MENA financials. Looking beneath the surface. Investor pay-out what you see is not what you get

Transcription

1 MENA financials Looking beneath the surface Investor pay-out what you see is not what you get Company Section May 23, 2012

2 C o m p a n y R e p o r t s M a y Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com Loubna Elhassan Nisreen Assi Christine Kalindjian Arqaam Arcapital Research offshore s.a.l. Michael Malkoun Jonathan Milan Zeina Nasreddine MENA Financials Banks, Insurance and Diversified Financials Table of Contents Abu Dhabi Commercial Bank... 2 Abu Dhabi Islamic Bank... 6 Commercial Bank of Dubai Dubai Islamic Bank Emirates NBD First Gulf Bank National Bank of Abu Dhabi Union National Bank Tamweel Mashreq Bank National Bank of Ras Al-Khaimah Commercial Bank of Qatar Doha Bank Qatar Islamic Bank Qatar National Bank Masraf Al Rayan Al Khaliji Bank Qatar International Islamic Bank Credit Agricole Egypt Commercial International Bank Housing Development Bank National Societe Generale Bank Egyptian Gulf Bank Bank Audi Blom Bank Bank Byblos Bank of Beirut Arab National Bank Al Rajhi Bank Banque Saudi Fransi Riyad Bank SAMBA Financial Group The Saudi British Bank Saudi Hollandi Bank Albilad Bank Bank Al-Jazira Saudi Investment Bank Alinma Bank National Bank of Kuwait Kuwait Finance House Gulf Bank Burgan Bank Boubyan Bank Bank Muscat Sohar Bank HSBC Oman Bank Ahli United Bank Shuaa Capital Dubai Financial Market EFG Hermes Salama Insurance Qatar Insurance Company Tawuniya Insurance MedGulf Insurance Core Buy Portfolio Company Ticker UNB UH Price Target AED 4.6 Upside (%) 57.1 Company Ticker FGB UH Price Target AED 13.4 Upside (%) 53.4 Company Ticker BKMB OM Price Target OMR 0.9 Upside (%) 51.2 Company Ticker SALAMA UH Price Target AED 0.93 Upside (%) 51.2 Company Ticker CBD UH Price Target AED 4.2 Upside (%) 49.1 Company Ticker BURG KK Price Target KWD 0.6 Upside (%) 45.3 Company Ticker AAAL AB Price Target SAR 38.3 Upside (%) 41.9 Company Ticker QNBK QD Price Target QAR Upside (%) 41.6 Company Ticker COMI EY Price Target EGP 35.6 Upside (%) 39.3 Company Ticker RJHI AB Price Target SAR Upside (%) 35.8 Company Ticker CIEB EY Price Target EGP 12.0 Upside (%) 32.2 Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

3 I n i t i a t i o n R e p o r t M a y Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com Nisreen Assi Arqaam Capital Research Offshore s.a.l Abu Dhabi Commercial Bank Capital deficit due to 1 buyback Earnings dilution on the back of sale of RHB Capital Capital adequacy remains a concern despite the sale of 25% stake in RHB Capital due to a 1 share buyback Low return bank: ADCB is generating slightly below average preprovision income relative to peers in UAE (2.9% of RWA) due to average net interest margins, high C/I of 34% (vs. 33% in FY 10A) and a decline of 6% in fees and commissions income in FY 11A. The bank sold its 25% stake in RHB Capital for a gain of AED 1.31bn forcing it to shift its focus to domestic core activity. We are forecasting a decline in net earnings of 41.3% (a 11.1% increase if we exclude the nonrecurring gain in FY 11A) in FY 12e to AED 1.64bn mainly driven by a 5% drop in fees and commissions to AED 853mn as it waives retail charges while NIMs are expected to stand at 2.78% in FY 12e. Earnings recovery thereafter: We expect earnings to recover at a 4 year CAGR of 16.9% (excluding nonrecurring gain of FY 11A) helped by a softening in loan loss charges, a small reduction in net interest margins, accompanied by an elevation in fees and commissions. Flight from retail and CC lending: We forecast loan book to increase at a 4 year CAGR of 6.9% after a muted 1.6% growth in FY 11A. The growth to be characterized by a flight away from retail and credit cards lending activity after the new regulation, which is currently evident on fees and commissions income and yet to reach margins. Asset quality improvement: Our asset quality screen suggests a cumulative loss of 911bps over the next 5 years, or 182bps pa. NPL stood at 4.6% in FY 11A, down from 11.1% in FY 10A as restructured loans of AED 6.7bn were reclassified (exposure to DW) and loan losses absorb 52% of operating profits. The bank is currently at a general provisions level of 1.6% of CRWAs surpassing the minimum requirement of 1.5% by FY 14e. Capital adequacy remains a concern, but liquidity is in comfort zone: The capital gain on the sale of RHB Capital and the release of AED 5.3bn in associates helped the estimated CET1 to reach 11.5% in FY 12e. However, capital adequacy is cut back to 11.1% by a drag on the back of a 1 share buyback; substantially below its Tier 1 of 14.2% under Basel II in FY 12e. ADCB enjoys an adequate liquidity as we calculate an NSFR of 92%, LCR of 151% and net cash balances of 13.2% in FY 11A. Fully priced in valuation: Our price target of AED 3 includes (i) a valuation of the bank s core operations which is roughly close to BV, (ii) a large deduction for capital deficit, and (iii) a small adjustment for real estate exposure and under-provisioning not accounted for in forecast period. The stock is expected to trade at a P/E13e of 7.1x and P/tNAV12e of 0.9x and to achieve an ROAE of 10.6% in FY 13e. HOLD Banks / UAE AED 3.0 Bloomberg code ADCB UH Market index Abu Dhabi Price target (local) 3.0 Upside (%) -5.2 Market data 17/05/2012 Last closing price Week range Market cap (AEDmn) 17,626 Market cap (USDmn) 4,799 Average daily value (AEDmn) 2.9 Average daily value (USDmn) 0.8 Year-end (local mn) e 2013e 2014e Revenues 6,069 6,131 6,532 6,990 Pre-provision Operating Profit 4,006 3,973 4,246 4,516 EPS P/E (x) (mkt price) BVPS Tangible BVPS P/B (x) (mkt price) P/TBVPS (x) ((mkt price) DPS Div. yield (%) RoAA (%) RoRWA (%) RoAE (%) Loan/ Deposit ratio (%) Risk weighted assets (bn) Core Equity Tier 1 ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) NPL ratio (%) Coverage ratio (%) Price Performance ADCB UH Abu Dhabi May/11 Aug/11 Nov/11 Feb/12 Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

