UAE banking - Research Portal

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UAE banking - Research Portal
Emerging Markets | EM Credit Research
UAE bank sector update
1 September 2015
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For important disclosure information please see pages 27-28.
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Analyst
Apostolos Bantis
+971 4 428 4972
[email protected]
Emerging Markets | EM Credit Research
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1 September 2015
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Emerging Markets | EM Credit Research
Table of contents
UAE banking sector update September 2015 .............................................................................. 4
Is the perceived “safe haven” status coming into question? ......................................................... 5
Liquidity conditions are tightening............................................................................................ 6
Profitability growth is bottoming out ......................................................................................... 8
Asset quality improvement trend to come to a halt .................................................................. 9
Real estate market is cooling off............................................................................................ 10
Entering a slower credit phase .............................................................................................. 10
UAE banks maintain high capitalisation buffers ..................................................................... 12
Dubai should muddle through refinancing risks over near term ............................................. 13
UAE macro update ................................................................................................................ 13
UAE Banks’ Credit Profiles ..................................................................................................... 15
Abu Dhabi Commercial Bank (ADCB) ........................................................................................ 16
Abu Dhabi Islamic Bank (ADIB).................................................................................................. 17
Commercial Bank of Dubai (CBD) .............................................................................................. 18
Dubai Islamic Bank (DIB) ........................................................................................................... 19
Emirates NBD (ENBD) ............................................................................................................... 20
First Gulf Bank (FGB) ................................................................................................................. 21
Mashreq Bank (Mashreq) ........................................................................................................... 22
National Bank of Abu Dhabi (NBAD) .......................................................................................... 23
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UAE banking sector update September 2015
The future of UAE banks is looking more challenging as the sharp fall in oil prices
combined with a softening of Dubai’s real estate market and the expected US rate hike
will result in tighter liquidity conditions and weigh on the sector’s profitability and growth
prospects. Operating performance remained resilient year-to-date while the sector’s
fundamentals appear in a good shape to withstand growing challenges. Ever since the
2008 crisis UAE banks have built up sizeable provisions, improved asset quality issues
and strengthened their capital bases while the cost of risk has been declining. Despite the
bleaker growth outlook and weaker liquidity a successful completion of Iran’s nuclear
deal with the P5+1 combined with increased capex in the run up to Dubai Expo 2020
should continue to boost investments and support the local banking sector. Up until
recently credit spreads of UAE financials remained fairly resilient as investors seem to
have ignored the sharp fall in oil prices and rising regional geopolitical tensions.
However, UAE banks have not managed to escape the latest sell-off that triggered intense
volatility and a rapid re-pricing on GCC credit spreads. In addition to the obvious drivers
of low oil prices, the devaluation of CNY followed by the sharp devaluation of the Kazakh
tenge stirred speculation about the sustainability of the GCC currency peg policies.
However, these concerns are premature in our view. While we believe that UAE banks
have not lost their “safe heaven” status relative to other EM bank peers current
valuations no longer look appealing as the sector was trading at historically low spreads
prior to the latest sell-off. Further volatility waves are likely to continue and we expect
subordinated bonds, particularly AT1 issues of smaller banks, to underperform.
Healthy fundamentals provide a cushion against rising challenges: The UAE banking
sector fundamentals remain in a fairly healthy state and the sector looks well placed to withstand
systemic risks. As of end-June 2015 the banking system was well capitalised with an average
capital adequacy ratio of 18.3% and a T1 ratio of 16.5%. The funding profile of UAE banks
remains prudent and well diversified with the loan to deposit ratio at a decent c. 100% and
limited reliance on foreign and capital market funding. Sector profitability metrics, such as return
on Assets (ROA) and return on Equity (ROE) stood at 1.7% and c. 14% respectively. In addition
UAE banks have made notable progress to clean their balance sheets from legacy exposures
and sector NPLs have now dropped to c. 7% and are well provisioned.
