anci
ng A
ctiv
itie
sM
ediu
m T
erm
Not
es
-
-
2,7
54.4
-
-
-
-
D
ivid
ends
pai
d (
432.
3) (
648.
4) (
648.
4) (
5�8.
7) (
500.
7) (
643.
7) (
834.
�)D
irec
tors
’ fe
es
(3.
0) (
3.0)
(3.
0) (
3.0)
(3.
0) (
3.0)
(3.
0)N
et c
ash
from
(us
ed in
) fi
nanc
ing
acti
viti
es
(43
5.3)
(65
1.4)
2,1
03.0
(
521.
7) (
503.
7) (
646.
7) (
837.
1)(D
ecre
ase)
Inc
reas
e in
Cas
h an
d C
ash
Equ
ival
ents
(
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) 2
,472
.0
(�,
758.
6) �
08.3
(
335.
0) 4
�2.�
4
05.6
C
ash
and
cash
equ
ival
ents
at �
Jan
uary
�
,923
.3
�,8
36.0
4
,308
.�
2,5
49.4
2
,657
.8
2,3
22.8
2
,734
.9
Cas
h an
d C
ash
Equ
ival
ents
At 3
� D
ecem
ber
�,8
36.0
4
,308
.�
2,5
49.4
2
,657
.8
2,3
22.8
2
,734
.9
3,�
40.5
Global Research - UAE Global Investment House
�46 UAE Banking Sector Report January 2007
FACT SHEETNBD
2003 2004 2005 2006E 2007E 2008E 2009EProfitability - Return on Average Assets 2.3% 2.4% 2.4% �.7% �.6% �.6% �.6% - Return on Average Equity �6.3% �9.3% 22.6% �9.3% 20.6% 22.2% 23.7% - Net interest income / Op. Income after Provisions for Loan Losses 64.8% 6�.4% 62.4% 74.6% 76.5% 77.9% 78.9% - Non-interest income / Op. Income after Provisions for Loan Losses 40.6% 4�.4% 38.0% 30.�% 29.7% 28.5% 28.9%
Margins - Interest Expense to Interest Income 24.�% 30.2% 46.8% 62.4% 63.2% 63.9% 64.9% - Interest Income to Interest Earning Assets 3.5% 3.5% 4.8% 6.2% 6.2% 6.3% 6.5% - Interest Expense to Interest Bearing Liabilities 0.9% �.�% 2.2% 3.9% 4.0% 4.�% 4.3% - Net Spread 2.6% 2.4% 2.5% 2.3% 2.2% 2.2% 2.2% - Net Interest Margin 2.7% 2.5% 2.5% 2.3% 2.3% 2.3% 2.3%
Efficiency -Cost / Op. Income after Provisions for Loan Losses 38.2% 30.�% 32.5% 39.9% 4�.5% 4�.6% 4�.5% - Staff Expense / Op. Income after Provisions for Loan Losses 20.7% �4.7% �6.0% �9.5% 20.4% 20.6% 20.7% - Cost to Average Total Assets �.4% �.�% �.2% �.�% �.�% �.�% �.�%
Liquidity - Gross Loans to Interest Earning Assets 37.6% 49.4% 60.9% 65.6% 67.�% 68.4% 69.7% - Gross Loans to Customer Deposits 44.5% 53.5% 76.0% 8�.8% 83.�% 83.8% 84.8%
Credit Quality - Provisions to Average Gross Loans 0.7% 0.3% 0.0% 0.2% 0.3% 0.3% 0.3% - Non Performing Loans (AED mn) 289.4 3�3.0 329.2 4��.0 532.8 67�.4 865.6 - Loan Loss Reserve (AED mn) 200.3 23�.8 250.8 328.8 452.9 604.3 822.3 - NPLs to Gross Loans 2.4% �.9% �.2% �.0% �.�% �.�% �.2% - NPLs to (Equity + Loan Loss Reserve) 5.�% 5.5% 5.7% 6.6% 7.5% 8.4% 9.6% - Loan Loss Reserve to Gross Loans �.7% �.4% 0.9% 0.8% 0.9% �.0% �.�% - NPL Coverage 69.2% 74.�% 76.2% 80.0% 85.0% 90.0% 95.0%
Capital Adequacy - Equity to Total Assets �5.4% �3.5% �0.7% 8.9% 8.3% 7.8% 7.4% - Equity to Gross Loans 45.9% 32.3% �9.5% �4.8% �3.3% �2.2% ��.3%
Constitution of Total Income - Net commission income / Op. Income after Provisions for Loan Losses �2.9% ��.6% �7.3% 22.0% �8.8% �7.6% �8.2% - Investment securities income / Op. Income after Provisions for Loan Losses 2.8% 3.0% 7.2% 5.0% 4.5% 4.�% 3.7% - Other operating income / Op. Income after Provisions for Loan Losses 4.6% 3.6% 5.5% 5.9% 5.3% 4.8% 4.5%
Operating Performance - Change in Net Interest Income �3.4% -3.4% 25.�% 2�.8% 23.2% 2�.0% �9.0% - Change in Other Income 33.0% -8.8% �04.2% ��.2% 4.7% �0.0% �7.4%
Ratios Used for Valuation - Shares in Issue (‘000) �08,065 �08,065 �29,678 �,296,779 �,296,779 �,296,779 �,296,779 - EPS (AED) 7.4 8.6 8.5 0.8 0.9 �.� �.3 - Book Value Per Share (AED) 44.7 44.3 38.4 4.2 4.6 5.� 5.6 - Market Price Year End (AED) * �04.2 �2�.5 200.4 9.0 9.0 9.0 9.0 - P/E (x) �4.0 �4.2 23.6 ��.7 �0.0 8.4 7.� - P/BV (x) 2.3 2.7 5.2 2.2 2.0 �.8 �.6 * Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �47
• At the extraordinary shareholders’ meeting held on �8th March 200� a resolution was passed to transform the bank’s activities to be in full compliance with the Islamic Shari’a rules and principles. The entire process was completed on 30th June, 2002. As a result the bank transformed its conventional banking products into Islamic banking products.
• All contracts, operations and transactions now are carried out in accordance with Islamic Shari’a principles.
• In 2006, SIB acquired Sharjah National Hotel Corp. for AED520mn from the Sharjah government. SNHC’s portfolio includes high end hotels and resorts such as the Marbella Resort, the Holiday International Hotel and the magnificent Oceanic Hotel in Khorfakkan (UAE). SIB also has 99% stake subsidiary Sharjah Islamic Financial Services which is a equity and sukuk brokerage arm of SIB.
• In 2005, SIB was nominated for the IRBC “Excellence in Islamic Finance” award. In 2005 and 2006, SIB received the top UAE financial institution award for straight through payments (STP) given by Wachovia Bank.
Sharjah Islamic Bank
Key DataEPS (AED) *
BVPS (AED) *
P / E (x)
P / BV (x)
Avg. daily vol.
52 week Lo / Hi (AED)
Market Cap (AED mn)
Target Price (AED)
0.2
2.0
�2.�
�.2
909,098
2.56/5.��
2,65�.0
2.70
Source: Global Research* Projected (2006)
Background
• Sharjah Islamic Bank (SIB) was incorporated in �975 as National Bank of Sharjah (NBS) as a public joint stock company by Emiri Decree issued by His Highness the Ruler of Sharjah, United Arab Emirates. The principal activity of the Bank is to provide commercial banking, which is carried out through its branches established in United Arab Emirates. The bank changed its name from National Bank of Sharjah to Sharjah Islamic Bank on February 2nd, 2006.
Reuters Code:SIB.AD
Listing:Abu Dhabi Securities Market
CMP:AED 2.4� (As on �6th January, 2007)
Buy
Global Research - UAE Global Investment House
�48 UAE Banking Sector Report January 2007
Shareholding Structure
• The founders, Government of Sharjah, hold 27.4% of its equity while Kuwait’s Islamic bank, Kuwait Finance House hold a 20% stake in the bank. The balance 52.6% holdings is in the hands of UAE nationals and other investors.
Recent Developments
• In Nov-06, SIB signed a financing deal for US$350mn leasing Islamic bonds, or Ijara Sukuk, for Sharjah Electricity & Water Authority.
• In Oct-06, SIB announced the appointment of its new Chief Executive Officer Mohammad Abdulla. Mohammed Abdulla has held the position of SIB deputy CEO as well as Head of Investment Group and Head of Prime Business Division in his most recent role in SIB prior to this new appointment. He has also previously served as Corporate Banking Group Head and Head of Retail Banking Group of SIB.
• In Sep-06, SIB marked its debut in global sukuk market as it closed a sukuk successfully at US$225mn. It was the first rated sukuk issued by a GCC institution and structured as a floating rate note set to mature in five years’ time. The sukuk attracted 4� per cent demand from investors from Europe and Asia with the remaining 59 per cent from Middle East investors. Prominent global and regional banks took 84 per cent of the sukuk issue while fund managers got �6 per cent.
• In Sep-06, SIB launched its brokerage services subsidiary Sharjah Islamic Financial Services.
• In Mar-06, Sharjah Islamic Bank (SIB) and Kuwait Finance House (KFH) in addition to other institutions announced that they will finance a major project in the utilities sector that will be launched soon in Sharjah. The first phase of the project will have a cost of more than AED�bn.
Rating Reviews
• In Sep-06, Standard & Poor’s Ratings Services assigned its ‘BBB’ long-term and ‘A-2’ short-term counterparty credit ratings to SIB with a stable outlook. According to S&P, the ratings on SIB factor in the bank’s strong financial performance, solid capitalization, and improving asset quality. The long-term rating also includes a one-notch uplift to reflect that the government of the Emirate of Sharjah, SIB’s largest single owner, would provide support if needed. Offsetting these positive factors were SIB’s narrow customer franchise and limited operating and geographic diversification, which contribute to high concentration risks. In addition, the bank remains dependent on short-term deposits for funding.
- Standard & Poor’s Ratings Services assigned its ‘BBB’ preliminary rating to SIB’s U.S. dollar floating-rate sukuk trust certificates due 20��. This was the first-ever rating assigned by Standard & Poor’s on bank sukuk trust certificates. The ‘BBB’ rating on the floating sukuk trust certificates is based on the ‘BBB’ long-term counterparty credit rating on SIB.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �49
Analysis of Financial Performance – 2005
- SIB’s balance sheet size grew at a CAGR of 30.2% during the last three years. Asset size increased from AED2.4bn in 2002 to AED5.3bn in 2005. The contribution of leased assets to total assets averaged around 5�% of the total assets in the period 2002-2005. The share of Murabaha & Mudaraba with financial institutions increased from ��.9% in 2004 to �7.6% in 2005.
Chart 1: Asset Structure (2005) Chart 2: Liabilities Structure (2005)
Source: Global Research
- During the period 2002-05, customer deposits increased from AED�.6bn in 2002 to AED2.9bn in 2005, registering a CAGR of 23%. Deposit base as a percentage of total balance sheet size decreased from 66% in 2002 to 56% in 2005.
Chart 3: Customer Deposits Profile
Source: Global Research
- The composition of deposits underwent a major change with the current accounts which constituted 24.5% of total deposits in 2002, witnessing strong growth and accounted for 40.9% of total deposits in 2005. On the other hand, time deposits which constituted 63.5% of total deposits in 2002 witnessed a major decline and in 2005 accounted for 44.6% of total deposits.
- The bank has been primarily doing Murabaha financing as it accounted for more than 90% of the total loans and advances of the bank in the period 2002-05.
Liquid assets24%
Other asset3%
FinancingReceivables
65%Investments8%
Due to Banks2%
Other Liabilities2%
CustomerDeposits
56%Shareholdersequity40%
100%
80%
60%
40%
20%
0%2002 2003 2004 2005
Current Accounts
Time Accounts
Saving Accounts
Margins
Call Accounts
Global Research - UAE Global Investment House
�50 UAE Banking Sector Report January 2007
- In terms of sectoral distribution of leased assets which are finance leases, Government of Sharjah (along with government department & authorities) accounted for 64.7% of total leased assets which is understandable keeping in mind its relationship with the government. However, the increased thrust of SIB on the retail sector can be seen from the fact that personal financing as a percent of total recorded strong increase from 0.9% in 2002 to 26.3% in 2005.
Table 1: Leased Assets - Sectoral Distribution 2002 2003 2004 2005Government of Sharjah 33.0% 3�.5% 27.4% 28.9%Government Department & Authorities 56.8% 49.4% 49.3% 35.7%Construction 5.0% 5.3% �.9% 0.4%Trading �.3% �.6% �.4% 4.�%Personal 0.9% 5.2% �4.�% 26.3%Other 3.0% 7.0% 5.8% 4.5%
Source: Global Research
- The net profit of the bank increased by a CAGR of 49.2% as it increased from AED56mn in 2002 to AED�86.�mn in 2005. This was mainly on the back of its core net commission income which grew by CAGR of 59.9%. The bank’s return ratios namely return on average equity and return on average assets witnessed significant improvement during the period under review. Return on average equity increased from 9.7% in 2003 to �3.2% in 2005. Correspondingly, return on average assets increased from 2.4% in 2003 to 4.2% in 2005.
Chart 4: SIB - Return Ratios
Source: Global Research
- Fee & commission income increased at a CAGR of 44.8% in the period 2002-05 as it reached AED74.7mn at the end of 2005. In line with the bank’s expansion strategy, the general and administrative expenses too increased at a CAGR of 22.3%, reaching AED8�.8mn in 2005.