4 Abacus Profitability NIM 4% 3% 2% 1% 3.4% 3.2% % 2.6% 2.4% 2.2% 2. Credit Quality Capital Ratios 26% 22% 18% 14% 1 Growth % 2.43% 0.1 Arqaam Capital Fundamental Data 2.91% 1.74% 2.03% 2.58% 2.59% 2.57% 2.55% 1.41% 1.28% % 1.06% 1.21% 1.28% 1.46% PPP/RWA Cost of risk/rwa RORWA 2.47% 2.91% 2.78% 2.77% 2.76% 2.75% Net interest margin 16.7% 12. FY12e FY13e FY14e FY15e NPL Cov ratio (%) 22.5% 15.9% NPL as % of tot loans 20.3% 20.1% 19.9% 19.7% 14.2% 14.2% 14.1% 14.2% Tier 1 CAR 6.2% 6.1% % 5.8% 5.7% 5.6% Abu Dhabi Commercial Bank Performance analysis Net Interest Margin (%) Cost/Income (%) Net Interest Income/ total income (%) Fees and commissions / Operating income (%) Trading gains / Operating income (%) RoAE (%) Pre Prov.ROE (%) RoAA (%) Revenue / RWA (%) Costs / RWA (%) PPP / RWA (%) Cost of risk / RWA (%) RoRWA (%) RoRWA (%) (adjusted for gross-up of associate) Asset Quality Charge offs / Avg gross loans (%) NPL/Gross Loans (%) Provision coverage (%) Provision/Avg gross loans (%) Loan Loss Charge/Operating Income (%) Funding and Liquidity Net loans/deposits (%) Cash and Interbank / assets (%) Deposits/Liabilities (%) Capital and leverage ratios Core Tier 1 ratio (Basel III) (%) Tier 1 ratio (%) Total capital ratio (%) Tangible equity / assets (%) RWA / assets (%) % 5% 4% 8% % 6% 6% 7% 8% 2% Loan growth Deposit growth Growth Asset growth (%) Net loan growth (%) Deposit growth (%) Net income growth (%) (120.3) 1,926.0 (41.3) Abu Dhabi Commercial Bank Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 3

5 Abacus Company Profile Arqaam Capital Fundamental Data Abu Dhabi Commercial Bank is the third largest bank in the UAE in total assets of AED 182.9bn as of Q1 12 and in market capitalization of AED 17.6bn with a 12.1% market share in gross loans and 10.3% in deposits in FY 11A. The bank was established in 1985 on the back of a merger between Emirate Commercial bank, Federal Commercial and Khalij Commercial Bank. ADCB is a full service bank providing retail banking, asset management, private equity, brokerage and investment banking services. The bank currently operates 48 branches in the UAE, 2 branches in India and 1 offshore branch in Jersey and employees more than 4000 employees. ADCB is 58% owned by the government of Abu Dhabi through the Abu Dhabi Investment Council, 6% by Tasameem Real Estate Company and has a free float of 36%. Loan Breakdown by Sector Abu Dhabi Commercial Bank Income statement (AEDmn) Interest income 7,376 7,716 8,082 8,776 9,470 10,236 Interest expense 3,694 3,028 3,255 3,586 3,893 4,232 Net interest income 3,682 4,688 4,827 5,190 5,577 6,005 Fee income Net trading income Other operating income Total Operating Income 5,000 6,069 6,131 6,532 6,990 7,503 Total Operating expenses 1,649 2,063 2,157 2,286 2,473 2,676 Pre-provision operating profit 3,351 4,006 3,973 4,246 4,516 4,827 Net provisions 2,860 2,082 2,164 2,091 2,097 1,905 Other provisions/impairment Operating profit 64 1,608 1,799 2,144 2,407 2,909 Associates 336 1, Pre-tax profit 400 3,081 1,934 2,289 2,564 3,079 Taxation Group Net profit 391 3,045 1,903 2,250 2,518 3,023 Minorities Tier 1 Coupon Attributable net profit 138 2,789 1,639 1,988 2,255 2,759 Diluted EPS DPS BVPS Tangible BVPS % 24.8% 73.3% Loan Breakdown by Country Retail Corporate Government UAE International Balance sheet (AEDmn) Gross loans and advances 129, , , , , ,227 Less: Loan loss provisions 6,296 5,712 7,226 8,667 10,114 11,369 Net loans and advances 122, , , , , ,857 Cash and central bank 5,888 6,630 8,178 12,817 17,224 20,375 Due from banks 18,398 20,840 22,029 22,604 23,250 23,855 Investment, net 17,887 20,391 24,556 25,087 25,672 27,696 Fixed assets 1, ,028 1,076 1,130 Other assets 12,256 10,145 12,139 13,040 14,074 15,190 Total assets 178, , , , , ,103 Customer deposits 106, , , , , ,388 Due to banks 4,842 3,138 10,638 9,648 9,425 7,416 Debt 33,926 35,897 35,016 38,016 41,016 44,016 Other liabilities 17,796 16,725 18,263 18,275 18,287 18,299 Total liabilities 162, , , , , ,119 Total Equity 15,573 18,078 18,039 19,454 21,014 22,985 Risk weighted assets (bn) Average interest-earning assets 149, , , , , ,728 Average interest-paying liabilities 138, , , , , ,511 Common shareholder s equity 15,410 17,948 17,908 19,322 20,881 22,851 Core Equity Tier 1 (Basel III) 9,005 16,676 17,244 18,529 19,987 21,772 Tier 1 capital 16,216 21,875 21,863 23,273 24,829 26,794 Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com Nisreen Assi Arqaam Capital Research Offshore s.a.l Abu Dhabi Commercial Bank Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 4