Tighter liquidity conditions and US rate hike increase downside risks: Currently the main
source of risk for the UAE banking sector stems from a weakening in liquidity and a rise in
funding costs. The much anticipated rate hike in the US combined with reduced government
deposits would result in slower growth and halt further progress on asset quality. While UAE
banks’ interest margins should benefit from higher US rates, post-provision margins will likely
stay under pressure offsetting any benefits. Overall systemic risks appear well contained and our
main scenario is that the sector is heading towards a soft landing rather than a sharp
deterioration similar to the 2008-09 crunch. Consequently, we have revised our assumptions
factoring in slower loan growth and a modest weakening in asset quality for 2016.
Resilient operating performance: Despite low interest rates and a slump in oil prices the
profitability of UAE banks remained resilient and the sector continued to generate sufficient internal
capital to support provisioning costs so far in 2015. Sector earnings increased by more than 20% in
2014 and the strong momentum continued this year. At the same time loan growth dynamics have
outpaced original expectations as total system credit advanced by more than 8% year on year in
July 2015. Credit growth is unlikely to lose steam any time soon, as the UAE authorities have not
announced major cuts in infrastructure spending, however lending conditions look set to normalise
in H2 2015 and drop modestly in 2016 as liquidity begins to tighten.
Slowing real estate not a major concern for UAE banks: The real estate market has shown signs
of a slowdown particularly in Dubai, where residential property prices have dropped consistently since
May 2014. In addition, rental increases have come to a halt and housing yields fallen below their
historical averages. The acceleration in the residential supply and retail mall space in 2015 would
exert some more downward pressure. Despite this, UAE banks are not very much exposed to the real
estate sector as they were at the time of the 2008 crisis. Regulations pertaining to residential
mortgages including increasing loan-to-value ratios and introduction of transaction fees have reduced
speculative activity and widened buffers around banks’ real estate exposures.
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Is the perceived “safe haven” status coming into question?
Current valuations of UAE bank credit are not particularly appealing: Credit spreads of UAE
banks remained fairly resilient during the first half of 2015 as investors seem to have ignored the
sharp fall in oil prices and growing regional geopolitical risks. Nevertheless UAE credit did not
manage to escape the recent global sell-off and witnessed intense volatility over the past few
weeks. Aside from the obvious concerns on low oil prices, the devaluation of China’s CNY followed
by the sharp devaluation of the Kazakh tenge stirred speculation about the sustainability of the
GCC currency peg policies, challenging the perceived “safe heaven” status of local credits. While
there is some merit on possible currency devaluation scenarios, especially if the low oil price
environment persists for too long, we believe such concerns are premature. We continue to
perceive UAE bank credit risk as a “safe heaven” asset class relative to the broader GEM banking
universe. However, considering that up until very recently the asset class was trading at historically
low spreads valuations no longer look appealing. While we expect UAE bank spreads to remain
more resilient relative to some of their GCC peers, especially Saudi and Bahraini corporate credit,
volatility risks are likely to persist until there is better clarity on the medium-term direction of the oil
markets. We expect subordinated debt and especially some of the AT1 issues of smaller banks to
widen further and underperform the senior curve.
Long positions on large state-controlled banks: Following the latest sell-off we are now
taking a more careful view on UAE banking credits as we find that the sector no longer offers
deep value across the curve. Prior to the latest sell-off the majority of UAE bank senior spreads
were trading not that far from historical troughs which we feel completely eliminates any further
tightening potential over the near term. Our general view is that the senior curve within the larger
government-controlled banks including NBAD, FGB, ENBD, ADCB and DIB will continue to be
supported from high local investor participation rates and therefore prove more resilient to further
volatility swings. Looking at the fundamental drivers, despite the sector’s weakening liquidity
conditions and an expected slowdown of the local economy all of the top-tier UAE bank profiles
are defensive enough and should remain profitable in 2016. We believe international investors
will continue to feel more comfortable with the larger players given their systemic importance and
higher probability of state support.