- With the overall increase in interest rates, SIB’s spreads improved from 2.9% in 2003 to 4.4% in 2005. SIB’s commission expenses to commission income ratio for 2005 stood at 2�.9% as compared to 29.8% recorded in 2003.
RO
AE
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%2001 2002 2003 2004 2005
Return on Average Assets Return on Average Equity
RO
AA
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �5�
Analysis of Financial Performance – 9M-2006
- SIB assets reported YTD growth of 27.6% as it reached AED6.76bn at the end of 3Q-2006 from AED5.3bn reported at the end of 2005. Financing receivable witnessed a strong growth of 37.2% as its reached AED946.4bn at the end of Sep-06.
- Leased Assets, which constitutes around 47% of the total assets reported YTD growth of �6.5% as it reached AED3.22bn at the end of 3Q-2006. We believe that leased assets will continue to account for the majority of SIB’s financing programs and it will gain prominence in SIB’s retail financing initiatives.
Table 2: SIB- Key Financial Data - 9M-2006 Balance Sheet ‘AED mn’
3Q2005 FY
2005 2Q2006 3Q2006
Growth- YoY
Growth - QoQ
Growth - YTD
Investments 283.4 427.6 55�.4 574.6 �02.8% 4.2% 34.4%Loans and advances 3,548.5 3,468.2 3,670.0 4,�79.2 �7.8% �3.9% 20.5%Total Assets 5,240.7 5,297.7 6,003.3 6,758.1 29.0% 12.6% 27.6%Customer deposits 2,9��.9 2,946.8 3,740.0 4,442.6 52.6% �8.8% 50.8%Total Liabilities 3,196.9 3,190.0 3,985.1 4,687.3 46.6% 17.6% 46.9%Share capital 1,000.0 1,000.0 1,100.0 1,100.0 10.0% 0.0% 10.0%Total shareholders’ equity 2,043.9 2,�07.7 2,0�8.2 2,070.8 �.3% 2.6% -�.8%Total Liabilities and Shareholders’ Equity
5,240.7 5,297.7 6,003.3 6,758.1 29.0% 12.6% 27.6%
Source: SIB
- On the liabilities side, customer deposits continued to account for the major chunk of liabilities, constituting 65.7% of the total funding mix at the end of Sep-06. Customer deposits too recorded a strong YTD growth of 50.7% as it reached AED4.44bn at the end of Sep-06.
Table 3: Quarterly Results - 3Q-2006
(AED mn)9M-2005
9M-2006
% Change
3Q-2005
3Q -2006
% Change
Income from Murabaha & Leasing �57.5 229.2 45.6% 60.7 86.5 42.6%Distribution to Depositors (35.9) (70.7) 96.7% (�3.�) (32.5) �48.7%Net Commission Income 121.5 158.5 30.5% 47.6 54.0 13.5%Fees & Commissions 56.5 62.2 �0.�% 20.3 23.4 �5.6%Income from Subsidiaries - �4.7 - - 9.4 -Total Income 178.0 235.5 32.3% 67.8 86.8 28.0%General & Administrative Expenses (59.9) (92.5) 54.5% (2�.4) (36.4) 69.9%Provisions of Customer Receivables (0.3) 0.4 - (�.4) �.8 -Other Recoveries 25.7 0.2 -99.4% - 0.� -Net Profit 143.5 143.6 0.1% 45.0 52.3 16.2%
Source: SIB
- SIB reported a net profit of AED�43.6mn for the first nine months of 2006 which was roughly same as AED�43.5mn reported in the corresponding period of the previous year. From the date of acquisition (30-Apr-2006) till 30th-Sep-2006, Sharjah National Hotels contributed profit of AED6.6mn to SIB.
Global Research - UAE Global Investment House
�52 UAE Banking Sector Report January 2007
- Income from Murabaha and Islamic financing continues to account of the major portion of SIB’s operating income as it grew by 45.6% in 9M-2006 as compared to 9M-2005. However, with the rise in yield coupled with strong growth in customer deposits, the distribution to depositors increased significantly by 96.7% for the same period.
- The decline in the capital market activity had its effect on Fee-based income which reported a growth of only �0.�% in 9M-2006 over the same period last year.
- However, the operating expenses grew significantly as the bank expanded its operations reaching AED92.5mn in 9M-2006, up 54.5% compared to the corresponding period of the previous year.
Outlook
Sharjah Islamic Bank seems to be aggressive in increasing its market share in the UAE market. The bank doubled its branch network taking the total number of branches to �7 by the end of 2006 which will enable it to increase its position in the lucrative, high margin retail banking business. The bank already enjoys the support and backing of the Government of Sharjah and is expected to benefit from the economic growth and project being initiated in the Emirate.
To capture the retail customers in it lending business, SIB offered a special 3.9% rate scheme on new car financing deals. The reduced rate for new cars is the part of the bank’s efforts to attract a broader potential customer base throughout the UAE. It also tied up with major auto player Hyundai wherein SIB customers will enjoy various benefits if the customer finances the car purchase through the bank. However, according to the management, in UAE, there is not major advantage of pure-play Islamic banks as is the case in Saudi Arabia.
SIB, with its entry in the tourism sector through the purchase of Sharjah National Hotels can also cross-sell and diversify its revenue stream. SIB recently offered its card holders the chance to avail discounts at Sharjah National Hotels , Holiday International, Marbella Resort Sharjah and Oceanic Hotel in Khorfakkan. SIB also launched Sharjah Islamic Financial Services (SIFS) SIB’s brokerage services subsidiary, the bank intends to expand its network across the country while it plans to open a branch of SIFS in Abu Dhabi, in addition to the existing branches in Sharjah and Dubai. SIB is open for and has done consortium lending in the past with conventional banks provided the product is Islamic. The bank is focusing on increasing its fee income and it launched 3 funds last year.
Valuation:
Based on the current market price of AED2.4�, SIB stock is trading at �3.0x of its 2005 earnings and �.�4x of its 2005 book value. On a one year forward basis, the stock is trading at �2.�x 2006F earnings and �.22x 2006F book value. Based on the combination of DDM and Relative valuation method, we recommend a BUY on the stock with a price target of AED2.70, an upside of ��.9% from current levels.
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �53
BA
LA
NC
E S
HE
ET
SI
BA
mou
nt in
AE
D m
n20
0320
0420
0520
06 (
F)
2007
(F
)20
08 (
F)
2009
(F
)A
sset
s:B
ank
& c
ash
equi
vale
nts
�79
.8
384
.8
343
.2
�
,453
.9
�
,22�
.6
�
,009
.8
�
,060
.7
Mur
abah
a &
Mud
arab
a w
ith F
Is
8
�0.2
4
��.2
9
3�.9
�,0
25.�
�,�
27.6
�,2
40.4
�,3
64.4
N
et M
urab
aha
357
.2
63�
.6
706
.0
�
,023
.6
�
,�26
.0
�
,�82
.3
�
,24�
.4
Lea
sed
Ass
ets
�
,�99
.7
�
,859
.4
2
,773
.�
3
,466
.4
4
,�59
.7
4
,783
.6
5
,262
.0
Inve
stm
ents
& I
nves
tmen
ts P
rope
rtie
s
40.4
�
03.7
4
27.6
6
04.2
7
6�.2
8
82.0
9
77.5
G
ross
Ass
ets
62
.8
66
.6
83
.0
644
.5
709
.0
744
.4
759
.3
Acc
. Dep
(28
.4)
(3�
.6)
(32
.4)
(50
.6)
(84
.4)
(
�20.
8)
(�5
8.4)
Net
Ass
ets
34
.4
35
.�
50
.6
593
.9
624
.6
623
.7
60�
.0
Oth
er a
sset
s
20.0
47.2
76.�
�
67.4
2
26.0
2
59.9
2
85.9
L
ess
: pro
visi
on
(3
.2)
(5
.8)
(�0
.9)
(20
.5)
(28
.�)
(35
.5)
(43
.4)
Tot
al A
sset
s
2,6
38.4
3,4
67.2
5,2
97.7
8,3
14.0
9,2
18.6
9,9
46.2
1
0,74
9.5
Lia
bilit
ies:
Due
to b
anks
and
FIs
37
.7
�77
.4
�26
.0
�38
.6
�52
.5
�67
.7
�84
.5
Cus
tom
er D
epos
its
�,8
57.5
2,4
8�.5
2,9
46.8
5,0
09.6
5,7
6�.0
6,3
37.�
6,9
70.8
Is
lam
ic S
ukuk
-
-
-
826
.7
826
.7
826
.7
826
.7
Acc
rued
Zak
at
6.8
7.4
22.7
-
-
-
-
Pr
opos
ed c
ash
divi
dend
s
38.6
-
-
-
-
-
-
Pr
opos
ed D
irec
tor’
s Fe
e
0.9
-
-
-
-
-
-
O
ther
liab
ilitie
s
59.8
96.�
95.8
�
58.�
�
73.9
�
82.6
�
9�.7
T
otal
Cur
rent
Lia
bilit
ies
2
,00�
.3
2
,762
.4
3
,�9�
.3
6
,�32
.9
6
,9�4
.0
7
,5�4
.�
8
,�73
.7
Ow
ner’
s E
quit
y:Pa
id-u
p E
quity
Cap
ital
385
.7
385
.7
�
,000
.0
�
,�00
.0
�
,�00
.0
�
,�00
.0
�
,�00
.0
Stat
utor
y R
eser
ve
65.2
65.2
89.0
�
�0.6
�
34.3
�
6�.5
�
92.�
G
ener
al &
Leg
al R
eser
ve
�
79.9
�
79.6
77
0.�
69�
.7
7�5
.4
742
.6
773
.2
Rev
alua
tion
Res
erve
�
.5
5
.3
54
.8
60
.3
66
.3
73
.0
80
.3
Ret
aine
d E
arni
ngs
4
.8
69
.0
�92
.5
2�8
.5
288
.4
355
.�
430
.2
Tot
al S
hare
hold
er’s
Equ
ity
6
37.0
9
7
04.8
2,1
06.4
2,1
81.1
2,3
04.5
2,4
32.2
2,5
75.8
T
otal
Lia
bilit
ies
2
,638
.4
3
,467
.2
5
,297
.7
8
,314
.0
9
,218
.6
9
,946
.2
10,
749.
5
Global Research - UAE Global Investment House
�54 UAE Banking Sector Report January 2007
OP
ER
AT
ING
ST
AT
EM
EN
T
SIB
Am
ount
in A
ED
mn
2003
2004
2005
2006
(F
)20
07 (
F)
2008
(F
)20
09 (
F)
Inco
me
from
Isl
amic
Fin
anci
ng &
Inv
estin
g A
sset
s
�0
4.6
��5.
0
22
3.9
325.
8
43
0.5
489.
7
54
3.9
Paym
ent t
o D
epos
itors
(3�
.2)
(26
.6)
(48
.9)
(96
.�)
(
�72.
2)
(�9
5.9)
(
2�7.
6)N
et C
omm
issi
on I
ncom
e
7
3.4
88.
4
17
4.9
229.
7
25
8.3
293.
8
32
6.3
Fees
, Com
mis
sion
& F
orex
Gai
ns
3
0.5
26.
6
7
4.7
93.
3
��
6.7
�28.
3
�4
�.2
Inco
me
from
Ass
ocia
tes
-
-
-
2
0.0
25.
0
2
8.8
33.
� L
ess
: Pro
visi
ons
for
Impa
irm
ent/R
ecov
erie
s
7.0
�
4.5
24.
3
9.6
7.7
7.3
8.0
N
on-I
nter
est I
ncom
e
3
0.5
26.
6
7
4.7
93.
3
��
6.7
�28.
3
�4
�.2
Ope
rati
ng I
ncom
e
11
0.8
129.
6
27
3.9
352.
6
40
7.7
458.
2
50
8.6
Gen
eral
& A
dmin
istr
atio
n E
xpen
ses
(44
.9)
(53
.5)
(8�
.8)
(
��8.
6)
(�3
6.4)
(
�50.
0)
(�6
5.0)
Dep
reci
atio
n
(4.6
)
(4.8
)
(6.�
)
(
�8.2
)
(
33.8
)
(
36.3
)
(
37.6
)O
pera
ting
Exp
ense
(49
.6)
(58
.3)
(87
.9)
(
�36.
8)
(�7
0.2)
(
�86.
3)
(20
2.6)
Ope
rati
ng p
rofi
t
6
1.3
71.
3
18
6.1
215.
8
23
7.4
271.
9
30
5.9
Net
Pro
fit A
fter
Min
ority
Int
eres
t
6
�.3
7�.
3
�8
6.�
2�5.
8
23
7.4
27�.
9
30
5.9
Net
Pro
fit
attr
ibut
able
to
shar
ehol
ders
61.
3
7
1.3
186.
1
21
5.8
237.
4
27
1.9
305.
9 P&
L A
ppro
pria
tion
Acc
ount
:
Op
Bal
ance
of R
eser
ves
4
.3
4
.8
69.
0
�9
2.5
2�8.
5
28
8.4
355.
� Z
akat
-
-
(22
.7)
-
-
-
-
Net
Pro
fit f
or th
e ye
ar
6
�.3
7�.
3
�8
6.�
2�5.
8
23
7.4
27�.