6 Abu Dhabi Commercial Bank valuation (AEDmn) Year-end perp subtotal % of total 1. DCF Net profit 381 3,026 1,879 2,228 2,495 2,999 2,999 Other adjustments (comprehensive income) Minus: excess return excess capital (452) (32) (69) (63) (60) (52) (52) Risk free rate Tax shelter Adjusted net profit 589 2,821 1,708 2,051 2,315 2,811 2,811 Capital requirements 24,454 17,468 18,722 19,898 21,298 22,934 22,934 RoEcC 2.4% 16.1% 9.1% 10.3% 10.9% 12.3% 12.3% Cost of capital 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% Capital charge 3,057 2,184 2,340 2,487 2,662 2,867 2,867 Economic profit (2,467) 637 (633) (436) (347) (56) (56) Discount factor NPV of Economic Profit (411) (291) (42) (42) DCF EVA Forecast period (744) (5.) Perpetual growth rate (GDP) 1.5% Terminal Value (508) Terminal value discounted (378) (2.5%) Required Capital (adjusted for release associates) 18, % Value of the bank operations 17, % 2. Capital surplus/deficit Available capital: Shareholders equity 15,573 18,078 18,039 19,454 21,014 22,985 Less Goodwill & intangibles (155) (124) (124) (124) (124) (124) Less non equity elements reported shareholders equity Less Dividends (if included in reported equity) -- (1,120) (574) (696) (789) (966) Tangible equity 15,418 16,834 17,342 18,635 20,101 21,895 Capital needs RWAs (Basel I in FY 11A, Basel II/III starting FY 12e) 135, , , , , ,212 RWAs (Basel III) 159, , , , , ,171 Equity as % RWA Financial stakes 5, Capital Requirements 24,454 17,468 18,722 19,898 21,298 22,934 Surplus capital (9,036) (634) (1,379) (1,264) (1,197) (1,038) (1,379) (9.2%) 3. Other adjustments Real estate losses (198) Corporate bond fair value losses Equity investment losses Under/overprovisioning not covered in forecast period (1,536) Level 3 assets (26) Total adjustments (1,761) (11.7%) 4. Dividends % Total Fair Value 15, Fully diluted number of shares 5,036 Fair value per share 3.0 Current share price 3.2 Upside (5.2%) Implied P/E (x) Implied P/tNAV (x) Abu Dhabi Commercial Bank Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 5

7 I n i t i a t i o n R e p o r t M a y Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com Nisreen Assi Arqaam Capital Research Offshore s.a.l Abu Dhabi Islamic Bank Weakest capital base in the UAE Tight capital base under Basel III, due to (i) low capital base, (ii) reliance on tier 1 capital notes, and (iii) dividends The retail focused bank is to be affected by CB s regulations capping fees, but CC ruling has a minimal effect (credit cards book < AED 1bn) Average returns helped by impressive margins in Islamic finance, offset by high C/I Decent returns: The bank is generating reasonable pre-provisioning income (3.2% of RWAs) on the back of relatively high margins of 4.1%, partly offset by a high C/I ratio of 43%. We expect RORWA to increase gradually to 1.4% in FY 15e despite continuing high additions to its loan loss reserves. Relatively poor earnings prospects: We are forecasting a drop in earnings of 15.8% for FY 12e due to slightly higher loan loss charges and lower net interest margins followed by a double digit recovery in FY 13e and FY 14e driven by normalization in loan loss charges. Limited asset quality concerns- no exposure to Dubai World and Dubai Holding: Our asset quality screen suggests a cumulative loss of 813bps over the next 5 years, or 163bps pa. The bank has a large unsecured consumer credit portfolio of 58.7% of gross loans in Q1 12A, and it may be affected by the UAE central bank forcing banks to be more lenient. We expect loan loss charges to move up 18% vs. FY 11A. Capital adequacy remains a drag on ADIB s valuation: We calculate a CET1 ratio of just 7.8%, the lowest within the UAE, which is no concern for debt repayment capacity, as it is controlled by Abu Dhabi, but we would not be surprised if ADIB addresses this weak capital base by an EPS dilutive capital hike in the next few years. Adequate Liquidity: We calculate an NSFR of 102% and an LCR of 217% which puts the bank at a conformable liquidity position. High valuation: ADIB is trading at reasonable multiples of P/E13e of 6.7x and 1.1x P/tNAV12e (ROAE of 13.8% in FY 13e). However, our price target of AED 2.7 includes: (i) a deduction for capital deficit, (ii) an impairment on its to investment properties and (iii) a deduction for underprovisioning. SELL Banks / UAE AED 2.7 Bloomberg code ADIB UH Market index Abu Dhabi Price target (local) 2.7 Upside (%) Market data 17/05/2012 Last closing price Week range Market cap (AEDmn) 7,331 Market cap (USDmn) 1,996 Average daily value (AEDmn) 1.1 Average daily value (USDmn) 0.3 Year-end (local mn) e 2013e 2014e Revenues 3,408 3,407 3,633 3,860 Pre-provision Operating Profit 1,959 1,882 2,014 2,131 EPS P/E (x) (mkt price) BVPS Tangible BVPS P/B (x) (mkt price) P/TBVPS (x) ((mkt price) DPS Div. yield (%) RoAA (%) RoRWA (%) RoAE (%) Loan/ Deposit ratio (%) Risk weighted assets (bn) Core Equity Tier 1 ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) NPL ratio (%) Coverage ratio (%) Price Performance ADIB UH Abu Dhabi May/11 Aug/11 Nov/11 Feb/12 Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