Stay on the side-lines when it comes smaller institutions and keep a very selective
approach on subordinated debt: At the same time we would stay more on the side-lines when
it comes to the second-tier banks particularly some of the recent newcomers due to the weaker
trading liquidity characteristics of these securities which makes them more vulnerable to volatility
risks. UAE bank subordinated bonds and all outstanding AT1 issues have experienced higher
volatility than the senior curves. While valuations of AT1 issues look more compelling than a few
weeks ago and we are not concerned about the risks of a principal write-down we prefer to stay
very selective and focus on a few higher quality names. We believe NBAD’s AT1 will prove the
most defensive issue in this area given its strong credit profile. We also favour the new Basel III
compliant DIBUH 6.75% perpetual that offers a c. 60bp spread pick up to the DIBUH 6.25
perpetual as the risks of a loss absorption trigger are remote while DIB remains one of the best
growth stories in the region. However, there is a chance of supply risk as DIB is reportedly
contemplating a new AT1 issue over the near term that is likely to be priced with a more
attractive premium given the more challenging market conditions. At the same time we expect
more volatility on ENBD’s perpetuals that have underperformed lately.
Primary market remained vibrant: UAE banks have been quite active in the international debt
capital market raising an aggregate of $7.7bn year-to-date, more than half of the entire $13.5bn
of new issues out of the GCC region so far this year. Among the key issuers were four of the
country’s largest banks, NBAD, ENBD, FGB and DIB along with three newcomers, Noor Bank,
Bank of Sharjah and Sharjah Islamic Bank. Aside from the senior unsecured bonds both DIB and
NBAD printed two perpetual AT1 issues. We expect primary market activity to continue as UAE
banks will try to lock into cheaper funding before the US interest rate hike and have a need for
longer-term funding. In addition UAE banks will likely be looking to print more AT1 perpetual
instruments to shore up their capital bases prior to the implementation of Basel III standards.
While primary market conditions are becoming more challenging and the persistently low oil
prices increase the risk sentiment for GCC credits we believe that UAE banks will continue to
enjoy easy access to the eurobond markets albeit at a moderately higher premium.
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TABLE 1: List of UAE bank credit securities
ISIN
Maturity Currency
Outstanding
Amt. (mn)
Ticker
Coupon
Ranking Ask price
YTM
XS0556042405
ADCBUH
3.745
04/11/2015
USD
750
Sr. Unsecured
100.624
0.06%
XS0708308845
ADCBUH
4.071
22/11/2016
USD
500
Sr. Unsecured
103.465
1.37%
XS0711035286
ADCBUH
3.78
30/11/2016
USD
500
Sr. Unsecured
103.041
1.30%
XS0995097671
ADCBUH
FRN
09/01/2017
USD
500
Sr. Unsecured
100.839
1.02%
XS0897453907
ADCBUH
2.500
06/03/2018
USD
750
Sr. Unsecured
97.600
1.99%
XS1040257062
ADCBUH
3.00
04/03/2019
USD
750
Sr. Unsecured
102.171
2.35%
XS1110651012
ADCBUH
2.750
16/09/2019
USD
600
Sr. Unsecured
100.876
2.52%
XS1199968998
ADCBUH
2.625
10/03/2020
USD
750
Sr. Unsecured
100.313
2.55%
XS0897453493
ADCBUH
4.500
06/03/2023
USD
750
Subordinated
102.000
4.19%
XS0937539921
ADCBUH
3.125
28/05/2023
USD
300
Subordinated
100.010
3.12%
XS0851081660
ADCBUH
6.375
Perpetual
USD
1000
Subordinated
104.535
4.79%
XS0977488294
ALHILA
