Q3 UPDATE: Abu Dhabi Islamic Bank

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1 Q3 UPDATE: Abu Dhabi Islamic Bank November 10, 2008 Fair value estimate: AED 5.18 Recommendation: BUY Strong performer ADIB posted a strong y-o-y result in Q with net profit increasing 57.8% to AED 216mn. Growth reflected a 90.2% rise in net intermediation income and 63.4% higher non-funded income on a y-o-y basis. ADIB reported a 41.2% y-o-y increase in Islamic financing assets which rose by AED 9.3bn to AED 32bn. Customer deposits also increased, by 18.1% to AED 34bn. However, on a q-o-q basis the results are less impressive with signs that growth is slowing. In particular, net profit declined by 21.5% q-oq due to a 34.0% fall in non-funded income. Also, ADIB s deterioration in operating efficiency is reflected in significant increase in its cost to income ratio from 29.9% in Q to 44.6% in Q In addition, customer deposits fell slightly on a q-o-q basis. Result Highlights Net profit: ADIB reported a strong 57.8% y-o-y increase in net profit to AED 216mn in Q3 due to a 90.2% y-o-y rise in net intermediation income and 63.4% higher non-funded income. However, net profit fell by 21.5% q-o-q due to a reduction in non-funded income and lower operating efficiency. Net intermediation income: Net intermediation income rose substantially by 90.2% y-o-y and 6.9% q-o-q to AED 453mn. Also, the Net Intermediation Margin (NIM) improved by 150bps to 4.23% over the same period last year. Intermediation expenses have fallen significantly since Q while ADIB has successfully prevented a similar decline in asset yields, leading to an improvement in NIM. Islamic financing: Net Islamic financing assets rose sharply by 41.2% y-o-y and 6.9% q-o-q to AED 32bn at the end of Q3 2008, resulting in a loan to deposit ratio of 95.3%. Customer deposits increased by 18.1% y-o-y to AED 33bn in Q3 but on a q-o-q basis fell slightly. Provisions: Due to higher lending volumes and slight deterioration in asset quality, asset impairment charge as a percentage of net financing assets has increased from 0.16% in Q to 0.34% in Q The Bank will focus more on risk management going forward and has established a Group Chief Risk Office, headed by Masarrat Hussain, Chief Risk Officer with more than 30 years experience in banking including risk management with Citibank and Samba Financial Group in Middle East, Africa and Europe. RESULT UPDATE Share Data Market Cap AED 7.8bn Price AED 3.95 Abu Dhabi General Index 3,127.0 Reuters ADIB.AD Bloomberg ADIB:UH Avg. Volume (52 Week) 3.8mn 52-Week High/Low AED 6.87/ 3.80 Shares Outstanding 1,970.6mn Fair Value Estimate AED 5.18 Key Figures Year to 31 Dec 2007A 2008E Net Intermediation income (mn) ,622.4 Total operating Income (mn) 1, ,245.8 Net Profit ex. one-off (mn) ,070.5 EPS (AED) /- (%) 34.5% 6.0% NIM (%) 2.6% 3.8% RoA (%) 1.9% 2.3% RoE (%) 16.5% 18.9% P / E (x) 7.7x 7.3x P / BV (x) 1.1x 1.2x Shareholding Pattern (%) Emirates International Invest. Company 43.4% Abu Dhabi Investment Council 7.6% Public 49.0% Relative Performance Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 ADIB Rebased Index ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 1

2 Non-funded income: Despite a 63.4% y-o-y increase in non-intermediation income, on a q- o-q basis it fell by 34.0% to AED 132mn, largely as a result of a decline in Investment and other income including dividend income and gains on sales of investment properties. Operating expenses: ADIB reported a high cost to income ratio of 44.6% for Q3 2008, a marginal improvement over the same period last year. On a q-o-q basis, the ratio has increased due to lower operating efficiency and reduced non-funded income. The operating efficiency was impacted due to more than 100% increase in administrative expenses. Outlook We expect liquidity in the UAE economy to tighten further due to the current global economic slowdown and falling oil prices. We believe that UAE GDP in 2008 will now increase by around 6% rather than previous market forecasts of 8-9%. Such a slowdown will impact UAE banks as companies may postpone projects and banks will reduce their real estate exposure, the fastest-growing sector in recent quarters. ADIB has diversified geographically, deriving around 30% of its operating income from outside UAE. We believe this share will increase. Furthermore, we also expect demand for Islamic banking products to rise in the long term. However, ADIB has significant exposure to the real estate sector through its subsidiary Burooj Properties. As sector growth is slowing, we now apply a lower P/BV multiple in valuing the real estate subsidiary. Also, based on ADIB s performance over the first nine months of this year, we have reduced our operating efficiency expectations. In our view, ADIB shares currently trade at a discount to our estimated fair value and offer a share price upside potential of 31.2%. We maintain our Buy rating on the stock. Key Figures Quarterly data Q Q Q Y-o-Y Q-o-Q (Figures in AED mn, except per share data) Net intermediation income % 6.9% Non-funded income % -34.0% Operating Income % -6.2% NIM (annualised) 2.58% 4.12% 4.23% G&A expenses % 39.9% Cost to income ratio 45.5% 29.9% 44.6% Net profit % -21.5% Impaired asset charge % -33.5% Impairment charge/net financing assets 0.16% 0.54% 0.34% Islamic financing assets 22, , , % 6.5% Deposit growth 28, , , % -0.2% ROAE 10.9% 20.5% 15.6% ROAA 1.3% 2.4% 1.8% Source: Company data, ADCB research ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 2