8 Abacus Profitability NIM 4% 3% 2% 1% 4.1% 3.9% 3.7% 3.5% Credit Quality Capital Ratios 26% 22% 18% 14% 1 Growth % 1.46% Arqaam Capital Fundamental Data 3.23% 1.71% % 2.73% 2.64% 1.25% 1.31% 1.43% 1.57% 1.21% 1.35% 1.31% 1.29% % PPP/RWA Cost of risk/rwa RORWA 4.02% 4.08% 4.05% 4.08% 4.06% 3.91% Net interest margin 16. FY12e FY13e FY14e FY15e NPL Cov ratio (%) 17.4% NPL as % of tot loans 15.4% 15.3% 15.2% 15.2% % 12.6% 12.6% 12.8% 13. Tier 1 CAR 17% 18% 2% 7% 7% 11% 8% 8.7% 8.6% 8.6% 8.5% 8.5% 8.4% 8.4% 5% 5% 7% 1% FY10 FY11-2% FY12e FY13e FY14e FY15e Loan growth Deposit growth Abu Dhabi Islamic Bank Performance analysis Net Interest Margin (%) Cost/Income (%) Net Interest Income/ total income (%) Fees and commissions / Operating income (%) Trading gains / Operating income (%) RoAE (%) Pre Prov.ROE (%) RoAA (%) Revenue / RWA (%) Costs / RWA (%) PPP / RWA (%) Cost of risk / RWA (%) RoRWA (%) RoRWA (%) (adjusted for gross-up of associate) Asset Quality Charge offs / Avg gross loans (%) NPL/Gross Loans (%) Provision coverage (%) Provision/Avg gross loans (%) Loan Loss Charge/Operating Income (%) Funding and Liquidity Net loans/deposits (%) Cash and Interbank / assets (%) Deposits/Liabilities (%) Capital and leverage ratios Core Tier 1 ratio (Basel III) (%) Tier 1 ratio (%) Total capital ratio (%) Tangible equity / assets (%) RWA / assets (%) Growth Asset growth (%) 17.4 (1.2) Net loan growth (%) Deposit growth (%) 17.2 (2.4) Net income growth (%) 4, (15.8) Abu Dhabi Islamic Bank Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 7

9 Abacus Company Profile Arqaam Capital Fundamental Data Abu Dhabi Islamic Bank has a 4.8% market share in gross loans and 5.2% in deposits as of FY 11A. The bank was established in 1997 and commenced commercial operations in 1998 with its activities conducted in accordance with the Islamic Shari a. ADIB and its subsidiaries carry out full banking services, financing and investing activities through various Islamic instruments such as Murabaha, Istisna a, Mudaraba, Musharaka, Ijara, Wakalah, Sukuk etc. The bank operates 70 branches in the UAE and 1 branch in Iraq; employing more than 1,701 employees. ADIB is 38.6% owned by the Emirates International Investment Company, 7.6% by Abu Dhabi Investment Council and has a free float of 53.8%. Loan Breakdown by Sector 5.3% Abu Dhabi Islamic Bank Income statement (AEDmn) Interest income 3,641 3,728 3,767 3,966 4,212 4,386 Interest expense 1, ,012 1,085 Net interest income 2,596 2,841 2,845 3,013 3,199 3,301 Fee income Net trading income Other operating income Total Operating Income 3,059 3,408 3,407 3,633 3,860 4,020 Total Operating expenses 1,301 1,450 1,525 1,619 1,729 1,838 Pre-provision operating profit 1,758 1,959 1,882 2,014 2,131 2,181 Net provisions Other provisions/impairment Operating profit 1,009 1, ,063 1,193 1,365 Associates Pre-tax profit 1,024 1, ,088 1,237 1,421 Taxation Group Net profit 1,024 1, ,088 1,237 1,421 Minorities Tier 1 Coupon Attributable net profit 903 1, ,116 1,301 Diluted EPS DPS BVPS Tangible BVPS % Loan Breakdown by Country 1.8% 0.7% 1.7% 95.8% Retail Corporate Government UAE Middle East Europe Others Balance sheet (AEDmn) Gross loans and advances 50,229 51,842 52,878 55,976 59,238 63,422 Less: Loan loss provisions 2,277 3,010 3,738 4,502 5,252 5,877 Net loans and advances 47,953 48,831 49,141 51,475 53,987 57,546 Cash and central bank 5,400 11,207 13,131 14,143 15,316 16,552 Due from banks 15,730 7,732 7,694 8,155 8,726 9,337 Investment, net 3,719 3,626 3,903 4,815 5,957 6,306 Fixed assets ,145 1,334 1,530 1,762 Other assets 1,870 1,965 1,923 1,631 1,745 1,867 Total assets 75,258 74,335 76,937 81,553 87,262 93,370 Customer deposits 56,517 55,172 59,142 63,199 70,079 75,699 Due to banks 891 1, (820) (1,111) Debt 9,647 8,798 9,028 9,269 9,269 9,269 Other liabilities 2,092 1,863 1,210 1, Total liabilities 69,147 67,764 70,153 74,280 79,329 84,676 Total Equity 6,111 6,571 6,784 7,273 7,933 8,694 Risk weighted assets (bn) Average interest-earning assets 64,551 69,605 70,281 73,862 78,870 84,345 Average interest-paying liabilities 60,849 64,478 65,422 69,105 73,898 79,193 Common shareholder s equity 6,108 6,568 6,781 7,268 7,928 8,688 Core Equity Tier 1 (Basel III) 4,720 5,170 5,473 5,975 6,521 7,191 Tier 1 capital 8,069 8,599 8,816 9,303 9,963 10,723 Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com Nisreen Assi Arqaam Capital Research Offshore s.a.l Abu Dhabi Islamic Bank Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 8