3.267
08/10/2018
USD
500
Sr. Unsecured
103.614
2.06%
XS1073217561
ALHILA
5.500
Perpetual
USD
500
Subordinated
101.006
5.20%
XS1117297272
BOSUH
3.374
08/06/2020
USD
500
Sr. Unsecured
98.220
3.78%
XS0933999863
CBDUH
3.375
21/05/2018
USD
500
Sr. Unsecured
102.388
2.46%
XS0787130540
DIBUH
4.752
30/05/2017
USD
500
Sr. Unsecured
105.068
1.78%
XS1241110300
DIBUH
2.921
03/06/2020
USD
750
Sr. Unsecured
100.109
2.90%
XS0902330769
DIBUH
6.250
Perpetual
USD
1000
Subordinated
104.244
4.93%
XS1167284436
DIBUH
6.750
Perpetual
USD
1000
Subordinated
105.610
5.53%
XS0765257141
EBIUH
4.625
28/03/2017
USD
1000
Sr. Unsecured
103.280
2.48%
XS0632908314
EBIUH
FRN
31/05/2018
USD
333
Sr. Unsecured
100.454
1.66%
XS1138457590
EBIUH
3.250
19/11/2019
USD
1000
Sr. Unsecured
101.207
2.94%
XS1227814883
EBIUH
3.000
06/05/2020
USD
350
Sr. Unsecured
99.838
3.04%
XS1207079499
EBIUH
1.750
23/03/2022
EUR
550
Sr. Unsecured
94.636
2.65%
XS0910935021
EBIUH
4.875
28/03/2023
USD
650
Subordinated
103.250
3.54%
XS0935833292
EBIUH
5.750
Perpetual
USD
500
Subordinated
99.250
5.97%
XS1111114135
EBIUH
6.375
Perpetual
USD
650
Subordinated
102.850
5.72%
XS0654587996
FGBUH
3.797
02/08/2016
USD
500
Sr. Unsecured
102.496
1.03%
XS0731930797
FGBUH
4.046
18/01/2017
USD
650
Sr. Unsecured
103.698
1.32%
XS0840538994
FGBUH
2.862
09/10/2017
USD
500
Sr. Unsecured
102.237
1.99%
XS0992167865
FGBUH
3.250
14/01/2019
USD
750
Sr. Unsecured
103.144
2.27%
XS1193304596
FGBUH
2.625
24/02/2020
USD
350
Sr. Unsecured
99.656
2.71%
XS0283928264
MASQUH
FRN
24/01/2017
USD
750
Subordinated
98.347
2.65%
XS0763531406
NBADUH
3.250
27/03/2017
USD
750
Sr. Unsecured
103.166
1.20%
XS0815939656
NBADUH
3.000
13/08/2019
USD
750
Sr. Unsecured
102.843
2.24%
XS1186986904
NBADUH
2.250
11/02/2020
USD
750
Sr. Unsecured
99.689
2.32%
XS1243334668
NBADUH
5.250
Perpetual
USD
750
Subordinated
101.927
4.79%
XS1224417847
NOORBK
2.788
28/04/2020
USD
500
Sr. Unsecured
98.993
3.02%
XS1078355986
RAKBNK
3.250
24/06/2019
USD
800
Sr. Unsecured
100.540
3.09%
XS1202089428
SIB
2.843
17/03/2020
USD
500
Sr. Unsecured
100.339
2.76%
XS0734046815
TAMWEE
5.154
18/01/2017
USD
300
Sr. Unsecured
104.416
1.88%
XS0703254978
UNBUH
3.875
10/11/2016
USD
650
Sr. Unsecured
103.108
1.22%
Source: Bloomberg, as of September 1, 2015.
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Liquidity conditions are tightening
Liquidity within the UAE banking system has improved notably since 2008. Currently the ratio of
liquid assets to total assets stands at 14.3% while the system’s loan-to-deposit ratio (LDR) sits
close to 101%, which is decent in the context of other GEM banking systems. UAE Islamic banks
demonstrate healthier LDRs benefiting from their strong deposit franchises. Wholesale funding
costs remained at historical lows year-to-date despite stronger credit growth. The three-month
Emirates Interbank Offered Rate (EIBOR) averaged c. 74 basis points over the past 18 months
but started to widen recently following the sharp market volatility and some concerns on the
currency peg. With underlying macro trends (low oil prices, slower GDP growth) expected to
weaken over the next 18 months and sluggish deposit growth the UAE banking system liquidity
picture is deteriorating. Should the low oil prices environment persist it will eventually translate to
lower government deposits inflows adding some pressure on funding costs. On the other hand
rising inter-bank rates could also help to attract more deposits from individuals and corporates.