9
30
5.9
Trf
r to
Sta
tuto
ry R
eser
ve
(
�2.3
)
(7.�
)
-
(2�
.6)
(23
.7)
(27
.2)
(30
.6)
Trf
r to
Gen
eral
Res
erve
-
-
-
(
2�.6
)
(
23.7
)
(
27.2
)
(
30.6
)D
irec
tor’
s Fe
e
(0.9
)
(0.9
)
(�.4
)
(�.4
)
(�.4
)
(�.4
)
(�.4
)A
ccou
ntin
g Po
licy
Cha
nge
-
3
9.5
-
-
-
-
- G
ain
on S
ale
(9
.0)
-
-
-
-
-
-
Cas
h D
ivid
end
(38
.6)
(38
.6)
(38
.6)
(
�45.
2)
(��
8.7)
(
�49.
5)
(�6
8.3)
C
l Bal
ance
of R
etai
ned
Ear
ning
s
4.8
6
9.0
�92.
5
2�
8.5
288.
4
35
5.�
430.
2
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �55
CA
SH F
LO
W S
TA
TE
ME
NT
SIB
Am
ount
in A
ED
mn
2003
2004
2005
2006
(F)
2007
(F)
2008
(F)
2009
(F)
Ope
rati
ngO
pera
ting
Act
iviti
es
55.
9
77.
7
�
99.6
2
42.3
2
77.6
3
�4.2
3
50.2
N
et P
rofi
t
6
�.3
7
�.3
�86
.�
2�5
.8
237
.4
27�
.9
305
.9
Dep
reci
atio
n
4.6
4.
8
6.
�
�8.
2
33.
8
36.
3
37.
6 L
oss/
(gai
n) o
n In
vest
men
t Pro
pert
ies
(9
.9)
-
-
-
-
-
Inco
me
from
Sal
es o
f D
evel
opm
ent p
rope
rtie
s
0.3
-
0.
3
-
-
-
-
D
irec
tor
Fee
(0
.9)
(
0.9)
(
�.4)
(
�.4)
(
�.4)
(
�.4)
(
�.4)
Prov
isio
ns f
or I
mpa
irm
ent
0
.6
2.5
8.5
9.6
7.7
7.3
8.0
Inc.
in R
eser
ves
with
Cen
tral
Ban
k
(
46.8
)
(
52.2
)
(
44.2
)In
c. in
Mur
abah
a an
d M
udar
aba
with
FIs
-
(
36.8
)
(0.
0)
(
93.2
)
(�
02.5
)
(�
�2.8
)
(�
24.0
)D
ec/ (
inc)
Isl
amic
Fin
anci
ng &
Inv
estin
g A
sset
s
3
7.9
(274
.4)
(77
.6)
(3�7
.7)
(�02
.4)
(56
.3)
(59
.�)
(In
crea
se)
/ Dec
reas
e in
Lea
sed
asse
ts
3
3.7
(659
.7)
(9�3
.7)
(693
.3)
(693
.3)
(624
.0)
(478
.4)
(In
crea
se)
/ Dec
reas
e in
oth
er a
sset
s
2.0
(
20.8
)
(
28.9
)
(
9�.3
)
(
58.6
)
(
33.9
)
(
26.0
)In
c/(d
ec)
from
ban
ks &
oth
er f
inan
cial
inst
itutio
ns
(
�9.0
)
�
39.6
(
5�.4
)
�2.
6
�3.
9
�5.
2
�6.
8 In
c/(d
ec)
of d
epos
its f
rom
cus
tom
ers
274.
8
6
24.0
4
65.3
2,0
62.8
7
5�.4
5
76.�
6
33.7
In
c/(d
ec)
othe
r lia
bilit
ies
(8
.3)
2
2.�
(
7.8)
6
2.3
�
5.8
8.7
9.�
Def
erre
d Pr
ofit
on M
urab
aha
Rec
eiva
ble
6
.�
--
--
--
Acc
rued
Zak
at
--
-
(22
.7)
-
-
-
Tot
al O
pera
ting
336.
3(1
80.5
)(4
58.7
)1,
161.
810
2.0
87.3
322.
3In
vest
ing
Cap
ex, N
et
(2.4
)
(4.
4)
(
2�.9
)
(5
6�.5
)
(
64.5
)
(
35.4
)
(
�4.9
)N
et P
urch
ase
of in
vest
men
ts
(
20.5
)
(
59.4
)
(2
74.5
)
(�
7�.0
)
(�
5�.0
)
(�
�4.2
)
(
88.2
)T
otal
Inv
esti
ng
(
22.8
)
(
63.9
)
(2
96.4
)
(7
32.6
)
(2
15.5
)
(1
49.6
)
(1
03.1
)F
inan
cing
Div
iden
d pa
id to
sha
reho
lder
s
(
36.7
)
(
38.6
)
(
38.6
)
(�
45.2
)
(�
�8.7
)
(�
49.5
)
(�
68.3
)C
apita
l Inc
reas
e-
-
�
,228
.6
-
-
-
-
Suku
k Is
sue
--
-
826
.7
-
-
-
Tot
al F
inan
cing
(36
.7)
(38
.6)
1
,190
.1
681
.4
(118
.7)
(149
.5)
(168
.3)
Net
Cha
nge
in C
ash
276.
7
(2
82.9
)
4
34.9
�,�
�0.6
(2
32.2
)
(2
��.9
)
50.
9 N
et C
ash
at b
egin
ning
586.
6
8
62.4
5
79.5
3
43.2
�,4
53.9
�,2
2�.6
�,0
09.8
N
et C
ash
at e
nd
86
3.4
579
.5
�
,0�4
.5
�
,453
.9
�
,22�
.6
�
,009
.8
�
,060
.7
Global Research - UAE Global Investment House
�56 UAE Banking Sector Report January 2007
FACT SHEET SIB
2003 2004 2005 2006F 2007F 2008F 2008FProfitability
- Return on Average Assets 2.4% 2.3% 4.2% 3.2% 2.7% 2.8% 3.0%- Return on Average Equity 9.7% �0.6% �3.2% �0.�% �0.6% ��.5% �2.2%- Net Islamic Financing & Investing Assets/ Total Op. Income 66.2% 68.2% 63.9% 65.�% 63.4% 64.�% 64.2%- Provisions/ Total Op. Income -6.3% -��.2% -8.9% -2.7% -�.9% -�.6% -�.6%- Non-Commission income/ total Op. Income 27.5% 20.5% 27.3% 32.�% 34.8% 34.3% 34.3%- Dividend payout ratio 63.0% 54.�% 20.7% 67.3% 50.0% 55.0% 55.0%
Margins
- Net income/ Revenues 55.3% 55.0% 67.9% 6�.2% 58.2% 59.3% 60.2%- Commission Expense to Commission Income 29.8% 23.�% 2�.9% 29.5% 40.0% 40.0% 40.0%-Commission Income to Commission Earning Assets 4.6% 4.4% 6.�% 6.6% 7.2% 7.2% 7.2%- Commission Expense to Commission Bearing Liabilities �.8% �.2% �.7% 2.�% 2.7% 2.8% 2.8%- Net Spread 2.9% 3.2% 4.4% 4.4% 4.5% 4.4% 4.4%- Net Commission Margin 3.3% 3.4% 4.8% 4.6% 4.3% 4.3% 4.3%
Efficiency
-Cost to Total Op Income 44.7% 45.0% 32.�% 38.8% 4�.8% 40.7% 39.8%- General & Administration Expense to Total Op Income 40.6% 4�.3% 29.9% 33.6% 33.5% 32.7% 32.4%- Cost to Average Total Assets 2.0% �.9% 2.0% 2.0% �.9% �.9% 2.0%
Liquidity
- Loans to Customer Deposits 83.8% �00.4% ��8.�% 89.6% 9�.7% 94.�% 93.3%- Customer Deposits to Equity 292% 352% �40% 230% 250% 26�% 27�%
Credit Quality
- Provisions to Total Operating Income -6.3% -��.2% -8.9% -2.7% -�.9% -�.6% -�.6%- Provisions to Average Receivables -�.8% -2.9% -3.6% -�.�% -0.7% -0.6% -0.7%
Capital Adequacy
- Equity to Total Assets 24.�% 20.3% 39.8% 26.2% 25.0% 24.5% 24.0%- Equity to Gross Receivables �78.4% ���.6% 298.4% 2�3.�% 204.7% 205.7% 207.5%
Constitution of Total Income
- Net Islamic Financing Income to Total Op Income 66.2% 68.2% 63.9% 65.�% 63.4% 64.�% 64.2%- Fees & Comm. to Total Op. Income 27.5% 20.5% 27.3% 26.5% 28.6% 28.0% 27.8%- Investment & Other Income to Total Op Income 0.0% 0.0% 0.0% 5.7% 6.�% 6.3% 6.5%
Operating Performance
- Change in Net Murabahas, Istisna and Leasing Income 66.7% �0.0% 94.6% 45.5% 32.2% �3.7% ��.�%- Change in Fees and Commission 24.�% -�2.7% �80.3% 25.0% 25.0% �0.0% �0.0%
RATIOS USED FOR VALUATION
- Shares in Issue (mn) 385.7 385.7 �,000.0 �,�00.0 �,�00.0 �,�00.0 �,�00.0 - EPS (AED) 0.2 0.2 0.2 0.2 0.2 0.2 0.3 - Book Value Per Share (AED) �.7 �.8 2.� 2.0 2.� 2.2 2.3 - Market Price Year End (AED) - 4.5 5.0 2.6 2.4 2.4 2.4 - Market Cap (AED mn) - �,7�6.3 5,040.0 2,805.0 2,65�.0 2,65�.0 2,65�.0 - P/E - 24.� 27.� �3.0 ��.2 9.8 8.7 - P/BV - 2.4 2.4 �.3 �.2 �.� �.0
* Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �57
• UAB has a total of nine branches spread out in five Emirates, three in Dubai, two in Sharjah, and one each in Abu Dhabi, Ras Al Khaimah, Al Ain, and Ajman
• For strategic reasons, SocGen sold its 20% stake in early 2005 to a fund created on behalf of the principal shareholders of the bank .
• UAB’s chairman H.E. Sheikh Faisal Bin Sultan Al-Qassimi, a member of the ruling family of Sharjah, holds a stake of 20.09% in UAB. The three largest shareholders hold 53% of the total shares, while the fund for principal shareholders owns �4% stake in UAB.
• UAB’s primary focus is on corporate banking, which is also considered as the strength of the bank. The bank has been able to maintain healthy relationships with the corporate customers over the years and is very selective in doing business with corporate customers. The retail banking is facilitated through the corporate customers, as the bank targets the employees as well as the high net worth individuals for retail banking.
Recent developments
• UAB was among the six participating banks for the Initial Public Offering (IPO) of RAK Properties, the real estate development company established by the Investment and Development Office of the government of Ras Al Khaimah, which generated an overwhelmingly positive response from investors.
Reuters Code:UAB.AD
Listing:Abu Dhabi Securities Market
CMP:AED8.00 (As on �6th January, 2007)
United Arab Bank
Key Data Background
• United Arab Bank (UAB) was established in �975 by leading UAE businessmen and France’s Societe Generale (SocGen). UAB is headquartered in the Emirate of Sharjah. In February 2005, UAB was listed on the Abu Dhabi Securities Market (ADSM).
EPS (AED)*
BVPS (AED)*
P / E (x)
P / BV (x)
Avg daily vol. (‘000)
52 week Lo - Hi
Market Cap (AED mn)
Target Price
0.28
�.54
28.63
5.49
45,578
6.34 / �0.5
4,639
6.89Source: Global Research* Projected (2006)
Reduce
Global Research - UAE Global Investment House
�58 UAE Banking Sector Report January 2007
Rating Reviews
• Capital Intelligence rating agency assigned a positive outlook on UAB in view of the bank’s continuing good performance, which appears sustainable over the long-term. UAB’s foreign currency ratings were affirmed at BBB- long-term and A3 short-term, while the financial strength rating was maintained at BBB-.
Financial Performance – 2005
• UAB is a small-size bank in terms of balance sheet size (banks under review) and had a market share of �.0% in 2005 (�.�% in 2002) in UAE. UAB is the smallest bank among the banks under review. The asset size increased from AED2.��bn in 2002 to AED4.�3bn in 2005, a CAGR of 25.�%. The bank’s share in total deposit base among the banks under review, remained at the same level of �.�% in 2002 to 2005. During the period 2002-05, customer deposits grew at a CAGR of 24.4% from AED�.5�bn in 2002 to AED2.9�bn in 2005.
• In the year 2005, customer deposits grew by 22.4% to AED2.9�bn as compared with AED2.37bn in the year 2004. Although, the customer deposits have grown in absolute terms, the contribution to the total assets declined from 74.4% in 2004 to 70.3% at the end of 2005.
• The bank’s objective is to target HNWIs to increase its customer deposit base. 72% of customer deposits have maturity less than three months period, which is in line with the trend witnessed in the UAE banking sector. In our opinion, UAB will be able to raise funds through their business network if the bank witness demand on the lending side.
Chart 1: Funding Mix
Source: Company Reports
• We have seen UAE banks diversifying the funding base through medium term borrowings over the past two to three years. However, that’s not the case for UAB, as the bank has not yet felt the need to raise funds through external funding. According to the management, they maintain a very strong relationship with their clients, which will enable the bank to meet the growing demand on the lending side.