3 Valuation We have valued ADIB (excluding investment in properties) using Discounted Equity Cash Flow (DECF) and Peer-Based Multiples. We have assigned subjective weights of 70% to our DECF and 30% to our Peer-based Multiple Valuations to calculate our fair value estimate for bank as standalone entity; we have separately valued investment in properties at 0.8x their book value. Our DECF valuation has been assigned a higher weight as it discounts firm-specific cash flows. These valuation models yield a fair value of AED 5.18 per share for the consolidated entity representing a premium of 31.2% to the current share price, significant portion of the value is generated by standalone banking entity (valued at AED 4.47), while the remaining value (AED 0.72) is represented by the Investment in properties. We maintain our Buy rating. Weighted Average Value per Share Valuation Method Value (AED) Weight (%) Discounted Equity Cash Flow (DECF) % Peer-based multiple valuation % Weighted Average Standalone Fair Value % Investment in properties and associates 0.72 Total Fair Value 5.18 Source: ADCB research The cost of equity is derived using the Capital Asset Pricing Model (CAPM). Our model s key assumptions are as follows: Risk free rate: 4.79% Equity Risk Premium: 6.0% Country Risk Premium: 0.9% Beta: 1.05 Cost of equity: 11.99% Terminal growth rate: 3.5% We have revised our cost of equity from 11.09% to 11.99% due to an increase in the beta from 0.9 to However, we expect the beta to revert to lower levels once current global turmoil begins to recede. Based on these assumptions, our fair value estimate using our DECF methodology is AED Sensitivity of fair value estimate, using different cost of equity and terminal growth rates: Terminal growth Source: ADCB research Terminal cost of equity % 11.49% 11.99% 12.49% 12.99% 2.50% % % % % ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 3

4 For our peer-based multiples valuation we have applied a discounted peer-group average 2008E P/B ratio of 1.98x as its ROE is marginally lower than peer average. This method yields a fair value per share of AED Company P/E P/BV RoE 2008E 2009E 2008E 2009E 2008E 2009E Al Rajhi 14.6x 11.7x 4.0x 3.5x 29.1% 32.3% Riyad Bank 11.3x 8.8x 1.4x 1.4x 16.9% 15.7% Qatar National Bank 12.1x 10.1x 2.3x 2.1x 20.6% 21.7% Dubai Islamic Bank 5.3x 4.5x 1.2x 1.1x 22.5% 25.2% Abu Dhabi Islamic Bank PJSC 7.5x 6.3x 1.4x 1.2x 23.0% 20.8% Mean 10.2x 8.3x 2.1x 1.9x 22.4% 23.1% Median 11.3x 8.8x 1.4x 1.4x 22.5% 21.7% Source: Company data, Reuters ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 4