CHART 1: UAE banks wholesale funding costs remained relatively low mirroring US rates
Source: Bloomberg
Over the past few years UAE banks have managed to improve their deposit structure which led
to lower funding costs. More specifically, most UAE banks increased reliance on the cheaper
demand type (CASA) deposits shying away from expensive time deposits. The increase in US
rates is likely to have an impact on the deposit structure given that term deposits are priced in
line with US rates therefore making them more appealing during times of rising interest rates.
Some banks could fare better than others especially banks with a higher share of low-cost
deposits and a greater reliance on corporate loans will be better placed under a rising interest
rates environment benefiting from an earlier re-pricing of corporate loans.
CHART 2: UAE deposits structure
Retail
deposits,
25%
Other, 2%
Non-Resident
deposits,
11%
Government
deposits,
11%
Public sector
deposits,
13%
CHART 3: The % of cheaper CASA deposits grew notably
currently comprising 54% of total system deposits
Corporate
deposits,
38%
Source: UAE Central Bank, Commerzbank Research, as of end July 2015
1 September 2015
Source: UAE Central Bank statistics, Commerzbank Research
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On the deposit front, governments and government-related entities comprise the largest
depositor class, averaging around one-quarter and one-third of deposits of most UAE banks.
Overall the pace of deposit inflows has slowed down recently primarily due to weaker
government deposits that fell by almost 15% so far this year, which is an indication that the
government is currently tapping into deposits to bridge the gap in the fiscal budget from lower oil
prices. Both NBAD along with FGB which hold some of the largest share of government deposits
posted declining deposits in Q2 2015 from Q1, reflecting a drop of government and GREs
deposits. While we expect to see some further deterioration in government-related deposits over
the next year we believe that the Abu Dhabi government maintains much greater resources of
foreign assets abroad to tap into and the share of government deposits will continue to remain in
line with the historical average. On the other hand corporate-linked, retail and GRE deposits
reported modest mid-single digit growth rates since the beginning of 2015 but the trend is
expected to slow down.
When it comes to wholesale debt maturities the banks remain very comfortable with the
aggregate 12-month debt rollover easily manageable. In addition UAE banks have been active in
the eurobond markets so far this year issuing a total of $7.6bn including two new AT1 bonds.
Capital market funding as a percentage of total liabilities has remained stable at c. 7% over the
past few years. UAE banks currently have no major dependency on offshore funding given their
fairly healthy liquidity on their balance sheets. Based on the UAE Central Bank statistics the
sector has been a net lender in the foreign interbank markets since June 2010, which offsets the
risks of a liquidity crunch experienced from external shocks similar to the 2008 crisis.
Profitability growth is bottoming out
Despite low interest rates and the sharp drop in oil prices UAE banks continued to report healthy
profitability metrics and generate decent internal capital to support growth and provisioning
costs. Looking at margins, UAE banks’ net interest spread has remained relatively resilient. The
sector’s average NIM currently stands at c. 2.7% and has dropped by an average of 25bp over
the past five years. Most of UAE banks’ management guided that NIMs have now bottomed out
and should remain flat for the remainder of 2015. Almost all of the UAE banks in our coverage
reported increasing fees & commission income during H1 2015. Any expansion in top-line
growth would prove a lot more challenging going forward given the weaker economic
environment and more cautious risk appetite. The provisioning trend continued to be
encouraging, as the sector’s cost of risk dropped to c. 80bp at the end of Q2 2015, with ADCB
and FGB reporting the most notable improvements. Given the sector’s sufficient NPL coverage
and stabilisation of new NPLs provisioning pressure should remain low over the near term but
we expect that the cost of funding may start to rise soon which will limit any further upside.