10 Abu Dhabi Islamic Bank valuation (AEDmn) Year-end perp subtotal% of total 1. DCF Net profit 1,023 1, ,087 1,236 1,421 1,421 Other adjustments (comprehensive income) Minus: excess return excess capital (151) (99) (121) (121) (113) (103) (103) Risk free rate Tax shelter Adjusted net profit 1,055 1, ,089 1,229 1,403 1,403 Capital requirements 8,627 8,559 9,204 9,696 10,197 10,748 10,748 RoEcC 12.2% 13.3% 10.8% 11.2% 12.1% 13.1% 13.1% Cost of capital 12.6% 12.6% 12.6% 12.6% 12.6% 12.6% 12.6% Capital charge 1,087 1,078 1,160 1,222 1,285 1,354 1,354 Economic profit (32) 56 (168) (133) (56) Discount factor NPV of Economic Profit (125) (46) DCF EVA Forecast period (135) (2.1%) Perpetual growth rate (GDP) 2. Terminal Value 463 Terminal value discounted % Required Capital 9, % Value of the bank operations 9, % 2. Capital surplus/deficit Available capital: Shareholders equity 6,111 6,571 6,784 7,273 7,933 8,694 Less Goodwill & intangibles Less non equity elements reported shareholders equity Less Dividends (if included in reported equity) (512) (578) (496) (513) (569) (598) Tangible equity 5,599 6,571 6,784 7,273 7,933 8,694 Capital needs RWAs (Basel I in FY 11A, Basel II/III starting FY 12e) 61,894 60,626 69,720 73,826 78,002 82,593 RWAs (Basel III) 64,919 64,348 69,720 73,826 78,002 82,593 Equity as % RWA Financial stakes Capital Requirements 8,627 8,559 9,204 9,696 10,197 10,748 Surplus capital (3,029) (1,988) (2,419) (2,424) (2,265) (2,055) (2,419) (37.7%) 3. Other adjustments Real estate investment properties (5) (561) (8.7%) Equity investment losses Under/overprovisioning not covered in forecast period (459) (7.2%) Level 3 assets (15%) (52) Total adjustments (1,072) (16.7%) 4. Dividends % Total Fair Value 6, Fully diluted number of shares 2,365 Fair value per share 2.7 Current share price 3.1 Upside (12.5%) Implied P/E (x) Implied P/tNAV (x) Abu Dhabi Islamic Bank Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 9

11 I n i t i a t i o n R e p o r t M a y Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com Nisreen Assi Arqaam Capital Research Offshore s.a.l Commercial Bank of Dubai Most attractive Dubai based bank Attractive upside potential of 49.1% Profitability is expected to remain decent, but two transitional years ahead Robust capital position that allows for 35% buyback or bonus dividends of AED 0.92 a share Strong returns: CBD should continue to deliver very solid preprovisioning income relative to others in UAE (currently at 3.7% of RWA) on the back of decent NIMs and efficiency manifested in a C/I ratio of 30.4%. We anticipate RORWA to remain over 2%, but the ROAE is diluted to 11.6% because of CBD s very solid capital base. Two transitional years ahead: We expect earnings to fall by 8.3% in FY 12e on the back of pressured margins and continuing additions to loan reserves, followed by tempered growth in FY 13e. However, we expect double digit bottom line growth to resume in FY 14e. Decent asset quality: Our asset quality screen suggests a cumulative loss of 904bps over the next 5 years, or 181bps pa, higher than the 1.6% it took in FY 11A. CBD is compelled to add to its collective provisioning in order to adhere to the CB s requirement of a 1.5% of CRWAs; as the bank is currently at 1.3% as of FY 11A. Significant surplus capital: We expect CBD s Basel III CET1 to be at 16.9% in FY 12e and to increase further on the back of limited RWA growth and strong ROAE. We would welcome a share buyback or higher pay-out to address its overcapitalization. The bank could finance up to 35% buyback or bonus dividends of AED 0.92 if it were to go back to 12% CET1, a key differentiator compared to the tight capital positions of other banks such as DIB and ENBD. Sufficient liquidity: The bank has an adequate liquidity position as we calculated an NSFR of 102% and LCR of 10 just at the threshold of requirements. Moreover, the bank enjoys a solid net cash balance of 18% despite an LTD ratio of c. 10. Attractive upside potential: CBD is trading at attractive multiples with a P/E13e of 6.8x (on our conservative forecasts) and P/tNAV12e of 0.8x, with an expected a ROAE of 11.6% in FY 13e. We believe the market does not acknowledge the bank s solid asset quality, robust capital position that allows for buybacks or bonus cash dividends and solid liquidity position. BUY Banks / UAE AED 4.2 Bloomberg code CBD UH Market index DFM Price target (local) 4.2 Upside (%) 49.1 Market data 10/05/2012 Last closing price Week range Market cap (AEDmn) 5,436 Market cap (USDmn) 1,480 Average daily value (AEDmn) 0.3 Average daily value (USDmn) 0.1 Year-end (local mn) e 2013e 2014e Revenues 1,857 1,908 1,970 2,058 Pre-provision Operating Profit 1,292 1,327 1,366 1,428 EPS P/E (x) (mkt price) BVPS Tangible BVPS P/B (x) (mkt price) P/TBVPS (x) ((mkt price) DPS Div. yield (%) RoAA (%) RoRWA (%) RoAE (%) Loan/ Deposit ratio (%) Risk weighted assets (bn) Core Equity Tier 1 ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) NPL ratio (%) Coverage ratio (%) Price Performance CBD UH DFM May/11 Aug/11 Nov/11 Feb/12 Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