2002 2003 2004 2005
93.8%
6.2%7.7%
92.3%90.8%
9.2%6.7%
93.3%
Customer’s Deposit Due to banks
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �59
• On the funding side, UAB is highly depended on customer deposits as seen in the above graph, which is more than 90% of the total funding base, while the remaining is in the form of due from banks.
Chart 2: Gross Loans as a percentage of Customer Deposits
Source: Company Report
• The bank’s gross loan book grew at a CAGR of 22.6% from AED�.66bn in 2002 to AED3.06bn in 2005. In 2005, the gross loan book of the bank increased from AED2.46bn in 2004 to AED3.06bn, reporting an increase of 24.3%. Gross loans and advances as a percentage of customer deposits have been in the range of �03%-��0%, during the period 2002-2005.
• In our opinion, lot of real estate, manufacturing and infrastructure projects are in the pipeline, which will help the bank in terms of increasing its deployment to higher yielding earning assets. This will further help the bank to increase its core earnings.
Chart 3: Gross Loans by Economic Sectors
Source: Company Reports
• Gross loan book of the bank is highly concentrated on three sectors, namely trade, manufacturing and personal sectors, which contributed around 8�.9% at end of 2005. Personal loans accounted for one-third of the total loan book, and the majority of the personal loans is provided to five names including some related parties.
4,000
3,000
2,000
1,000
-
115%
110%
105%
100%
95%2002 2003 2004 2005
105.2%
103.7%
110.8%110.1%
Customer Deposit Gross Loans & advances Gross Loans as a % of Customer Deposit
AED
mn
Personal Loans30%
Manufacturing21%
2004
Trade24%
Bublic Sector 1%
Transport &Communication
3%Government
6%
Agriculture 1%
Construction 7%
Service 6%
Financial Institutions1%
Personal Loans34%
Manufacturing22%
2005
Trade 25%
Bublic Sector 1%
Transport &Communication
2%Government
3%
Agriculture 1%
Construction 5%
Service 5%
Financial Institutions2%
Global Research - UAE Global Investment House
�60 UAE Banking Sector Report January 2007
• The contribution of lending to trade and manufacturing sectors is 25.�% and 22.2% respectively. The bank has been very careful in lending to the real estate sector, until and unless adequate collateral is provided against the loan. As a result, the bank’s exposure to construction sector declined by �5% last year. Loans to government also continued to decline from 5.9% in 2004 to 2.9% of the total loan book in 2005.
Chart 4: Asset Quality
Source: Company Reports
• During the last three years, the bank’s asset quality has improved. Non-Performing Loans (NPLs) as a percentage of gross loans declined from 4.5% in 2004 to 3.2% in 2005. In absolute terms, gross NPLs has also declined from AED��0.8mn in 2004 to AED98mn in 2005. Though the NPLs to gross loans in 2002 was at the same level as 2005, it increased in 2003 and 2004, which was further brought down to 3.2�% in 2005. It is worth noting that there has been a sharp improvement in asset quality, due to the strict adherence and close monitoring that has helped the bank improve its credit risk during this period.
• During the last three years, the bank’s net profit grew at a CAGR of 28.�%, from AED73.6mn in 2002 to AED�54.83mn in 2005. During the same period, operating income of the bank grew by 23.�% and total expense increased at a CAGR of �4.�%. Most notable was the fees from banking services, which grew at a CAGR of �6.�% for the period under review.
• In 2005, UAB reported net profit of AED�54.83mn as compared with AED88.36mn in 2004, registering a growth of 75.2%. The segmental breakdown of the net profit during the last two years shows that income from treasury services has grown significantly, contributing around 42.5% of the total net profit. All three business segments (retail, corporate and treasury) have a significant contribution to the bank’s net profit as seen in the chart below.
3000
2600
2200
1800
1400
6.0%
5.0%
4.0%
3.0%2005200420032002
Gross Loans NPLs Gross Loans
3.21%
3.40%
4.50%
3.21%
AED
mn
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �6�
Chart 5: Net Profit - Segmental
Source: Company Reports
• The non-interest income of the bank grew at a CAGR of 29.6%, from AED4�.28mn in 2002 to AED89.74mn in 2005. This has been one of the main growth drivers for the bank in the year 2005. In the year 2005, the bank reported an income from trading investments of AED2�.27mn, which was due to the buoyancy in the capital markets during the year 2005.
Chart 6: Non-Interest Income – Break Up
Source: Company Reports
• On other hand, fees and commission income also showed a healthy growth of 29.4% to AED30.4mn in 2005 as compared with AED23.5�mn in 2004. During the year 2005, UAB was the collecting bank for RAK properties and Dana Gas in their IPOs, which attracted large interest from the investors, which helped to improve the overall profitability of the bank in the year 2005.
• On the expense front, loan loss provisions grew at a CAGR of 36.8% for the period 2002-05. Aggressive provisioning by the bank during this period has helped in increasing its coverage ratio from 80.5% in 2002 to �07.5% in 2005.
15.6%
58.2%
26.2%20.1%
37.4%
42.5%
2004 2005
Retail Corporate Treasury
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%2002 2003 2004 2005
47.2%
23.5%
29.3% 28.7%
23.6%
47.7%44.6%
24.3%
31.0% 24.9%
17.5%
33.9%
23.7%
Income from trading Investments Fees and commission income
Profile on exchange Other Income
Global Research - UAE Global Investment House
�62 UAE Banking Sector Report January 2007
Chart 7: Margins
Source: Company Report, Global Research
• The bank’s yield on interest earnings assets increased significantly from 5.�% in 2004 to 9.5% in 2005. On the same time, the cost of interest bearing liabilities also increased significantly from �.3% in 2004 to 6.2% in 2005. The net interest margin for the bank improved from 4.�% in 2004 to 4.6% in 2005. It is worth mentioning that the bank’s participation in two IPOs have boosted their interest income in 2005, which is the reason for the increase in the yield on interest earning assets.
Chart 8: Operating Efficiency
Source: Company Report
• During the period 2002-05, operating costs increased from AED52.6mn in 2002 to AED79.3mn in 2005. Cost to income ratio of the bank declined from 38.2% in 2002 to 30.9% in 2005. Similarly, the ratio of operating cost to average assets declined from 2.5% in 2002 to 2.2% in 2005.
10.5%
8.5%
6.5%
4.5%
2.5%
0.5%
4.7%
4.5%
4.3%
4.1%
3.9%2002 2003 2004
Yield on interest earning assets Cost of interest bearing liabilities
Net Interest Matgin
4.6%
4.2% 4.1%
4.6%
41.0%
39.0%
37.0%
35.0%
33.0%
31.0%
29.0%
27.0%
25.0%
2.6%
2.5%
2.4%
2.3%
2.2%
2.1%
2.0%2002 2003 2004 2005
Cost/Op. Income Cost to Average Total Assets
2.5% 2.4%
2.3%
2.2%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �63
Chart 9: Return Ratios
Source: Company Report
• The bank’s healthy performance in 2005, has helped the bank in improving the return ratios. In 2005, return on average assets increased from 3.5% in 2002 to 4.2% in 2005. Also return on average equity increased from �5.9% in 2002 to 20.2% in 2005.
Nine Months Performance - 2006
• UAB’s asset size increased by 2.9% as compared to 2005 to reach AED3.20bn at the end of first nine months of 2006.
• On the funding side, customer deposits declined marginally by 0.6% to AED2.89bn at end of sept-06 as compared with AED2.9�bn at the end of year 2005. As a result, the contribution of customer deposits to the total assets declined from 70.3% at the end of 2005 to 67.9% at the end of sept-06. In our opinion, the customer deposits is likely to register growth at the end of the year, as this drop is due to the maturing deposits during the end of third quarter.
• On the lending side, the gross loans and advances increased by �3.3% to AED3.34bn at the end of sept-06 as compared with AED2.95bn in the corresponding period of the previous year. The bank is witnessing increase demand from the lending side, especially from the trade and manufacturing sectors. We believe that the bank will have to increase its deposit base in order to facilitate the demand from the lending side.
22.0%
20.0%
18.0%
16.0%
14.0%
4.5%
4.1%
3.7%
3.3%
2.9%
2.5%2002 2003 2004 2005
3.5%
3.2%
3.0%
4.2%
Return on Average Equity Return on Average Assets
Global Research - UAE Global Investment House
�64 UAE Banking Sector Report January 2007
Table 1: Nine Months Performance - 2006Amount in AED ‘000 3Q 3Q % 9M 9M %
2005 2006 Change 2005 2006 ChangeInterest Income 59,635 77,4�� 29.8% �6�,404 2�9,348 35.9%Interest Expense (�8,�32) (22,455) 23.8% (48,49�) (67,503) 39.2%Net interest income 41,503 54,956 32.4% 112,913 151,845 34.5%Net Fees and commission income �2,594 �2,537 -0.5% 36,672 46,555 26.9%Gain Less losses from foreign currencies 4,057 4,340 7.0% ��,299 �3,074 �5.7%Change in fair value of trading investments - (72) - (�5,622)Gain on sale of investment - 5,022 - 5,022 Other income 490 �,0�� �06.3% �,609 3,644 �26.5%Total Income 58,644 77,794 32.7% �62,493 204,5�8 25.9%Staff expenses (�5,666) (�8,380) �7.3% (45,008) (53,680) �9.3%Depreciation (�,�44) (�,205) 5.3% (3,269) (3,345) 2.3%Other expenses (4,�52) (5,�26) 23.5% (�2,469) (�5,652) 25.5%Provision for credit losses (6,443) (9,655) 49.9% (�3,46�) (20,553) 52.7%Net Profit 31,239 43,428 39.0% 88,286 111,288 26.1%
Source: Global Research
• In the first nine months of 2006, UAB reported a net profit of AED���.29mn, registering a healthy growth of 26.�% as compared to the corresponding period of the previous year. On a sequential basis (q-o-q), the bank has reported a growth of 39.0% to AED43.43mn at the end of 3Q-06 as compared with AED3�.24mn during the same period in the previous year.
Chart 10: Growth in Core Income
Source: Company reports
• UAB has been able to show healthy growth from the core business activities. In the first nine months of 2006, UAB reported net interest income of AED�5�.85mn, registering a healthy growth of 34.5% as compared to the corresponding period of the previous year. On a sequential basis (q-o-q), the bank has reported a growth of 32.4% to AED54.96mn at the end of 3Q-06 as compared with AED4�.50mn reported during the same period in previous year.
• The net fees and commission income of the bank was AED46.56mn at the end of sept-06 as compared to AED36.67mn during the same period of the previous year, registering an increase of 26.9%. This growth in the net fees and commission was mainly earned during the first quarter, which was about doubled compared to the first quarter of 2005.
56
52
48
44
40
45%
40%
35%
30%
25%
20%
1Q-06 2Q-06 3Q-06
In A
ED m
n
42.8%
28.4%
32.4%
Net interest income Growth in NII
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �65
• UAB would have shown much better result during the first nine months of 2006, but this was distressed by the loss incurred in investments due to the major corrections witnessed in the UAE capital markets during the first nine months of 2006. Looking at the net profit excluding the loss of investments and gain on sale of investment, the bank would have reported a net income of AED�2�.89mn, an increase of 38.�% as compared to the same period of the previous year.
• UAB’s total operating expenses has grown by 20.6% at the end of 9M-2006 over the corresponding period of the previous year mainly due to the �9.3% rise in the staff expenses.
Outlook
• According to the management, real estate sector is the most significant for the development of UAE. Although the country has diversified well over the years, yet the future depends on oil.
• The bank is concentrating on corporate and industrial lending, which are likely to be the key growth drivers of the bank in the future. The bank has selected clients, which they want to concentrate and expand the exposure going forward.
• UAB intends to be in the niche market of medium to high corporate customers which is the strong growth area in the UAE market. UAB does not have any major plans in expanding the retail lending as retail banking is provided to the corporate customers and their employees. This is basically to provide additional services to their existing corporate customers.
• According to the management, the bank does not intend to go for medium tern borrowing, which is the current trend witnessed in UAE banks. Rather, the bank expects to issue bonds in case it faces any liquidity issues from increasing their deposit base. The bank does not have an Islamic products but intends to participates in Sukuks going forward.
• In our opinion, the outlook for 2006-2007 for the bank seems positive. Moreover, we also believe that oil revenues are likely to exceed the forecasted budget, which will result in a huge inflow of liquidity in the country. Going forward, although UAB is a small bank in the UAE, however, it is well-positioned to take advantage of the growth witnessed in the UAE economy and will leverage its franchise by offering attractive services to its valued customers.
Valuation:
Based on the current market price of AED8.0, UAB stock is trading at a 32.83x 2005 earnings and 5.30x 2005 book value. On a one year forward basis, the stock is trading at 28.63x 2006F earnings and 5.�9x 2006F book value. UAB will continue to enjoy the depositors’ confidence due to the bank’s fundamental strength and strong corporate relationships over the years. Based on the DDM valuation method, we recommend a REDUCE on the stock with a price target of AED6.89, an downside of �3.9% from current levels.