CHART 4: UAE banking sector key profitability indicators
have been on a steadily improving trend
CHART 5: Key profitability indicators of major UAE banks
Source: UAE Central Bank, Commerzbank Research, as of end Q2 2015
Source: Banks data, Commerzbank Research, as of end Q2 2015
The sector’s return on average assets stood close to 1.7% at end-December 2014 with the
sector’s ROE at 13.6%, which compares well with most other GEM bank peers, although the
trend is declining. One of the sector’s positive characteristics is its fairly efficient cost structure,
with the average cost to income ratio below 40% benefiting from low labour costs, limited
distribution networks, and the absence of income taxes. 2014 was a strong year for UAE bank
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profitability as sector earnings increased by more than 20% supported by strong economic
growth, declining provisioning charges and improving collateral values. The positive earnings
growth momentum continued in 1H 2015 albeit at a slower pace. UAE bank aggregate sector
earnings slowed to a 13.9% growth rate in Q2 2015 from c. 20.6% in Q1 2015, as interest
margins tightened and fee income growth decelerated. We expect a drop in operating income for
the rest of 2015 and in 2016 due to slower growth momentum, weakening liquidity and reduced
capital markets activity. This means that growth in net profits should be slower over the next 18
months than it has been lately but despite these challenges, we expect UAE banks to continue
generating positive earnings.
Mixed impact from Fed rate hike: After six years of near-zero rates the Fed is widely expected
to start raising US rates before the end of this year. On balance higher US rates should have a
positive impact on UAE bank interest margins as the asset base tends to re-price faster than
liabilities; however, post provision margins may remain under pressure offsetting most of the
benefits. UAE banks have more flexibility to transfer the costs of higher funding to their
borrowers especially when it comes to corporate loans. Initially banks that have a higher portion
of CASA deposits are likely to benefit the most under a rising interest rates environment;
however, if US rates continue to grow the positive impact on margins might be constrained as
depositors are likely to switch out of CASA into more attractively priced term deposits. All in all,
the effects of the Fed’s tightening would not be felt in the UAE until early 2016.
Asset quality improvement trend to come to a halt
Asset quality trends of UAE banks continued to improve in 2014 and during the first half of 2015.
Most banks cleaned up their balance sheets from legacy GRE and real estate exposures as
reflected in declining NPLs, falling cost of risk and recovering collateral values. A large part of
this improvement was attributed to the reclassification of Dubai World’s exposure following
completion of the latest restructuring. Consequently, the banking sector ratio of NPLs to gross
loans dropped to 7% by year-end 2014, from 8.6% in 2013. We see some scope for further
improvement in asset quality in the second half of 2015 and expect a slower pace of new NPLs;
however, any further improvements would likely be limited.
As the economy is about to slow down asset quality pressures may reappear given expected
higher rates and tighter funding conditions but the deterioration should be measured and nothing
similar to that of the 2009 crisis as the sector is well sealed from the cyclical real estate with little
exposure to the oil & gas sector. Prudent provisioning policies led to an improving NPL coverage
ratio that stood at 102% as at the end of December 2014 compared to 92% a year earlier. It is
also encouraging that many UAE corporates and the GREs and public sector entities have
managed to deleverage and improve leverage metrics through asset sales and stricter
regulations that limit lending concentrations.
CHART 6: UAE banks made good progress on their asset quality issues
Source: UAE Central Bank, IMF, Commerzbank Research, ratios based on national banks only
Collateral values have recovered notably over the past three years as real estate prices and the
equity markets have been moving up but the latest sharp volatility in equity markets, combined
with falling oil prices and softening in real estate markets will reverse this trend. The share of
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restructured corporate loans peaked at c. 15%-20% as of end 2012 but dropped notably since
then. Part of those loans were restructured on a distressed basis and ultimately turned into
problem exposures. The first set of distressed loan restructurings in 2009-10 were mostly
speculative real-estate ventures or offshore financial investments made before the 2008 crisis
which ultimately defaulted. However, the second and third round of restructurings concluded in
2012 are expected to perform better and generate higher recoveries supported by the
improvement in Dubai’s real estate markets since 2013. It is also important to remember that the
UAE government has in the past stepped in and remains committed to maintain stability and
support the banking system as and when needed.