12 Abacus Profitability NIM 5% 4% 3% 2% 1% % 3.6% 3.4% 3.2% 3. Credit Quality 51% 5 49% 48% 47% 46% Capital Ratios 26% 22% Arqaam Capital Fundamental Data 3.87% 3.67% 3.61% 3.55% 3.53% 3.52% 2.36% 2.33% 2.05% 2.07% % 1.51% 1.34% 1.56% 1.48% 1.23% 0.89% PPP/RWA Cost of risk/rwa RORWA 3.91% 3.75% 3.71% % 3.49% Net interest margin FY12e FY13e FY14e FY15e 22.1% NPL Cov ratio (%) NPL as % of tot loans 13.4% 13.3% 13.2% 13.1% % 23.1% 23.2% 23.1% 23.2% 23.4% Commercial Bank of Dubai Performance analysis Net Interest Margin (%) Cost/Income (%) Net Interest Income/ total income (%) Fees and commissions / Operating income (%) Trading gains / Operating income (%) RoAE (%) Pre Prov.ROE (%) RoAA (%) Revenue / RWA (%) Costs / RWA (%) PPP / RWA (%) Cost of risk / RWA (%) RoRWA (%) RoRWA (%) (adjusted for gross-up of associate) Asset Quality Charge offs / Avg gross loans (%) NPL/Gross Loans (%) Provision coverage (%) Provision/Avg gross loans (%) Loan Loss Charge/Operating Income (%) Funding and Liquidity Net loans/deposits (%) Cash and Interbank / assets (%) Deposits/Liabilities (%) % 14% 1 Growth % 16.6% 16.9% 17.1% 17.4% 17.8% Tier 1 CAR 5% 6% 5% 5% 5% 5% 5% 5% 5% FY10 FY11-4% -1% FY12e FY13e FY14e FY15e -3% Loan growth Deposit growth Capital and leverage ratios Core Tier 1 ratio (Basel III) (%) Tier 1 ratio (%) Total capital ratio (%) Tangible equity / assets (%) RWA / assets (%) Growth Asset growth (%) 4.7 (0.7) Net loan growth (%) (4.3) (1.3) Deposit growth (%) 4.6 (2.7) Net income growth (%) (8.3) Commercial Bank of Dubai Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 11

13 Abacus Company Profile Arqaam Capital Fundamental Data Commercial Bank of Dubai has a market share of 2.7% in both gross loans and deposits as of FY 11A. The bank was established in 1969 carrying out full banking services, operating 31 branches in the UAE and employing more than 1200 employees. The bank is 2 owned by the Investment Corporation of Dubai, 10.5% by Al Futtaim Private Company, 8.8% by Arab Orient Insurance Company, 6.9% by Abdullah Hamad Al Futtaim, 6.4% by Ghobash Trading and Investment Company, 5.8% by Abdulwahid Hassan Mohammed Al Rostamani, and has a free float of 41.6%. Loan Breakdown by Sector 64.6% 7.7% 27.8% Loan Breakdown by Country 0.7% 99.3% Retail Corporate Government UAE GCC Commercial Bank of Dubai Income statement (AEDmn) Interest income 1,968 1,769 1,759 1,831 1,915 2,004 Interest expense Net interest income 1,385 1,341 1,351 1,378 1,433 1,495 Fee income Net trading income Other operating income Total Operating Income 1,890 1,857 1,908 1,970 2,058 2,156 Total Operating expenses Pre-provision operating profit 1,347 1,292 1,327 1,366 1,428 1,499 Net provisions Other provisions/impairment Operating profit ,120 Associates Pre-tax profit ,120 Taxation Group Net profit ,120 Minorities Tier 1 Coupon Attributable net profit ,120 Diluted EPS DPS BVPS Tangible BVPS Balance sheet (AEDmn) Gross loans and advances 28,420 28,596 30,140 31,647 33,230 34,891 Less: Loan loss provisions 1,256 1,781 1,954 2,123 2,222 2,200 Net loans and advances 27,165 26,815 28,187 29,524 31,008 32,691 Cash and central bank 5,076 5,376 5,818 6,417 6,990 7,492 Due from banks 2,298 1,701 1,210 1,283 1,360 1,442 Investment, net 1,890 2,086 2,691 3,014 3,351 3,703 Fixed assets Other assets 1,644 1,811 2,017 2,138 2,267 2,403 Total assets 38,509 38,241 40,345 42,765 45,331 48,051 Customer deposits 29,210 28,423 30,140 31,647 33,230 34,891 Due to banks ,062 1,514 1,810 Debt 1,467 1,632 1,583 1,535 1,489 1,444 Other liabilities 1,644 1,539 1,373 1,451 1,538 1,689 Total liabilities 32,630 31,920 33,657 35,696 37,770 39,834 Total Equity 5,879 6,322 6,687 7,069 7,561 8,217 Risk weighted assets (bn) Average interest-earning assets 35,399 35,806 36,410 38,297 40,493 42,826 Average interest-paying liabilities 30,575 30,683 31,333 33,264 35,239 37,189 Common shareholder s equity 4,235 4,510 4,670 4,931 5,295 5,814 Core Equity Tier 1 (Basel III) 5,419 5,842 6,206 6,564 7,029 7,590 Tier 1 capital 5,429 5,852 6,216 6,574 7,039 7,600 Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com Nisreen Assi Arqaam Capital Research Offshore s.a.l Commercial Bank of Dubai Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 12

14 Commercial Bank of Dubai valuation (AEDmn) Year-end perp subtotal% of total 1. DCF Net profit ,120 1,120 Other adjustments (comprehensive income) Minus: excess return excess capital Risk free rate Tax shelter Adjusted net profit Capital requirements 4,198 4,241 4,418 4,630 4,863 5,125 5,125 RoEcC % % 19.4% 19.4% Cost of capital 13.8% 13.8% 13.8% 13.8% 13.8% 13.8% 13.8% Capital charge Economic profit Discount factor NPV of Economic Profit DCF EVA Forecast period % Perpetual growth rate (GDP) 1. Terminal Value 2,240 Terminal value discounted 1, Required Capital 4, % Value of the bank operations 6, % 2. Capital surplus/deficit Available capital: Shareholders equity 5,879 6,322 6,687 7,069 7,561 8,217 Less Goodwill & intangibles Less non equity elements reported shareholders equity Less Dividends (if included in reported equity) (388) (388) (415) (438) (465) (560) Tangible equity 5,491 5,933 6,273 6,631 7,096 7,656 Capital needs RWAs (Basel I in FY 11A, Basel II/III starting FY 12e) 34,840 35,210 36,734 38,498 40,441 42,623 RWAs (Basel III) 34,897 35,261 36,734 38,498 40,441 42,623 Equity as % RWA Financial stakes Capital Requirements 4,198 4,241 4,418 4,630 4,863 5,125 Surplus capital 1,293 1,692 1,855 2,002 2,233 2,532 1, % 3. Other adjustments Real estate losses (87) (1.1%) Corporate bond fair value losses Equity investment losses Under/overprovisioning not covered in forecast period (499) (6.2%) Level 3 assets Total adjustments (586) (7.2%) 4. Dividends % Total Fair Value 8, Fully diluted number of shares 1,941 Fair value per share (AED) 4.2 Current share price 2.8 Upside 49.1% Implied P/E (x) Implied P/tNAV (x) Commercial Bank of Dubai Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 13

