Q3 UPDATE: National Bank of Abu Dhabi

Transcription

1 Q3 UPDATE: National Bank of Abu Dhabi October 27, 2008 Fair value estimate: AED 17.8 Recommendation: BUY Strong value play National Bank of Abu Dhabi (NBAD) reported a 39.5% y-o-y increase in net interest income in Q The loan book rose at a robust 54% y-o-y and 5.7% q-o-q to AED 112.5bn while non-trading investments grew by 4.8% q-o-q to AED 13.4bn. To support business growth, customer deposits and medium term borrowings increased at an attractive 8.9% and 24.7% q-o-q to AED 97.2bn and AED 8.9bn, respectively. Medium term borrowings rose due to a USD 550mn loan from four major international relationship banks. However, interbank funding declined by 24% q-o-q to AED 31.4bn due to the unwillingness of international banks to lend money. Lower interbank funding was met by a reduction in cash & balances held with the central bank of AED 5.8bn, and investments at fair value of AED 255.3mn. We expect the interbank rate to increase by around 25bps, exerting pressure on NIM. Result Highlights Net profit: NBAD reported net profit of AED 650.7mn in Q3 2008, up 13% from AED 575.7mn in Q However, on a q-o-q basis net profits declined 35% due to higher loan provisioning and mark-to-market losses on investments. Net interest income: Net interest income increased 39.5% y-o-y and 2.6% q-o-q to AED 845.1mn. The Net Interest Margin (NIM) remained almost flat at 2.36% in Q Non interest income: Non interest income increased 46.1% y-o-y to AED 367.9mn mainly due to higher fee and commission income. However, on a q-o-q basis non interest income declined by 41.7%, largely as a result of AED 85.5mn losses on investments compared to a gain of AED 153.5mn last quarter, and a 3.6% decline in commission and fee income to AED 310mn. INITIATING COVERAGE Share Data Market Cap AED 27.1bn Price AED Abu Dhabi General Index 3,321.5 Reuters NBAD.AD Bloomberg NBAD:UH Avg. Volume (52 Week) 0.6mn 52-Week High/Low AED / Diluted Shares Outstanding 2,416.6mn Fair Value Estimate AED Rating BUY Key Figures Year to 31 Dec 2007A 2008E Net Interest Income (mn) 2, ,260.4 Total Net optng Income (mn) 3, ,041.1 Net Profit (mn) 2, ,197.4 EPS (AED) /- (%) (8.5)% (16.0)% NIM (%) 2.1% 2.2% RoA (%) 2.1% 2.1% RoE (%) 24.8% 24.3% P / E (x) 7.1x 8.5x P / BV (x) 1.6x 1.8x Shareholding Pattern (%) Abu Dhabi Investment Council 73 Public & Others 27 Relative Performance Operating expenses: Total operating expenses increased during Q by 44.8% y-o-y and 2% q-o-q to AED 364.3mn due to the bank s continuing and upcoming investments in infrastructure, systems, network, and brand. The cost to income ratio increased from 24.6% in Q to 30% in Q due to lower non interest income Loans and Deposits: Compared to the end of September 2007, the Bank s loan book increased strongly by 54% to AED 112.5bn, while deposits rose by a positive 37.1% to AED 97.2bn. However, on a q-o-q basis, advances were 5.7% higher while deposits increased by a modest 8.9%. The loans to deposits ratio fell to 115.7% in Q from 119.2% in Q Interbank lending activity also contracted with due to banks and repo agreements declining 23.4% and 28.7% to AED 28.1bn and AED 3.2bn, 9.0 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Rebased Index NBAD Oct-08 ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 1

2 respectively as 90 percent of money in speculative investments left the country due to an end in the speculation that UAE will revaluate its currency. Provisions: The Bank increased its loan provisioning during the quarter to AED 178.5mn from AED 76.7mn in Q of which AED 169mn was new collective provision taken in the third quarter. The Bank s NPL coverage ratio improved to 139%. For the nine months ending September 30, NBAD reported cumulative provisions of AED 323.3mn and an asset base of AED 159.6bn, resulting in an asset charge of 0.2%, below its peer group average of 0.3%. We expect the bank to make additional provision of AED 75mn in fourth quarter. We also anticipate pressure on NPLs as a result of the current market crisis, and forecast increased provisioning over the next 4-6 quarters. Outlook We expect liquidity in the UAE economy to tighten further due to the current global economic slowdown and falling oil prices. We believe UAE GDP will now increase by around 6% rather than previous market forecasts of between 8-9%. Such a slowdown will impact UAE banks as companies postpone projects and banks reduce their real estate exposure, in recent quarters the fastest growth sector. We expect a slowdown in NBAD s earnings as the Bank is likely to increase its provisions over the next 4-6 quarters which will impact earnings. We believe NBAD s funding mix and government support will help the Bank to weather the effects of the present crisis. Despite current tight liquidity the Bank was able to borrow USD 550mn from four major international relationship banks. Moreover, the Bank has no exposure to CDOs, SIVs, or the US sub-prime mortgage market. We regard NBAD as a value investment based on its sound asset quality, high NIM, and sustained increases in its core business. Consequently, we maintain our Buy rating on the stock. Key Figures Quarterly Data Q3'07 Q2'08 Q3'08 YoY % QoQ% (Figures in AED mn, except per share data) Net interest income % 2.6% Net operating Income 858 1,455 1, % (16.6%) Profit from operations bf. impairment 606 1, % (22.7%) Net profit att. to equityholders 576 1, % (35.0%) Cost/Operating Income(%) 29.3% 24.6% 30.0% - - NIM 2.3% 2.4% 2.4% - - Per Share Data EPS % -34.0% BVPS % 3.2% Source: Company data, ADCB research Valuation We have valued National Bank of Abu Dhabi 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 2008E. Our DECF valuation has been assigned a higher weight as it discounts firm-specific cash ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 2