The risks from UAE banks’ international operations appear well contained. In aggregate the
foreign exposures of local banks outside the UAE stood at c. AED 568bn (c. $160bn) or 27% of
the total assets of UAE-based banks at the end of 2014. However, most of these foreign
exposures are concentrated in the GCC countries (Qatar and Saudi) as well as in the UK, US
and DIFC with a smaller presence in India and Turkey. Overall the foreign exposure of UAE
banks represents limited risks to the financial stability of the sector as they are well diversified
and primarily to GCC, major financial hubs and core trading partners.
Real estate market is cooling off
UAE’s real estate market is beginning to cool off, with retail, hotel and residential segments
showing signs of a slowdown. The number and value of transactions in the residential segment
dropped by 30% and 14%, respectively in 2014, according to data from the Land Department
and the downtrend continued in H1 2015. Real estate broker Jones Lang Lasalle expects prices
in Dubai to drop by up to 10% in 2015 but the outlook for Abu Dhabi looks more resilient. We
believe that a potential price correction on the UAE's real estate markets will have a much lower
impact on local banks than it did back in 2009. Price declines are unlikely to be that sharp while
the major UAE property developers operate with healthier balance sheets relative to 2009.
Regulation also requires developers to secure equity funding before they launch any project
while a large portion of recent projects have been funded through advanced sales to customers
rather than short-term bank funding. Finally, the UAE regulator has introduced stricter loan-tovalue ratios to prevent overleveraging that should protect mortgages risks along with higher real
estate transaction fees and restrictions on total mortgages discouraging speculators.
CHART 7: Historical Dubai and Abu Dhabi residential property sales price indices
2,000
1,800
1,600
1,400
1,200
1,000
800
600
2009
2010
2011
2012
2013
Dubai high-end villa
Dubai mid-range villa
Dubai mid-range apartments
Abu Dhabi high-mid end villa
2014
2015
Dubai high-end apartments
Source: Cluttons LLC Real Estate Indices, Bloomberg, as of end June 2015
Entering a slower credit phase
Loan growth dynamics outperformed expectations during H1 2015 with the aggregate sector
credit expanding by 8.2% during the first seven months of 2015. DIB, NBAD and CBD reported
some of the stronger growth trajectories outstripping the sector average. The stronger
momentum in H1 2015 was driven by some one-off large corporate loans and short-term trade
finance deals. While credit growth is unlikely to lose steam in 2015, as the UAE government
authorities have not yet announced any major cutbacks in infrastructure spending, we expect
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overall lending trends to normalise in the second half and drop modestly in 2016 but the
reduction in credit growth should be less pronounced than the overall economic slowdown. The
UAE government is likely to sustain public spending but the low oil price environment and falling
real estate markets will affect sentiment for both consumers and corporates. Our growth
assumptions are more tempered for 2016 with a c. 6.5% average system credit growth rate as
the slowdown fully filters through and the higher US rates could reduce the appetite to borrow.
However, sustained spending by the government and especially capex and other private
investments linked to Dubai’s Expo 2020 should drive some recovery in credit from 2016
onwards.
CHART 8: Major UAE banks LTM credit & deposit growth dynamics
Source: Bank reports, Commerzbank Research, as of end June 2015.
Based on the UAE Central Bank’s latest credit sentiment survey most of the local banks reported
tighter credit criteria especially in corporate loans with rising premiums on riskier loans. With oil
prices lower, Abu Dhabi’s public sector is likely to draw down its deposits and rely more on
working capital financing. We also expect banks to be generally more selective on loans with
longer maturities such as infrastructure projects and are likely to tighten their lending policies
within the higher risk consumer finance and retail segments. This tightening combined with
gradually deteriorating liquidity conditions and less appetite from international banks will
eventually reduce price competition and offer UAE banks more opportunities to lend to the
higher quality GCC corporates at more attractive pricing. At the same time, we believe Islamic
banks will continue to expand their balance sheets at a higher rate than their conventional peers.