Global Research - UAE Global Investment House
�66 UAE Banking Sector Report January 2007
BA
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63
�,4
48
3,8
33
�2,
653
2,0
09
Cum
ulat
ive
chan
ges
in f
air
valu
e �
,427
(
�62)
28,
028
�2,
490
��,
484
�2,
852
�4,
263
Prop
osed
cas
h di
vide
nd 2
4,20
8 -
-
-
-
-
-
T
otal
Sha
reho
lder
’s E
quit
y 5
12,6
79
573
,444
9
58,4
67
979
,323
1
,022
,146
1
,082
,536
1
,132
,937
Tot
al L
iabi
litie
s an
d E
quit
y 2
,697
,304
3
,188
,241
4
,132
,613
4
,377
,946
4
,893
,982
5
,393
,812
5
,894
,913
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �67
INC
OM
E S
TA
TE
ME
NT
U
NIT
ED
AR
AB
BA
NK
Am
ount
in A
ED
‘00
020
0320
0420
0520
06(F
)20
07(F
)20
08(F
)20
09(F
)
Inte
rest
Inc
ome
�23
,93�
�
49,9
�2
344
,424
3
07,�
70
346
,997
4
0�,9
90
465
,25�
In
tere
st E
xpen
se (
22,�
74)
(3�
,260
) (
�77,
��8)
(99
,29�
) (
�2�,
820)
(�4
7,90
2) (
�79,
575)
Net
inte
rest
inco
me
101
,757
1
18,6
52
167
,306
2
07,8
80
225
,177
2
54,0
88
285
,676
Inco
me
from
trad
ing
inve
stm
ents
-
-
2�,
270
�0,
635
�2,
230
�4,
37�
�7,
245
Fees
and
com
mis
sion
inco
me
23,
037
23,
505
30,
407
47,
89�
59,
864
74,
830
89,
796
Prof
its o
n ex
chan
ge �
�,40
5 �
2,8�
7 �
5,67
6 �
6,46
0 �
7,69
4 �
8,57
9 �
9,50
8 O
ther
inco
me
�3,
843
�6,
322
22,
384
5,5
96
6,0
�6
6,3
�6
6,6
32
-
Ope
rati
ng in
com
e 1
50,0
42
171
,296
2
57,0
43
288
,462
3
20,9
81
368
,184
4
18,8
57
Prov
isio
n fo
r L
oans
and
Adv
ance
s (
�0,7
68)
(�0
,863
) (
�8,3
98)
(24
,540
) (
26,7
62)
(29
,429
) (
32,2
68)
Les
s : S
taff
cos
ts (
57,8
8�)
(68
,094
) (
79,3
74)
(82
,000
) (
82,9
�3)
(83
,325
) (
83,6
40)
Les
s: D
epre
ciat
ion
(3,
659)
(3,
977)
(4,
437)
(4,
376)
(4,
086)
(4,
4�9)
(4,
780)
Net
Pro
fit
77,
734
88,
362
154
,834
1
77,5
45
207
,221
2
51,0
11
298
,169
P&
L A
ppro
pria
tion
Acc
ount
:
Op
Bal
ance
of R
etai
ned
Ear
ning
s 2
9 2
9 �
,�37
5
63
�,4
48
3,8
33
�2,
653
Net
Pro
fit f
or th
e ye
ar 7
7,73
4 8
8,36
2 �
54,8
34
�77
,545
2
07,2
2�
25�
,0��
2
98,�
69
Trf
r to
Gen
eral
res
erve
s �
32
-
4,0
00
-
-
-
-
Trf
r to
Spe
cial
res
erve
s (
7,77
3) (
8,83
6) (
�5,4
83)
(�7
,755
) (
20,7
22)
(25
,�0�
) (
29,8
�7)
Trf
r to
Sta
tuto
ry r
eser
ves
(7,
773)
(8,
836)
(�5
,483
) (
�7,7
55)
(20
,722
) (
25,�
0�)
(29
,8�7
)D
irec
tors
rem
uner
atio
n (
�,80
0) (
�,80
0) (
�,35
0) (
�,35
0) (
�,35
0) (
�,35
0) (
�,35
0) B
onus
Iss
ue (
36,3
�2)
(67
,782
) (
�27,
092)
-
-
-
-
Cas
h D
ivid
end
(24
,208
) -
-
(
�39,
80�)
(�6
2,04
2) (
�90,
638)
(24
7,82
9)
Cl B
alan
ce o
f Ret
aine
d E
arni
ngs
29
�,�
37
563
�
,448
3
,833
�
2,65
3 2
,009
Global Research - UAE Global Investment House
�68 UAE Banking Sector Report January 2007
CA
SHF
LO
W
UN
ITE
D A
RA
B B
AN
KA
mou
nt in
AE
D ‘
000
2003
2004
2005
2006
(F)
2007
(F)
2008
(F)
2009
(F)
Ope
rati
ng A
citi
viti
esN
et p
rofi
t for
the
year
77,
734
88,
362
�54
,834
�
77,5
45
207
,22�
2
5�,0
��
298
,�69
A
djus
tmen
ts f
or:
Dep
reci
atio
n 3
,659
3
,977
4
,437
4
,376
4
,086
4
,4�9
4
,780
Pr
ovis
ion
for
cred
it lo
sses
-
�0,
863
�8,
398
-
-
-
-
Fair
val
uatio
n lo
ss o
n tr
adin
g in
vest
men
ts -
-
(
2�,2
70)
(�5
,538
) (
�,00
6) �
,368
�
,4�2
O
pera
ting
prof
it be
fore
cha
nges
8�,
393
�03
,202
�
56,3
99
�66
,383
2
�0,3
00
256
,798
3
04,3
60
(Inc
reas
e) in
loan
s an
d ad
vanc
es to
cus
tom
ers
(48
3,48
3) (
309,
�42)
(60
3,27
7) (
457,
605)
(3�
4,42
8) (
37�,
028)
(39
5,03
�)(I
ncre
ase)
/dec
reas
e in
oth
er a
sset
s (
�2,5
6�)
394
(
50,2
�5)
(3,
�87)
(8,
729)
(�0
,476
) (
��,�
53)
(Dec
reas
e)/I
ncre
ase
in d
ue f
rom
ban
ks �
0,00
0 -
-
�
5�,6
�5
(74
,896
) (
�,05
6) (
82,8
90)
(Dec
reas
e)/I
ncre
ase
in d
ue f
rom
cen
tral
ban
ks -
-
-
6
�,74
5 4
2,50
2 �
�,8�
8 �
2,37
9 (D
ecre
ase)
/Inc
reas
e in
due
to b
anks
�26
,823
(
�6,6
36)
38,
566
(�0
,600
) 3
4,52
6 2
8,88
5 2
�,30
2 In
crea
se in
cus
tom
er’s
dep
osits
434
,378
4
3�,�
99
532
,36�
�
8�,7
55
387
,656
3
93,9
39
4�2
,634
(D
ecre
ase)
/Inc
reas
e in
oth
er li
abili
ties
�3,
06�
(3,
758)
33,
768
(8,
423)
8,5
28
4,7
98
4,3
84
Net
cas
h ge
nera
ted
from
ope
rati
ng a
ctiv
itie
s 1
69,6
11
205
,259
1
07,6
02
81,
684
285
,460
3
13,6
78
265
,985
In
vest
ing
Act
ivit
ies
Purc
hase
of
Fixe
d as
sets
(2,
925)
(7,
�46)
(4,
304)
(4,
7��)
(5,
065)
(5,
445)
(5,
853)
Purc
hase
of
inve
stm
ent
-
(9�
,823
) (
33,7
80)
(�5
,879
) (
27,�
36)
(27
,576
) (
28,8
84)
Red
empt
ions
/Sal
e of
inve
stm
ents
28
-
27,
505
-
-
-
-
Net
cas
h (u
sed
in)
inve
stin
g ac
tivi
ties
(2,
897)
(98
,969
) (
10,5
79)
(20
,590
) (
32,2
01)
(33
,020
) (
34,7
37)
Fin
anci
ng A
ctiv
itie
sD
ivid
end
Paid
(27
,509
) (
24,2
08)
-
(�3
9,80
�) (
�62,
042)
(�9
0,63
8) (
247,
829)
Dir
ecto
rs r
emun
erat
ion
(�,
800)
(�,
800)
(�,
350)
(�,
350)
(�,
350)
(�,
350)
(�,
350)
Proc
eeds
fro
m is
sue
of s
hare
cap
ital
-
203
,349
-
-
-
-
N
et c
ash
from
/(us
ed in
) fi
nanc
ing
acti
viti
es (
29,3
09)
(26
,008
) 2
01,9
99
(14
1,15
1) (
163,
392)
(19
1,98
8) (
249,
179)
Incr
ease
in c
ash
and
cash
equ
ival
ents
�37
,405
8
0,28
2 2
99,0
22
(80
,058
) 8
9,86
7 8
8,67
0 (
�7,9
32)
Cas
h an
d ca
sh e
quiv
alen
ts a
t beg
inni
ng o
f th
e ye
ar 3
09,6
04
447
,009
5
27,2
9�
359
,764
2
79,7
06
369
,573
4
58,2
43
Cas
h an
d ca
sh e
quiv
alen
ts a
t th
e en
d of
the
yea
r 4
47,0
09
527
,291
8
26,3
13
279
,706
3
69,5
73
458
,243
4
40,3
12
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �69
FACT SHEET UNITED ARAB BANK
2003 2004 2005 2006(F) 2007(F) 2008(F) 2009(F)
Profitability - Return on Average Assets 3.2% 3.0% 4.2% 4.2% 4.5% 4.9% 5.3% - Return on Average Equity �5.9% �6.3% 20.2% �8.3% 20.7% 23.9% 26.9% - Net interest income / Op. Income 67.8% 69.3% 65.�% 72.�% 70.2% 69.0% 68.2% - Non-interest income / Op. Income 9.2% 9.5% �7.0% 5.6% 5.7% 5.6% 5.7%
Margins - Net income / Revenues 62.7% 58.9% 45.0% 57.8% 59.7% 62.4% 64.�% - Operating profit / Revenues �2�.�% ��4.3% 74.6% 93.9% 92.5% 9�.6% 90.0% - Interest Expense to Interest Income �7.9% 20.9% 5�.4% 32.3% 35.�% 36.8% 38.6% - Yield on interest earning assets 5.�% 5.�% 9.5% 7.3% 7.6% 8.0% 8.4% - Cost of interest bearing liabilities �.2% �.3% 6.2% 3.�% 3.5% 3.8% 4.�% - Net Spread 3.9% 3.8% 3.3% 4.2% 4.�% 4.2% 4.3% - Net Interest Margin 4.2% 4.�% 4.6% 5.0% 5.0% 5.0% 5.2%
Efficiency -Cost / Op. Income 4�.0% 42.�% 32.6% 29.9% 27.�% 23.8% 2�.�% - Cost to Average Total Assets 2.6% 2.4% 2.3% 2.0% �.9% �.7% �.6%
Liquidity - Loans to Interest Earning Assets 84.6% 83.8% 83.0% 88.2% 87.4% 88.2% 87.5% - Loans to Customer Deposits ��0.8% �03.7% �05.2% ��3.6% ��0.0% �08.7% �07.7% - Customer Deposits to Equity 378.8% 4�3.8% 303.�% 3�5.2% 340.0% 357.4% 377.9% - Due from Banks to Due to Banks �69.2% 207.4% 265.3% �97.3% 200.4% �77.2% �94.2%
Credit Quality - Provisions to Average Gross Loans 0.4% 0.4% 0.4% 2.8% 2.6% 2.6% 2.6% - Non Performing Loans (AED mn) 73.�0 ��0.80 98.00 ���.48 ��8.52 �26.�2 �29.07 - NPLs to Gross Loans 3.4% 4.5% 3.2% 3.2% 3.�% 3.0% 2.8% - NPL Coverage 98.4% �34.8% �07.5% ��5.6% ��9.2% ��5.4% �07.7%
Capital Adequacy - Equity to Total Assets �9.0% �8.0% 23.2% 22.4% 20.9% 20.�% �9.2% - Equity to Gross Loans 23.8% 23.3% 3�.4% 27.9% 26.7% 25.7% 24.6%
Ratios Used for Valuation - Shares in Issue (‘000) 302,599 338,9�� 508,368 635,460 635,460 635,460 635,460 - EPS (AED) 0.26 0.�8 0.30 0.28 0.33 0.40 0.47 - Book Value Per Share (AED) �.69 �.69 �.89 �.54 �.6� �.70 �.78 - Market Price Year End (AED) * - - �0.00 8.00 8.00 8.00 8.00 - P/E (x) - - 32.83 28.63 24.53 20.25 �7.05
* Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
Global Research - UAE Global Investment House
�70 UAE Banking Sector Report January 2007
• UNB is a premier banking company with a large branch network in the UAE, catering to various segments covering personal financial services, wealth management, commercial and corporate banking, investment banking, treasury and foreign exchange, and equity brokerage.
• UNB is the only bank in the country which is owned by the government of both Abu Dhabi and Dubai among its other stakeholders. This is a huge advantage for the bank, which gives them a competitive edge in terms of doing business in both the places, especially in such a competitive industry in the UAE.
• UNB’s vision to be “A key player in the region”, led the bank to have a presence in the Egyptian banking sector through its successful acquisition of the Alexandria Commercial and Maritime Bank. Currently, UNB is also reviewing other geographic locations or strategic alliances as a part of bank’s expansion plan.
• Union Brokerage Company (UBC), one of the oldest brokerage firms in UAE, is a subsidiary of UNB. Besides being a leading player in the Brokerage industry, was among the first national companies to deal in the brokerage field in the country. Besides its head office in Khalidiya, Abu Dhabi, it has a well diversified branch network with 5 other branches at ADSM, Dubai Financial Market (DFM), Al Ain, Al Dhafra, Fujairah and Ras Al Khaimah.