3 flows. This valuation model yields a fair value of AED per share for 2008E representing a premium of 58.5% to the current share price. We maintain our Buy rating. Valuation Method Weighted Average Value per Share Value (AED) Weight (%) Discounted Equity Cash Flow (DECF) % Peer-based multiple valuation % Weighted Average Fair Value % 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% (Average last three years - 10 yr. US Tr. Bond Rate) Equity Risk Premium: 6.0% Country Risk Premium: 0.9% Beta: 1.19 Cost of equity: 12.83% Terminal growth rate: 3.5% We have revised our cost of equity from 11.09% to 12.83% due to an increase in the banking sector 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 Using our peer-based multiples valuation, our regression analysis yields a fair value per share of AED Sensitivity of fair value estimate, using different cost of equity and terminal growth rates: Terminal cost of equity Terminal growth % 12.33% 12.83% 13.33% 13.83% 2.50% % % % % x Regression Analysis P/B 4.0x 3.0x 2.0x 1.0x 12.0% 17.0% 22.0% 27.0% 32.0% ROE Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 17 Intercept X Variable ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 3

4 Income Statement FY06 FY07 FY08E FY09E Key Ratios FY06 FY07 FY08E FY09E (AED M,Yr. ending Dec. 31) Interest Income 5,458 7,084 7,017 8,006 Per share data (AED) Interest Expense 3,437 4,679 3,757 4,578 Shares outstanding (mn) 1,224 1,591 2,417 2,417 Net Interest Income 2,021 2,405 3,260 3,428 EPS YoY Growth (%) 20.5% 19.0% 35.6% 5.1% DPS Other Income 935 1,261 1,781 1,801 Book value per share Total Net Income 2,956 3,666 5,041 5,229 YoY Growth (%) (13.3%) 24.0% 37.5% 3.7% Valuation ratios (x) Operating Expense 700 1,054 1,370 1,628 P/Pre-provisioning Profit 6.1x 6.8x 7.4x 7.5x Pre-Provisioning Profit 2,256 2,611 3,671 3,602 P/E 6.5x 7.1x 8.5x 8.3x Provisions and Contingencies P/B 1.5x 1.6x 1.8x 1.6x Profit Before Tax 2,157 2,570 3,273 3,349 Tax Performance ratio (%) Net Profit 2,106 2,505 3,197 3,272 Return on avg. assets 2.3% 2.1% 2.1% 1.9% YoY Growth (%) (18.4%) 19.0% 27.6% 2.3% Return on avg. net worth 25.8% 24.8% 24.3% 20.3% Yield 5.6% 6.1% 4.8% 4.9% Balance Sheet Cost of funds 4.5% 4.5% 2.8% 3.1% Cash and due from Banks 30,029 44,558 28,460 27,433 Spread 1.1% 1.7% 2.0% 1.8% Investments 10,935 11,255 14,622 17,150 NIM 2.1% 2.1% 2.2% 2.1% YoY Growth (%) 11.5% 2.9% 29.9% 17.3% Advances 57,486 79, , ,280 Balance Sheet ratios (%) YoY Growth (%) 11.7% 38.7% 44.6% 6.9% Advances growth 11.7% 38.7% 44.6% 6.9% Fixed Assets (Net) ,301 1,362 Deposits growth 18.7% 15.5% 21.6% 6.0% Other Assets 2,092 3,306 4,613 4,931 Advances to deposit 81.3% 97.5% 116.0% 117.0% Total Assets 100, , , ,157 Trading Investment (% of deposit) 0.6% 1.5% 1.2% 1.3% Non-Trading Investment (% of deposit) 14.9% 12.3% 13.5% 15.0% Customer Deposits 70,738 81,737 99, ,368 Liquid assets (% of assets) 7.7% 26.1% 12.2% 10.3% YoY Growth (%) 18.7% 15.5% 21.6% 6.0% Other Assets (% of deposit) 3.0% 4.0% 4.6% 4.7% Borrowings 18,101 42,298 45,034 46,689 Borrowings (% of advances) 31.5% 53.1% 39.1% 37.9% YoY Growth (%) 32.3% 133.7% 6.5% 3.7% Other Liabilities (% of assets) 3.1% 3.0% 2.9% 2.9% Other Liabilities 3,122 4,182 4,809 4,978 Capital Adequacy ratio 20.9% 16.2% 15.0% 15.0% Total Liabilities 91, , , ,034 Operating ratios (%) Share Capital 1,224 1,591 1,977 1,977 Operating cost to operating income 23.7% 28.8% 27.2% 31.1% Reserves & Surplus 7,781 9,623 13,081 15,146 Operating cost to net income 33.2% 42.1% 42.8% 49.7% Total Equity & Liabilities 100, , , ,157 Operating cost to avg. assets 0.8% 0.9% 0.9% 1.0% ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 4

5 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 5

6 ADCB Research Team: Khaled Akl, MBA, CFA Sami Benghezal,M.Sc, FRM,CFA Head of Research Research Manager Khaleefa Al Mulla, EMBA Jehad Saeed Al Mazrooei Research Analyst Research Analyst Khaleefa.a@adcb.com Jehad.s@adcb.com ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 6