15 I n i t i a t i o n R e p o r t M a y Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com Nisreen Assi Arqaam Capital Research Offshore s.a.l Dubai Islamic Bank Substantial potential hidden losses Large hidden losses from (i) valuation of associates (ii) aggressive valuation of Tamweel (iii) real estate investment portfolio not fully impaired (iv) fair value losses Severe asset quality concerns, due to exposure to commercial real estate Tight pre-provisioning earnings capacity Muted returns bank and more transitional years ahead: DIB is generating low pre-provisioning income relative to peers (2.8% of RWAs) due to relatively average margins and burdening efficiency levels with a C/I ratio of 41%. DIB has also substantial unrealized losses of AED 0.9bn in FY 11A. We are forecasting at least two transitional years due to continued high loan loss charges as DIB has not bitten the bullet so far due to its limited earnings capacity and tight capital base. Substantial hidden losses: The market value of DIB s associates is as much as AED 1.3bn below their BV exerting unfolded drag on DIB s valuation. Moreover, DIB has assigned a premium to Tamweel s BV, which increased DIB s book value by AED 276mn. The situation is even magnified if we use Tamweel s market valuation which would bring the discrepancy to above AED 875mn. We are assuming 5 cumulative impairment (or AED 1.2bn) on real estate investment portfolio. We also take into account a substantial underprovisioning and fair value losses (AED0.9bn not being deducted from Tier-1). Worst asset quality: Our asset quality screen suggests a cumulative loss of 1,143bps, or 229bps pa, the highest relative to peers in the UAE due to the bank s high commercial real estate loans exposure (32% of total loans), well above the loan loss charges DIB has been taking (1.7% in FY 11A). We therefore cannot rule out further disappointments with respect to the cost of risk. Underlying capital base is very weak: DIB s Basel III CET1 is expected to stand at 10.2% in FY 12e. However, this does not include the above mentioned fair value losses; if included, the underlying CET1 would be much lower (merely 5.5%). Liquidity is of concern: We calculate an NSFR of 116% and LCR of 27, putting DIB in the highest liquidity position in the UAE, highly surpassing the short-term requirements, and helped by a high cash balances 17.7% (DIB could easily absorb Tamweel s liquidity needs) and LTD of 91%. Full valuation: DIB is trading at multiples of P/E13e of 7.7x and P/tNAV12e of 0.8x, while offering an ROAE of 9.7% in FY 13e. We however initiate with a Sell recommendation as the current share price SELL Banks / UAE AED 1.8 Bloomberg code DIB UH Market index DFM Price target (local) 1.8 Upside (%) -7.0 Market data 17/05/2012 Last closing price Week range Market cap (AEDmn) 7,176 Market cap (USDmn) 1,954 Average daily value (AEDmn) 5.8 Average daily value (USDmn) 1.6 Year-end (local mn) e 2013e 2014e Revenues 3,618 3,945 4,092 4,258 Pre-provision Operating Profit 2,122 2,398 2,489 2,563 EPS P/E (x) (mkt price) BVPS Tangible BVPS P/B (x) (mkt price) P/TBVPS (x) ((mkt price) DPS Div. yield (%) RoAA (%) RoRWA (%) RoAE (%) Loan/ Deposit ratio (%) Risk weighted assets (bn) Core Equity Tier 1 ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) NPL ratio (%) Coverage ratio (%) Price Performance DIB UH DFM May/11 Aug/11 Nov/11 Feb/12 Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

16 Abacus Profitability NIM 3% 2% 1% 3.4% 3.2% % 2.6% 2.4% 2.2% 2. Credit Quality Capital Ratios 26% 22% 18% 14% 1 Growth % Arqaam Capital Fundamental Data 2.82% 2.47% 2.51% 2.49% 1.09% 1.44% 1.57% 1.58% % % 1.38% 1.12% 2.35% 1.41% 0.93% PPP/RWA Cost of risk/rwa RORWA 2.87% 3.33% 3.19% 3.02% 3.04% 2.9 Net interest margin 12.7% FY12e FY13e FY14e FY15e NPL Cov ratio (%) 17.8% 18.2% 13.6% 11.1% NPL as % of tot loans 14.8% 14.3% 13.9% 14.1% 14.2% % 13.6% 13.4% 13.2% 10.3% 10.5% 10.8% Tier 1 CAR 15% 2% 9% 2% 3% 1% 3% 1% -1% -1 Loan growth Deposit growth Dubai Islamic Bank Performance analysis Net Interest Margin (%) Cost/Income (%) Net Interest Income/ total income (%) Fees and commissions / Operating income (%) Trading gains / Operating income (%) RoAE (%) Pre Prov.ROE (%) RoAA (%) Revenue / RWA (%) Costs / RWA (%) PPP / RWA (%) Cost of risk / RWA (%) RoRWA (%) RoRWA (%) (adjusted for gross-up of associate) Asset Quality Charge offs / Avg gross loans (%) NPL/Gross Loans (%) Provision coverage (%) Provision/Avg gross loans (%) Loan Loss Charge/Operating Income (%) Funding and Liquidity Net loans/deposits (%) Cash and Interbank / assets (%) Deposits/Liabilities (%) Capital and leverage ratios Core Tier 1 ratio (Basel III) (%) Tier 1 ratio (%) Total capital ratio (%) Tangible equity / assets (%) RWA / assets (%) Growth Asset growth (%) Net loan growth (%) 14.5 (9.8) Deposit growth (%) (1.2) Net income growth (%) (52.4) 82.6 (13.8) Dubai Islamic Bank Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 15