• UNB is one of the 26 organizations worldwide that has received an international award for excellence in auditing. Similarly, the bank has also won prestigious awards like “Dubai Quality Award 2005” for continuous improvement and contribution to the society.
Reuters Code:UNB.AD
Listing:Abu Dhabi Securities Market
CMP:AED 7.00 (As on �6th January, 2007)
Union National Bank
Key DataEPS (AED)*
BVPS (AED)*
P / E (x)
P / BV (x)
Avg. daily vol.(‘000)
52 week Lo / Hi
Market Cap (AED mn)
Target Price
�.4�
3.86
4.95
�.82
283,25�
6.6� / �3.72
�0,562.5
8.09Source: Global Research* Projected (2006)
Background
• Union National Bank (UNB) was established in �982 as a Public Joint Stock Company. UNB is headquartered in Abu Dhabi and is listed on the Abu Dhabi Securities Market (ADSM). UNB has a wide array of products offered to both the retail and corporate clients, which includes lending, deposits, treasury services, and investment banking services.
Buy
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �7�
Recent developments
• UNB and IndusInd Bank of India (IBL) announced a strategic alliance in Dubai on 26th March, 2006. The strategic alliance will encompass a wide range of banking services, including deposit accounts, remittance business, loans, wealth management advisory, distribution of third-party products, trade finance, global banking, and investment banking including corporate finance. Through this alliance both banks will focus primarily on the business opportunities generated by expatriate minority communities (especially Non-Resident Indians) in the UAE. UNB and IBL will treat each other as preferred partners with reciprocity of business flows and promotion of each other’s banking services.
• UNB announced the launch of a new company under the name “Al Wifaq Finance Company” at its first Constituent General Assembly Meeting held on 24th June, 2006. Al-Wifaq Finance Company was established with a capital of AED500mn, which has been invested totally by its share holders. The primary purpose of the company is to offer financial, commercial and investing services to both organizations and individuals in compliance with the rules and principles of the Islamic Law. The company plans to have state-of-the-art branches and technology systems in all the emirates to provide easier and more convenient access and services to its clients.
Rating Reviews
• In June 2006, Capital Intelligence upgraded UNB’s foreign currency long-term rating to A+ from A, and the foreign currency short-term rating to A� from A2. These ratings are similar to the foreign currency ratings assigned to the country. The financial strength rating was also raised to A from A-, while the outlook for the rating was ‘Positive’.
Financial Performance – 2005
• UNB is a medium-size bank with a market share in terms of balance sheet size (banks under review) of 8.0% in 2005 (7.2% in 2002). The asset size increased from AED�4.72bn in 2002 to AED34.93bn in 2005, a CAGR growth of 33.4%. The bank’s share in total deposit base among the banks under review, increased from 7.8% in 2002 to 8.8% in 2005. During the period 2002-05, customer deposits grew at a CAGR of 30.2% from AED��.69bn in 2002 to AED25.79bn in 2005.
• In 2005. customer deposits grew by 44.�5% to AED25.79bn as compared with AED�7.89bn in the year 2004. As a result, the contribution of customer deposits to the total assets increased from 72.8% in 2004 to 73.8% at the end of 2005. The contribution of time deposits to total deposits declined from 82.0% in 2004 to 76.7% in 2005. Correspondingly, the share of current and other deposits has increased from �6.8�% in 2004 to 22.3% in 2005.
Global Research - UAE Global Investment House
�72 UAE Banking Sector Report January 2007
Chart 1: Deposit Mix
Source: Company Report
• The growth in the current and other deposits augurs well for the bank going forward, however it did not have any major impact on the cost of funds due to the small contribution to the total deposits. On the other hand, time deposits will have an impact on the margins, but going forward it will be the main source for increasing the customer deposits, which is done primarily by paying higher interest rates to the customer. Due to the increasing competition in the country and new players entering the UAE market, we will continue to see this trend continue to attract more deposits.
Chart 2: Liability Mix
Source: Company Report
• On the funding side, we have seen banks diversifying through medium term borrowings in the past two to three years. Similarly, UNB has increased external funding in the form of medium term borrowings, which has a maturity period of � to 5 years. From the above chart, which clearly depicts that medium term borrowing contributes 8.3% of the total liabilities in the year 2005 as compared with 4.5% in 2004. This trend of increasing dependence on external funding is likely to continue in the UAE banking sector going forward.
100%90%80%70%60%50%40%30%20%10%
0%20052004
Current & other accounts Time Deposits Savings Accounts
1.19% 1.03%
76.67%82.00%
16.81% 22.30%
2003 2004 2005
Customer’s Deposit Due to banks Medium term borrowing Other Liabilities
85.3% 80.1% 86.8%
8.3%4.5%6.7%
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �73
Chart 3: Gross Loans as a percentage of Customer Deposits
Source: Company Report
• On the lending side, the bank’s gross loan book grew at a CAGR of 3�.7% from AED9.43bn in 2002 to AED2�.53bn in 2005. High oil prices, and surging capital markets in 2005 has resulted in strong demand for credit both from the corporate as well as from the consumer segment. Gross loans and advances as a percentage of customer deposits have been in the range of 79%-83.0%, except for the year 2004, where it reached 95%. The bank still has the room for increasing its loan book as the requirement from the Central Bank of UAE is �00%.
Chart 4: Gross Loans by Economic Sectors
Source: Company Reports
• The strong growth on the lending front is in line with the management’s policy of spreading credit concentration over various economic segments. The contribution of government lending to the overall loan portfolio has increased significantly especially in the last two years, as it reached 34.0% in 2005 as compared with ��.8% in 2002. This growth in the government lending is good for improving the quality of assets, but not in terms of margins.
• Government, Commercial and Personal loans together contributed around 77.8% of the total loan portfolio at the end of 2005. The contribution from these three sectors have remained in the range of 77%, however the concentration in each of three sectors have been fluctuating over the last four years.
120%
100%
80%
60%
Gross Loans Customer Deposits Gross Loans as a % of Customer Deposits
2001 2002 2003 2004 2005
83.50%
95.38%
82.60%80.68%79.14%
27,500
23,500
19,500
15,500
11,500
7,500
In A
ED m
n
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%2002 2003 2004 2005
Government Commercial Consumer Public Sector Financial institutions Others
11.8%
47.5%
17.8%
4.6%4.0%
14.3% 13.3%
3.7%7.1%
17.8%
42.0%
15.9% 31.2% 34.0%
31.4% 31.4%
12.3%13.0%
5.8% 5.5%
13.3%14.3%
3.4%4.3%
Global Research - UAE Global Investment House
�74 UAE Banking Sector Report January 2007
Chart 5: Asset Quality
Source: Company Reports
• During the last three years, the bank’s asset quality has improved. Gross Non-Performing Loans (NPLs) as a percentage of gross loans declined from 9.27% in 2002 to 2.53% in 2005. In absolute terms, gross NPLs have declined from AED874mn in 2002 to AED544mn in 2005. The gross NPLs in percentage terms in 2002 was as high as 9.27%. It is worth noting that there has been a sharp improvement in asset quality. Strict adherence and close monitoring along with higher concentration on government lending (with no risk) has helped the bank improve its credit risk during this period.
Chart 6: Net Profit
Source: Company Reports
• During the last three years, the bank’s net profit after minority interest grew at a CAGR of 56.6%. During the same period, operating income of the bank grew by 40.7% and total expense increased at a CAGR of �2.�%. Most notable is that fees from banking services grew at a whopping CAGR of 90.�% for the period under review.
• On the expense front, loan loss provisions grew at a CAGR of 36.4% for the period 2002-05. Aggressive provisioning during this period has helped the bank to increase its coverage ratio from 85.2% in 2002 to �52.6% in 2005.
• During the period 2002-05, the revenue mix has significantly changed and has skewed more towards fees and commission from banking services. The contribution of fees and commission income from banking services increased by 242.5% from AED�99.2mn in 2004 to AED682.2mn in 2005.
22,500
20,000
17,500
15,000
12,500
10,000
7,500
10.0%
80.0%
6.0%
4.0%
2.0%2002 2003 2004 2005
2.53%
4.72%
7.27%
9.27%
Gross Loans NPLs as a % of Gross Loans
in A
ED m
n
1,200
1,000
800
600
400
200
70%
65%
60%
55%
50%
45%
40%2002 2003 2004 2005
Net Profit (after minority) Profit Margin
49.4%
56.2%53.9%
68.1%
in AE
D mn
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �75
• The fees and commission was one of main determinants for the growth in the overall banking sector due to the booming capital markets in UAE. However, it is unlikely for the banks to maintain the same growth levels during the year 2006 and 2007. It should be noted that there is still growth from the core banking, due to the current boom in real estate as well as development projects in UAE.
Chart 7: Margins
Source: Company Report, Global Research
• The bank’s yield on average earnings assets increased from 4.4% in 2002 to 5.3% in 2005. On the same time, the cost of average bearing liabilities increased significantly from �.6% in 2002 to 3.5% in 2005. As a result of this, the net spread for the bank dropped from 2.8% in 2002 to �.8% in 2005. However, with the general increase in interest rates, cost of funds for the bank has gone up in the past few years.
Chart 8: Operating Efficiency
Source: Company Report
• During the period 2002-05, operating costs increased from AED2�3.5mn in 2002 to AED30�.0mn in 2005. Cost to income ratio of the bank declined from 35.�% in 2002 to �7.8% in 2005. Similarly, the ratio of operating cost to average assets declined from �.5% in 2002 to �.0% in 2005.
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%2005200420032002
Yield on interest earning assets Cost of interest bearing liabilities
Net Spread
2.8%2.6%
2.3%
1.8%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
1.6%
1.4%
1.2%
1.0%
0.0%2005200420032002
Cost to income ratio OPEX to Average assets
1.0%
1.1%
1.4%
1.5%
Global Research - UAE Global Investment House
�76 UAE Banking Sector Report January 2007
Chart 9: Return Ratios
Source: Company Report
• During the last three years, the bank’s net profit increased at a CAGR of 56.6%. Net profit of the bank increased from AED300.27mn in 2002 to AED��53.23mn in 2005. Due to this, the bank’s return ratios have increased significantly during this period. Return on average assets increased from 2.�5% in 2002 to 3.88% in 2005. Also return on average equity increased from �8.9% in 2002 to 3�.0% in 2005.
Chart 10: Capital Adequacy Ratio
Source: Company Report
• UNB is well capitalized to support growth in risk-adjusted assets. As at end 2005, the bank’s Capital Adequacy Ratio (CAR) stood at 24.3% as compared to that of �2.7% in 2002. The bank is well above the required rate of �0% by the Central Bank of UAE.
Financial Performance – Nine Months Performace-2006
• UNB’s asset size increased by 3.2% as compared to 2005 to reach AED36.05bn at the end of third quarter of 2006. The bank reported a strong sequential growth of 6.6% in 3Q-2006.
• Customer deposits declined marginally by 0.�% to AED25.75bn at end of sept-06 as compared with AED25.79bn at the end of year 2005. As a result, the contribution of customer deposits to the total assets declined from 73.8% at the end of 2005 to 7�.4% at the end of sept-06. The growth in total liabilities was driven by the growth in due to
6.00%
4.00%
2.00%
0.00%
45.00%
30.00%
15.00%
0.00%2002 2003 2004 2005
31.0%
21.5%20.4%18.9%
Return on Average Assets Return on Average Equity
25.0%
20.0%
15.0%
10.0%2002 2003 2004 2005
24.3%
13.1%14.3%
12.7%
In accordance with Central Bank of UAE
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �77
banks, which increased from AED4�9.�mn at the end of 2005 to AED8�0.7mn at the end of sept-06.
Chart 11: Deposit Mix
Source: Company Reports
• The contribution of time deposits to total deposits increased from 76.7% in 2005 to 80.7�% at the end of sept-06. Correspondingly, the share of current and other deposits declined from 22.30% in 2005 to �5.�8% at the end of sept-06.
• On the lending side, the gross loans and advances increased by 23.�% to AED26.5�bn at the end of sept-06 as compared with AED2�.53bn.
• UNB reported net profit of AED833.65mn at the end of sept-06, reporting a decline of 9.0% as compared to the corresponding period of the previous year. This was primarily due to the fees and commission income, which was the main driving force for the bank in the year 2005. However, the bank saw a reduced growth of 47.6% in 3Q-2006 as compared to the corresponding quarter of the previous year.