5 Income Statement Key Ratios (AED mn, Yr. ending Dec. 31) FY06A FY07A FY08E FY09E FY06A FY07A FY08E FY09E Income from Islamic financing 2,058 2,392 2,445 2,644 Per share data (AED) Depositors share of profits 1,351 1, Shares outstanding (mn) 1,500 1,500 1,971 1,971 Net Intermediation income ,622 1,657 EPS (pre-exceptional) YoY Growth (%) 14.9% 34.8% 70.3% 2.2% DPS Other Income Book value per share Total Operating Income 1,011 1,449 2,246 2,458 YoY Growth (%) 38.5% 43.2% 55.0% 9.5% Valuation ratios (x) Operating Expense ,013 P/Pre-provisioning Profit 9.4x 6.7x 5.6x 5.4x Pre-Provisioning Profit ,402 1,445 P/E 10.4x 7.7x 7.3x 6.0x Provisions P/B 2.1x 1.1x 1.2x 1.0x Non recurring items Profit Before Tax (ex. one-off) ,071 1,303 Performance ratio (%) Tax Return on average assets 1.91% 1.9% 2.3% 2.3% Net Profit (ex. one-off) ,071 1,303 Return on average net worth 24.2% 16.5% 18.9% 18.6% YoY Growth (%) 66.0% 34.5% 39.2% 21.7% Yield 7.8% 6.7% 5.7% 5.4% Net Profit (incl. one-off) ,071 1,303 Intermediation expenses 5.9% 4.9% 2.5% 2.6% Spread 1.9% 1.7% 3.2% 2.8% Balance Sheet NIM 2.7% 2.6% 3.8% 3.4% Cash and balances 1,440 2,299 4,343 5,053 Provision to Gross loans 0.2% 0.3% 0.8% 0.3% Islamic fin. & intl. murabahat 30,964 37,655 41,396 48,337 Investments & others 3,181 2,841 3,515 4,267 Balance Sheet ratios (%) Property & Equipment, net Islamic fin. & intl. murabahat growth 59.7% 21.6% 9.9% 16.8% Other Assets ,461 2,610 Deposits growth 32.1% 24.4% 17.9% 18.8% Total Assets 36,290 44,042 52,101 60,656 Advances to deposit 85.8% 83.6% 96.5% 92.5% Investments (% of deposit) 13.4% 9.6% 10.1% 10.3% Customer Deposits 23,822 29,629 34,934 41,491 Liquid assets (% of assets) 4.0% 5.2% 8.3% 8.3% Financing obligation 8,284 7,123 7,995 8,695 Other Assets (% of assets) 1.4% 2.0% 4.7% 4.3% Other Liabilities 1,415 1,869 2,605 3,033 Borrowings (% of advances) 40.5% 28.8% 23.7% 22.7% Total Liabilities 33,521 38,621 45,533 53,219 Capital Adequacy ratio 13.3% 12.1% 11.9% 11.7% Share Capital 1,500 1,500 1,971 1,971 Reserves & Surplus 1,268 3,918 4,594 5,462 Operating ratios (%) Total Shareholders' Equity 2,768 5,418 6,564 7,433 Operating cost to operating income 37.5% 38.8% 37.6% 41.2% Minority Interest Operating cost to net income 66.2% 73.1% 78.8% 77.8% Total Equity & Liabilities 36,290 44,042 52,101 60,656 Operating cost to avg. assets 1.3% 1.4% 1.8% 1.8% Source: ADCB research, Company data ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 5

6 Investment Ratings: Buy: More than 15% potential return. We recommend that investors buy the stock based on the annualised return to the shareholders over 6-24 months time horizon (percentage change from current price to the projected target price). Sell: Negative potential return. We recommend that investors sell the stock based on the annualised return to the shareholders over the 6-24 months time horizon. Hold: Between 0 and 15% potential return. We take a neutral view on the stock over the 6-24 months period. Other Disclosures: Abu Dhabi Commercial Bank (ADCB) publishes independent research based on its own opinions and does not have investment banking relationships with any firm whose security is mentioned in this report. ADCB does, however, hold securities of the firm mentioned in this report through its fund management activities. If you choose to use the information in this report, you do so on your own initiative, and you are responsible for compliance with any applicable local laws. ADCB certifies that no part of the research analyst s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. The information and opinions in this report were prepared by employees of ADCB and are current as of the date of the report. The information contained herein has been obtained from sources that they believe to be reliable, but ADCB does not guarantee its accuracy, adequacy, completeness, reliability, or timeliness. Moreover, it is not responsible for any errors or omissions or for the results obtained from the use of such information. All opinions and estimates included in this report are subject to change without notice. ADCB will furnish, upon request, available investment information supporting this recommendation. This report is intended for qualified customers of ADCB. This research report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment or any options, futures or derivatives related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Investors should note that income from such securities or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. To the fullest extent permitted by law, neither ADCB nor any of its employees will be liable to you or anyone else under any tort, contract, negligence, strict liability, products liability, or other theory with respect to this presentation of information. You may not redistribute this report without explicit permission from ADCB. ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 6

7 ADCB Research Team: Khaled Akl, MBA, CFA Head of Research Sami Benghezal,M.Sc, FRM,CFA Research Manager sami.b2@adcb.com Khaleefa Mohamed Al Mulla, EMBA Research Analyst Khaleefa.a@adcb.com Jehad Saeed Al Mazrooei Research Analyst Jehad.s@adcb.com Rakesh Kumar Agrawal Research Analyst Rakesh.k@adcb.com ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 7