17 Abacus Company Profile Arqaam Capital Fundamental Data Dubai Islamic Bank has a market share of 5.2% in gross loans and 6.1% in deposits as of FY 11A. The bank was established in 1975 and commenced commercial operations in 1984 with its activities conducted in accordance with the Islamic Shari a. DIB carries out full banking services, financing and investing activities and operates in 71 branches in the UAE. The bank is 29.8% owned by the Investment Corporation of Dubai, 7.2% by Saeed Ahmad Lootah and has a free float of 63.. Loan Breakdown by Sector 54.4% 4.6% 41. Loan Breakdown by Country 3.7% 96.3% Retail Corporate Government UAE International Dubai Islamic Bank Income statement (AEDmn) Interest income 3,634 4,049 3,942 3,872 3,929 3,911 Interest expense 1,436 1,387 1,348 1,387 1,376 1,392 Net interest income 2,199 2,662 2,593 2,484 2,553 2,519 Fee income Net trading income Other operating income Total Operating Income 3,273 3,618 3,945 4,092 4,258 4,315 Total Operating expenses 1,383 1,496 1,547 1,602 1,695 1,792 Pre-provision operating profit 1,889 2,122 2,398 2,489 2,563 2,523 Net provisions ,438 1,474 1, Other provisions/impairment Operating profit 1,026 1, ,140 1,523 Associates (463) Pre-tax profit 563 1, ,215 1,601 Taxation Group Net profit 559 1, ,207 1,592 Minorities Tier 1 Coupon Attributable net profit 553 1, ,153 1,520 Diluted EPS DPS BVPS Tangible BVPS Balance sheet (AEDmn) Gross loans and advances 60,128 55,517 56,854 58,506 60,494 63,164 Less: Loan loss provisions 2,957 3,931 4,394 5,867 7,195 8,096 Net loans and advances 57,171 51,586 52,460 52,639 53,300 55,068 Cash and central bank 11,247 12,952 12,867 12,863 13,992 14,756 Due from banks 2,357 3,043 2,786 2,869 2,984 3,133 Investment, net 16,142 19,326 21,332 23,745 25,534 27,659 Fixed assets Other assets 2,314 3,099 2,786 2,869 2,984 3,133 Total assets 89,884 90,588 92,853 95,639 99, ,438 Customer deposits 63,447 64,771 70,501 70,602 71,086 73,108 Due to banks 4,409 4,052 (1,311) 625 3,085 4,760 Debt 7,929 7,927 8,135 8,223 8,312 8,403 Other liabilities 3,826 3,664 4,974 5,182 5,440 5,743 Total liabilities 79,611 80,415 82,300 84,632 87,924 92,015 Total Equity 10,273 10,174 10,553 11,006 11,540 12,423 Risk weighted assets (bn) Average interest-earning assets 76,708 79,998 81,268 82,378 83,956 86,909 Average interest-paying liabilities 73,799 76,268 77,038 78,388 80,967 84,378 Common shareholder s equity 9,309 9,135 9,532 9,954 10,446 11,274 Core Equity Tier 1 (Basel III) 9,393 9,499 9,897 9,274 9,777 10,820 Tier 1 capital 10,370 10,576 11,022 10,538 11,071 11,954 Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com Nisreen Assi Arqaam Capital Research Offshore s.a.l Dubai Islamic Bank Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 16

18 Dubai Islamic Bank valuation (AEDmn) Year-end perp subtotal% of total 1. DCF Net profit 553 1, ,153 1,520 1,759 Other adjustments (comprehensive income) (0) Minus: excess return excess capital (44) (18) (110) (108) (106) (80) (80) Risk free rate Tax shelter Adjusted net profit 598 1, ,053 1,259 1,600 1,839 Capital requirements 10,765 10,053 12,238 12,501 12,965 13,494 13,494 RoEcC 5.6% 10.2% % 9.7% 11.9% 13.6% Cost of capital 13.5% 13.5% 13.5% 13.5% 13.5% 13.5% 13.5% Capital charge 1,453 1,357 1,652 1,688 1,750 1,822 1,822 Economic profit (856) (329) (671) (635) (491) (221) 18 Discount factor NPV of Economic Profit (596) (406) (161) 13 DCF EVA Forecast period (1,163) (17.4%) Perpetual growth rate (GDP) 2. Terminal Value 154 Terminal value discounted % Required Capital 12, % Value of the bank operations 11, % 2. Capital surplus/deficit Available capital: Shareholders equity 10,273 10,174 10,553 11,006 11,540 12,423 Less Goodwill & intangibles (17) Less non equity elements reported shareholders equity Less Dividends (if included in reported equity) (380) (475) (523) (662) (692) (532) Tangible equity 9,876 9,699 10,031 10,345 10,848 11,891 Capital needs RWAs (Basel I in FY 11A, Basel II/III starting FY 12e)) 79,154 75,273 96,963 99, , ,429 RWAs (Basel III) 85,113 78,797 96,963 99, , ,429 Equity as % RWA Financial stakes Capital Requirements 10,765 10,053 12,238 12,501 12,965 13,494 Surplus capital (888) (353) (2,207) (2,156) (2,117) (1,603) (2,207) (33.1%) 3. Other adjustments Real estate losses (5 of investment portfolio in UAE) (1,205) (18.1%) Mark-to-market loss associates (1,269) (19.) minus what is already reflected on DCF 1, % Tamweel revaluation (276) (4.1%) Under/overprovisioning not covered in forecast period (1,475) (22.1%) Level 3 assets Total adjustments (2,827) (42.4%) 4. Dividends % Total Fair Value 6, Fully diluted number of shares 3,797 Fair value per share (AED) 1.8 Current share price 1.9 Upside (7.) Implied P/E (x) Implied P/tNAV (x) Dubai Islamic Bank Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 17