Table 1 : Nine Months Performance - 2006
Source: Global Research
100%90%80%70%60%50%40%30%20%10%0%
2005 9M-06
22.30%
1.03%
76.67%80.71%
2.87%
1.25%
15.18%
Current and other accounts
Time Deposits
Savings accounts
Islamic Products
Amount in AED ‘000 3Q 3Q % 9M 9M % 2006 2005 Change 2006 2005 Change
Interest Income 553,538 38�,699 45.0% �,78�,596 �,006,�08 77.�%Interest Expense (339,868) (206,873) 64.3% (�,�36,569) (550,6�8) �06.4%Net interest income 213,670 174,826 22.2% 645,027 455,490 41.6%Fees and commission income 6�,�98 2�0,443 -70.9% 456,�3� 532,099 -�4.3%Net gains from dealing in foreign currencies 5,986 �0,233 -4�.5% �7,932 2�,904 -�8.�%Net trading gains/(losses) 3,434 77,59� -95.6% (3�,894) ��9,849 -�26.6%Net gains on non-trading financial instruments �,564 �7,675 -9�.2% 33,652 �8,4�4 82.8%Other operating income �8,434 �8,477 -0.2% 62,407 52,32� �9.3%Operating income 304,286 509,245 -40.2% �,�83,255 �,200,077 -�.4%Impairment Losses (net) 259 (39,77�) -�00.7% (65,508) (7�,084) -7.8%Less : Staff costs (66,405) (54,233) 22.4% (�98,9�7) (�49,460) 33.�%Less: Depreciation (5,594) (5,03�) ��.2% (�6,045) (�4,209) �2.9%Less: Other operating expenses (25,4�8) (�6,324) 55.7% (68,22�) (48,5�4) 40.6%Net Profit Before Minority Interest 207,128 393,886 -47.4% 834,564 916,810 -9.0%Minority Interest (823) (�40) (9�8) (7�7)Net Profit 206,305 393,746 -47.6% 833,646 916,093 -9.0%
Global Research - UAE Global Investment House
�78 UAE Banking Sector Report January 2007
• However, UNB has continued to perform well in the core banking section, as the bank’s net interest income has grown by 4�.6% to reach AED645.03mn at the end of sept-06 as compared with AED455.49mn during the same period in the corresponding year. Q-o-Q, UNB has registered a growth of 22.2% to reach AED2�3.67mn as compared with AED�74.83mn. Going forward, the bank will continue to perform well due to the growing demand in the market.
Chart 12: Cost to Income
Source: Company Reports
• UNB’s total operating expenses have also grown by 33.5% at the end of 2006 over the corresponding period of the previous year mainly due to the 33.�% rise in the employee expenses. The above chart depicts that the cost to income ratio has increased significantly during the second and third quarter of 2006, which is primarily due to the drop in operating income in the respective quarters.
Outlook
UNB seems to have braced itself for the upcoming competition by increasing its product offerings and using its branch network to penetrate the local market. Till now the growing competition has had little effect on UNB’s position as one of the leading financial institution in the banking sector. Going forward, in our opinion UNB will continue benefited from strong economic growth on the back of high oil prices and production. In addition, the real estate boom in the country will also help the bank in increasing its gross loans.
At the end of 2005, UNB had 35 branches across the emirates. Currently, the branches are around 42. As per the management by end of 2007, UNB will have around 52 branches from the current 42 branches. On the ATMs, the bank has around 90 ATMs, which the bank intends to increase by the end of the year 2006. The main reason for increase in the number of ATMs is due to the increasing number of malls in the country, which will allow them to be accessible to the clients easily. We believe that this expansion in terms of branch network will help the bank to maintain its competitive edge in consumer banking as well as retail banking, which will strengthen its position in the banking industry.
According to the management, the key growth drivers of the bank are likely to be corporate and the Small and Medium Enterprise (SME) segment. The bank also believes in concentrating on their core business, which is the retail and corporate sector. Retail loan contribution is
650
500
350
200
50
40%
30%
20%
10%
0%1Q-05 2Q-05 3Q-05 4Q-05 1Q-06 2Q-06 3Q-06
30.2%
15.1% 14.8%
18.0%
15.9%
31.4% 32.0%
Operating income Operating expenses Cost to Income Ratio
in A
ED m
n
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �79
around �2% – �5%, which is in line with the bank’s strategy. However, this had dropped from a level of �9% in 2004. We believe that the growth in the bank’s loan book will be facilitated by the retail in the form of personal loans as well as corporate lending in the form of lending to the growing sectors.
In our opinion, the outlook for 2006-2007 seems positive for the banks in UAE. The core underlying banking income has remained strong YTD despite the downward bias in the capital markets. Government thrust towards providing further impetus to economic growth is likely to benefit the banking sector. However, in our opinion the bank will be able to maintain its position as one of the leading banks in the UAE. One of the biggest strengths of the bank being the support, which the bank receives from both the governments, which allows them to operate efficiently in the two emirates. Currently, the bank is well-positioned to take advantage of the growing UAE economy.
Valuation:
Based on the current market price of AED7.00, UNB stock is trading at a ��.88x 2005 earnings and 2.87x 2005 book value. On a one year forward basis, the stock is trading at 4.95x 2006F earnings and �.82x 2006F book value. UNB will continue to enjoy the customer’s confidence keeping in mind the image of the bank in the country. Based on the DDM valuation method, we recommend a BUY on the stock with a price target of AED8.09, an upside of �5.6% from current levels.
Global Research - UAE Global Investment House
�80 UAE Banking Sector Report January 2007
BA
LA
NC
E S
HE
ET
UN
ION
NA
TIO
NA
L B
AN
KA
mou
nt in
AE
D ‘
000
2003
2004
2005
2006
(F)
2007
(F)
2008
(F)
2009
(F)
Ass
ets
Cas
h ba
lanc
es 8
3�,4
�9
�,5
32,3
72
2,8
65,�
63
3,2
�2,7
�6
4,5
56,6
32
4,4
�4,3
39
4,6
30,7
66
Fina
ncia
l ass
ets
held
for
trad
ing
��,
078
3�,
825
�46
,738
�
88,�
58
�93
,937
2
20,8
3�
227
,066
D
ue f
rom
ban
ks 4
,38�
,857
3
,60�
,452
8
,266
,960
6
,7�9
,9�9
7
,359
,322
8
,7�9
,626
�
0,04
9,8�
4 N
et lo
ans
and
adva
nces
to c
usto
mer
s 9
,799
,368
�
6,�5
0,�2
� 2
0,70
2,9�
5 2
5,87
�,68
7 2
8,7�
7,57
3 3
2,78
4,95
4 3
6,6�
4,39
� In
vest
men
ts a
vaila
ble-
for-
sale
783
,739
7
52,0
28
725
,�84
9
26,0
64
�,0
27,9
3�
�,�
28,5
��
�,2
4�,3
62
Inve
stm
ents
hel
d-to
-mat
urity
�,0
70,8
04
�,4
99,0
4�
�,2
77,5
�3
�,7
09,6
57
�,8
97,7
20
�,7
63,2
98
�,9
39,6
28
Gro
ss p
rope
rty
and
equi
pmen
t 3
0�,4
74
305
,977
3
45,0
52
372
,656
4
02,4
69
430
,64�
4
60,7
86
Les
s: D
epre
ciat
ion
(�8
6,32
6) (
�92,
245)
(20
9,4�
0) (
223,
594)
(24
�,48
�) (
258,
385)
(27
6,47
2)L
ess:
Pro
visi
on f
or im
pair
men
t (
�,97
2) (
�,97
2) (
�,97
2) (
�,97
2) (
�,97
2) (
�,97
2) (
�,97
2)N
et p
rope
rty
and
equi
pmen
t �
�3,�
76
���
,760
�
33,6
70
�47
,090
�
59,0
�5
�70
,285
�
82,3
43
Oth
er A
sset
s �
32,0
06
88�
,730
8
�4,0
90
967
,668
9
69,6
84
�,0
�9,2
2�
�,0
78,5
63
Tot
al A
sset
s 1
7,12
3,44
7 2
4,56
0,32
9 3
4,93
2,23
3 3
9,74
2,96
1 4
4,88
1,81
4 5
0,22
1,06
5 5
5,96
3,93
2 L
iabi
litie
sC
usto
mer
’s D
epos
it �
2,9�
4,32
� �
7,89
0,83
0 2
5,78
6,68
6 2
8,49
4,28
8 3
�,62
8,66
0 3
5,26
5,95
6 3
8,79
2,55
� D
ue to
ban
ks �
,032
,0�0
2
,47�
,857
4
�9,0
96
997
,300
7
90,7
�6
936
,546
9
�3,7
84
Med
ium
term
bor
row
ing
�,0
�0,0
75
�,0
�0,0
75
2,4
79,2
75
3,0
85,3
20
4,�
65,�
82
4,3
73,4
4�
5,0
29,4
57
Oth
er L
iabi
litie
s �
76,3
34
97�
,�83
�
,0�3
,748
�
,�39
,772
�
,265
,�46
�
,4�0
,638
�
,55�
,702
T
otal
Lia
bilit
ies
15,
132,
740
22,
343,
945
29,
698,
805
33,
716,
680
37,
849,
705
41,
986,
581
46,
287,
495
Ow
ner’
s E
quit
ySh
are
capi
tal
904
,332
9
04,3
32
�,2
50,0
00
�,5
62,5
00
�,5
62,5
00
�,5
62,5
00
�,5
62,5
00
Leg
al r
eser
ves
448
,666
4
54,6
4�
2,2
07,�
�6
2,2
84,8
80
2,2
88,2
25
2,2
92,3
�8
2,2
97,3
56
Gen
eral
res
erve
75,
000
75,
000
75,
000
-
-
-
-
Ret
aine
d ea
rnin
gs 5
62,7
09
782
,�49
�
,700
,394
2
,�77
,��0
3
,�78
,702
4
,375
,982
5
,8��
,774
T
otal
Sha
reho
lder
’s E
quit
y 1
,990
,707
2
,216
,122
5
,232
,510
6
,024
,491
7
,029
,427
8
,230
,800
9
,671
,630
M
inor
ity I
nter
est
-
262
9�
8 �
,790
2
,682
3
,683
4
,807
T
otal
Lia
bilit
ies
and
Equ
ity
17,
123,
447
24,
560,
329
34,
932,
233
39,
742,
961
44,
881,
814
50,
221,
065
55,
963,
932
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �8�
INC
OM
E S
TA
TE
ME
NT
U
NIO
N N
AT
ION
AL
BA
NK
Am
ount
in A
ED
‘00
020
0320
0420
0520
06(F
)20
07(F
)20
08(F
)20
09(F
)In
tere
st I
ncom
e 6
37,9
77
826
,626
�
,558
,4�4
2
,4�3
,785
2
,75�
,877
3
,225
,8��
3
,783
,229
In
tere
st E
xpen
se (
�70,
4�3)
(29
3,55
6) (
867,
746)
(�,
530,
839)
(�,
686,
898)
(�,
883,
585)
(2,
067,
928)
Net
inte
rest
inco
me
467
,564
5
33,0
70
690
,668
8
82,9
46
�,0
64,9
79
�,3
42,2
26
�,7
�5,3
0�
Fees
and
com
mis
sion
inco
me
��0
,459
�
99,�
70
682
,249
5
43,6
60
603
,462
6
80,5
09
754
,069
N
et g
ains
fro
m d
ealin
g in
for
eign
cur
renc
ies
�7,
633
�9,
323
28,
996
35,
6�8
39,
536
44,
082
48,
49�
Net
trad
ing
gain
s/(l
osse
s) �
,3�8
9
,692
�
93,7
57
2,4
�9
59,
673
67,
948
75,
689
Net
gai
ns o
n no
n-tr
adin
g fi
nanc
ial i
nstr
umen
ts 3
2,24
0 2
0,79
8 3
2,22
0 4
0,27
5 4
6,3�
6 5
0,94
8 5
6,04
3 O
ther
ope
ratin
g in
com
e 3
9,8�
8 5
8,00
� 6
6,3�
5 9
4,07
9 �
08,9
03
�27
,403
�
43,8
08
Ope
ratin
g in
com
e 6
69,0
32
840
,054
�
,694
,205
�
,598
,997
�
,922
,870
2
,3�3
,��6
2
,793
,40�
Im
pair
men
t Los
ses
(net
) (
68,2
98)
(�5
�,�3
5) (
239,
�47)
(�3
4,39
8) (
�79,
0�9)
(22
0,83
�) (
264,
9�0)
Les
s : S
taff
cos
ts (
�37,
277)
(�5
5,�8
3) (
2��,
820)
(27
�,39
4) (
3�2,
952)
(36
0,87
2) (
4�6,
�3�)
Les
s: D
epre
ciat
ion
(27
,447
) (
�8,7
78)
(�8
,�77
) (
�4,�
84)
(�7
,887
) (
�6,9
04)
(�8
,087
)L
ess:
Oth
er o
pera
ting
expe
nses
(59
,953
) (
62,0
49)
(7�
,030
) (
72,4
68)
(74
,279
) (
76,�
36)
(78
,040
)N
et P
rofi
t B
efor
e M
inor
ity
Inte
rest
376
,057
4
52,9
09
1,1
54,0
31
1,1
06,5
53
1,3
38,7
33
1,6
38,3
73
2,0
16,2
33
Min
ority
Int
eres
t -
(
207)
(79
3) (
872)
(89
2) (
�,00
�) (
�,�2
3)N
et P
rofi
t 3
76,0
57
452
,702
1
,153
,238
1
,105
,681
1
,337
,841
1
,637
,372
2
,015
,110
P&
L A
ppro
pria
tion
Acc
ount
: -
-
-
Op
Bal
ance
of R
etai
ned
Ear
ning
s 3
07,6
70
562
,709
7
82,�
49
�,7
00,3
94
2,�
77,�
�0
3,�
78,7
02
4,3
75,9
82
Net
Pro
fit f
or th
e ye
ar 3
76,0
57
452
,702
�
,�53
,238
�
,�05
,68�
�
,337
,84�
�
,637
,372
2
,0�5
,��0
T
rfr
to le
gal r
eser
ves
(37
,606
) (
5,98
0) (
2,47
5) (
2,76
4) (
3,34
5) (
4,09
3) (
5,03
8)C
hang
e in
acc
ount
ing
polic
y -
9
5,6�
9 -
-
-
-
-
D
irec
tors
rem
uner
atio
n (
�,20
0) (
�,20
0) (
�,20
0) (
�,20
0) (
�,20
0) (
�,20
0) (
�,20
0) C
ash
Div
iden
d (
82,2
�2)
(22
6,03
3) (
�35,
650)
(3�
2,50
0) (
33�,
704)
(43
4,79
8) (
573,
080)
Bon
us I
ssue
-
(95
,668
) (
95,6
68)
(3�
2,50
0) -
-
-
Cl B
alan
ce o
f Ret
aine
d E
arni
ngs
562
,709
7
82,�
49
�,7
00,3
94
2,�
77,�
�0
3,�
78,7
02
4,3
75,9
82
5,8
��,7
74
Global Research - UAE Global Investment House
�82 UAE Banking Sector Report January 2007
CA
SHF
LO
W
UN
ION
NA
TIO
NA
L B
AN
K
Am
ount
in A
ED
‘00
020
0320
0420
0520
06(F
)20
07(F
)20
08(F
)20
09(F
)O
pera
ting
Aci
tivi
ties
Net
pro
fit f
or th
e ye
ar 3
76,0
57
452
,702
�
,�53
,238
�
,�05
,68�
�
,337
,84�
�
,637
,372
2
,0�5
,��0
A
djus
tmen
ts f
or:
Dep
reci
atio
n 2
7,44
7 �
8,77
8 �
8,�7
7 �
4,�8
4 �
7,88
7 �
6,90
4 �
8,08
7 Im
pair
men
t los
ses(
net)
68,
298
�5�
,�35
2
39,�
47
-
-
-
-
Net
gai
ns o
n no
n-tr
adin
g fi
nanc
ial i
nst
(32
,240
) (
20,7
98)
(32
,220
) -
-
-
-
N
et g
ain
on s
ale
of p
rope
rty
and
equi
pmen
t (
�,20
0) (
3,46
0) (
38)
-
-
-
-
Prof
it at
trib
utab
le to
min
ority
inte
rest
sha
reho
lder
s -
2
07
793
8
72
892
�
,00�
�
,�23
D
irec
tor’
s re
mun
erat
ion
-
(�,
200)
(�,
200)
(�,
200)
(�,
200)
(�,
200)
(�,
200)
Ope
ratin
g pr
ofit
befo
re c
hang
es 4
38,3
62
597
,364
�
,377
,897
�
,��9
,537
�
,355
,420
�
,654
,076
2
,033
,�20
D
ecre
ase/
(inc
reas
e) in
fin
anci
al a
sset
s he
ld f
or tr
adin
g �
�,38
6 (
20,7
47)
(��
4,9�
3) (
4�,4
20)
(5,
779)
(26
,894
) (
6,23
5)(I
ncre
ase)
/dec
reas
e in
due
from
ban
ks m
atur
ing
afte
r 3 m
onth
s (
422,
395)
422
,395
-
�
,547
,04�
(
639,
403)
(�,
360,
304)
(�,
330,
�88)
(Inc
reas
e) in
loan
s an
d ad
vanc
es to
cus
tom
ers
(�,
�84,
447)
(6,
553,
253)
(4,
79�,
94�)
(5,
�68,
772)
(2,
845,
886)
(4,
067,
38�)
(3,
829,
437)
(Inc
reas
e)/d
ecre
ase
in o
ther
ass
ets
(36
,44�
) (
40�,
752)
67,
640
(�5
3,57
8) (
2,0�
6) (
49,5
37)
(59
,342
)In
crea
se in
cus
tom
er’s
dep
osits
�,2
28,6
88
4,9
76,5
09
7,8
95,8
56
2,7
07,6
02
3,�
34,3
72
3,6
37,2
96
3,5
26,5
96
Incr
ease
in d
ue to
ban
ks m
atur
ing
afte
r 3
mon
ths
73,
460
3�2
,205
(
4�4,
498)
578
,204
(
206,
584)
�45
,829
(
22,7
62)
(Dec
reas
e)/I
ncre
ase
in o
ther
liab
ilitie
s (
756)
452
,892
4
6,75
� �
26,0
24
�25
,375
�
45,4
92
�4�
,064
N
et c
ash
gene
rate
d fr
om o
pera
ting
act
ivit
ies
107
,857
(
214,
387)
4,0
66,7
92
714
,637
9
15,4
99
78,
577
452
,816
In
vest
ing
Act
ivit
ies
Purc
hase
of
prop
erty
and
equ
ipm
ent
(26
,880
) (
40,5
68)
(40
,80�
) (
27,6
04)
(29
,8�2
) (
28,�
73)
(30
,�45
)Pr
ocee
ds f
rom
sal
e of
pro
pert
y an
d eq
uipm
ent
-
26,
666
752
-
-
-
-
Pu
rcha
se o
f in
vest
men
t sec
uriti
es h
eld-
to-m
atur
ity (
790,
82�)
(�,
0�0,
697)
(34
8,69
3) (
200,
880)
(�0
�,86
7) (
�00,
579)
(��
2,85
�)Pr
ocee
ds a
risi
ng o
n m
atur
ity o
f in
vest
men
ts 3
90,5
52
634
,305
5
70,4
43
-
-
-
-
Purc
hase
of
avai
labl
e-fo
r-sa
le in
vest
men
ts (
�05,
095)
(73
,880
) (
59,3
66)
(43
2,�4
4) (
�88,
062)
�34
,422
(
�76,
330)
Proc
eeds
fro
m s
ale
of a
vaila
ble-
for-
sale
9�,
070
��9
,944
�
�4,0
22
-
-
-
-
Net
cas
h (u
sed
in)
inve
stin
g ac
tivi
ties
(44
1,17
4) (
344,
230)
236
,357
(
660,
629)
(31
9,74
2) 5
,670
(
319,
326)
Fin
anci
ng A
ctiv
itie
sD
ivid
end
Paid
(82
,2�2
) (
226,
033)
(�3
5,65
0) (
3�2,
500)
(33
�,70
4) (
434,
798)
(57
3,08
0)D
ivid
end
Paid
to m
inor
ity s
hare
hold
er -
(
49)
(�8
7) -
-
-
-
A
dditi
onal
cap
ital r
ecei
ved
from
min
ority
sha
reho
lder
-
-
50
-
-
-
-
Incr
ease
in m
edui
m te
rm b
orro
win
g �
,0�0
,075
-
�
,469
,200
6
06,0
45
�,0
79,8
62
208
,259
6
56,0
�6
Proc
eeds
fro
m r
ight
s is
sues
-
-
2,0
00,0
00
-
-
-
-
Net
cas
h fr
om/(
used
in)
fina
ncin
g ac
tivi
ties
927
,863
(
226,
082)
3,3
33,4
13
293
,545
7
48,1
58
(22
6,53
9) 8
2,93
6 In
crea
se in
cas
h an
d ca
sh e
quiv
alen
ts 5
94,5
46
(78
4,69
9) 7
,636
,562
3
47,5
53
�,3
43,9
�5
(�4
2,29
2) 2
�6,4
27
Cas
h an
d ca
sh e
quiv
alen
ts a
t beg
inni
ng o
f th
e ye
ar 3
,384
,705
3
,979
,25�
3
,�94
,552
2
,865
,�63
3
,2�2
,7�6
4
,556
,632
4
,4�4
,339
C
ash
and
cash
equ
ival
ents
at
the
end
of t
he y
ear
3,9
79,2
51
3,1
94,5
52
10,
831,
114
3,2
12,7
16
4,5
56,6
32
4,4
14,3
39
4,6
30,7
66
Global Research - UAE Global Investment House
January 2007 UAE Banking Sector Report �83
FACT SHEET UNION NATIONAL BANK
Amount in AED ‘000 2003 2004 2005 2006(F) 2007(F) 2008(F) 2009(F)
Profitability - Return on Average Assets 2.4% 2.2% 3.9% 3.0% 3.2% 3.4% 3.8% - Return on Average Equity 20.4% 2�.5% 3�.0% �9.6% 20.5% 2�.5% 22.5% - Net interest income / Op. Income 69.9% 63.5% 40.8% 55.2% 55.4% 58.0% 6�.4% - Non-interest income / Op. Income 29.9% 35.4% 47.8% 44.6% 4�.5% 39.0% 35.9%
Margins - Net income / Revenues 58.9% 54.8% 74.0% 45.8% 48.6% 50.8% 53.3% - Operating profit / Revenues �04.9% �0�.6% �08.7% 66.2% 69.9% 7�.7% 73.8% - Interest Expense to Interest Income 36.4% 55.�% �25.6% �73.4% �58.4% �40.3% �20.6% - Yield on interest earning assets 3.9% 3.9% 5.3% 6.5% 6.5% 6.8% 7.�% - Cost of interest bearing liabilities �.2% �.6% 3.5% 5.0% 4.9% 4.9% 4.8% - Net Spread 2.6% 2.3% �.8% �.5% �.6% �.9% 2.3% - Net Interest Margin 2.8% 2.5% 2.3% 2.4% 2.5% 2.8% 3.2%
Efficiency -Cost / Op. Income 33.6% 28.�% �7.8% 22.4% 2�.�% �9.6% �8.3% - Staff Expense / Op. Income 20.5% �8.5% �2.5% �7.0% �6.3% �5.6% �4.9% - Cost to Average Total Assets �.4% �.0% �.0% �.0% �.0% �.0% �.0%
Liquidity - Loans to Interest Earning Assets 64.4% 73.0% 66.5% 73.0% 73.4% 73.7% 73.3% - Loans to Customer Deposits 82.6% 95.4% 83.5% 94.3% 94.3% 96.3% 97.6% - Customer Deposits to Equity 648.7% 807.3% 492.8% 473.0% 449.9% 428.5% 40�.�% - Due from Banks to Due to Banks 424.6% �45.7% �972.6% 673.8% 930.7% 93�.0% �099.8%
Credit Quality - Provisions to Average Gross Loans 8.�% 5.4% 3.9% 3.8% 3.8% 3.5% 3.3% - NPLs to Gross Loans 7.27% 4.72% 2.53% 2.63% 2.73% 2.75% 2.59% - NPL Coverage ���.8% ��3.5% �52.6% �42.5% �37.6% �27.�% �25.2%
Capital Adequacy - Equity to Total Assets ��.6% 9.0% �5.0% �5.2% �5.7% �6.4% �7.3% - Equity to Gross Loans �8.7% �3.0% 24.3% 22.4% 23.6% 24.2% 25.6%
Ratios Used for Valuation - Shares in Issue (‘000) 904,332 904,332 �,250,000 �,562,500 �,562,500 �,562,500 �,562,500 - EPS (AED) 0.38 0.4� �.0� �.4� �.�7 0.95 0.78 - Book Value Per Share (AED) 2.20 2.45 4.�9 3.86 4.50 5.27 6.�9 - Market Price Year End (AED) * 4.45 8.94 �2.00 7.00 7.00 7.00 7.00 - P/E (x) ��.7� 2�.80 ��.88 4.95 5.99 7.34 9.03 - P/BV (x) 2.02 3.65 2.87 �.82 �.56 �.33 �.�3 - Dividend pay-out ratio (%) 60.�% 30.0% 27.�% 30.0% 32.5% 35.0% 35.0%
* Market price for 2007 and subsequent years as per last closing price as on Jan. 16, 2007
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Company
Abu Dhabi Commercial BankAbu Dhabi Islamic BankCommercial Bank InternationalEmirates Bank InternationalFirst Gulf BankMashreq BankNational Bank of Abu DhabiNational Bank of DubaiSharjah Islamic BankUnited Arab BankUnion National Bank
Recommendation
HoldBuyHoldHoldBuyHoldBuyBuyBuy
ReduceBuy
Ticker
ADCB.ADADIB.ADCBI.AD
EBIL.DUFGB.AD
MASB.DUNBAD.ADNBDD.DU
SIB.ADUAB.ADUNB.AD
Price
AED 6.00AED 52.35AED 2.61
AED 12.10AED 12.8AED 270AED 22.9AED 9.00AED 2.41AED 8.00AED 7.00
Disclosure
1,101,101,101,101,101,101,101,101,101,101,10
Disclosure Checklist
1. Global Investment House did not receive and will not receive any compensation from the companyor anyone else for the preparation of this report.
2. The company being researched holds more than 5% stake in Global Investment House.3. Global Investment House makes a market in securities issued by this company.4. Global Investment House acts as a corporate broker or sponsor to this company.5. The author of or an individual who assisted in the preparation of this report (or a member of his/her
household) has a direct ownership position in securities issued by this company.6. An employee of Global Investment House serves on the board of directors of this company.7. Within the past year , Global Investment House has managed or co-managed a public offering for
this company, for which it received fees.8. Global Investment House has received compensation from this company for the provision of
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The following is a comprehensive list of disclosures which may or may not apply to all our researches.
Only the relevant disclosures which apply to this particular research has been mentioned in the table
below under the heading of disclosure.
Global rating
Buy
Global Research: Equity Ratings Definitions
HoldReduceSell
Definition
Fair value of the stock is >10% from the current market priceFair value of the stock is between +10% and -10% from the current market priceFair value of the stock is between -10% and -20% from the current market priceFair value of the stock is < -20% from the current market price
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