Personal lending policies to tighten: Despite stricter retail lending regulations introduced in
2013 retail loan growth remained upbeat in the first seven months of 2015 (up 8.7%) supported
by improved consumer confidence. Retail growth was even stronger within the Islamic banks (up
20%), driven by the increasing number of expats. However, we expect banks to tighten their
lending policies within the higher risk consumer finance and retail segments to prevent asset
quality risks. We note that the UAE retail banking market is vulnerable as it has one of the
highest credit card and personal loan utilisation rates among other EM peers. In addition the
introduction of the Al Etihad credit bureau, that is to be officially launched in Q4 2015, should
result in slower retail lending as banks get a better sense of their client’s exposures to screen
potential problem loans. Despite the negative near-term impact the new credit bureau should
help banks over time to implement risk based pricing and reduce loan losses.
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CHART 9: UAE banks loan structure breakdown
CHART 10: UAE banks system loan industry breakdown
Source: UAE Central Bank, Commerzbank Research, as of end July 2015
Source: UAE Central Bank, Commerzbank Research, as of end July 2015
UAE banks maintain high capitalisation buffers
Post the Dubai World credit event in 2009, UAE banks and the regulator have focused on
building up capital buffers to contain future systemic risks. As a result UAE banks have built up
their capital ratios over the past couple of years supported by a combination of government
capital injections (through T1 and T2 loans), strong earnings retention and moderate loan growth
rates. The sector’s capital ratios reached a peak in 2012 (Tier 1 at 17% and total CAR at 21%) at
which point the banks were incentivised to release some of their capital. This has been achieved
through: 1) repayment of government notes over 2012-14 which supported lower funding costs
and 2) increasing dividends as well as selective share buybacks.
While these actions trimmed some of the capital buffers the UAE banking system continues to
enjoy one of the strongest capital metrics worldwide with the system Tier 1 ratio at 16.5% and
the total CAR adequacy ratio north of 18% as of end June 2015. The ratios are calculated under
Basel II standards and the full implementation into Basel III is expected to erode the system’s
capital adequacy buffers by an average of c. 200bp. Based on a recent severe economic stress
test conducted by the UAE Central Bank the majority of UAE banks have sufficient buffers and
will remain well capitalised with only four out of the 22 local banks’ capital ratios falling below the
minimum regulatory requirements.
Going forward we expect banks to take a more cautious approach on releasing capital to their
shareholders and preserve their buffers in anticipation of any future need for more provisions
and lower government deposit inflows. In addition slower credit growth will also act as a hedge
offsetting capital pressures. Another positive characteristic is that shadow banking in the UAE
represents less than 3% of total financial system assets and is subject to Central Bank
regulations similar to that applied to UAE banks therefore reducing financial stability concerns.
CHART 11: UAE banks’ capitalisation levels rank among the highest in the GCC space
Source: UAE Central banks data, Commerzbank Research
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The UAE regulator continues to lag behind Saudi and Qatar on the implementation of Basel III
standards which is a bit of a drawback and raises some questions among investors. This delay
creates uncertainty on the treatment of some of the outstanding UAE bank hybrid bonds that do
not contain Basel III features. We do expect that the UAE Central Bank will provide formal
guidance on the timeline of its Basel III implementation plans during the course of 2016. In
addition, we believe that the UAE regulator will grandfather all existing AT1 issues that do not
include loss absorption language setting a gradual amortisation schedule which could essentially
prevent capital disqualification given that these bonds are permitted to amend the structure
terms to comply with new regulatory requirements. Despite this uncertainty UAE banks have
been the most active issuers of hybrid additional Tier 1 bonds within the GCC (with seven
outstanding bonds) aiming to support their capital bases in anticipation of the transition to Basel
III. We expect issuance of AT1 bonds to continue although the latest re-pricing of GCC risk will
make it a bit more challenging and result in higher premiums.
Dubai should muddle through refinancing risks over the
near term
The Dubai World agreement with its creditors and prepayment of the 2015 maturities together
with the $2.2bn of proceeds from Borse Dubai’s LSE stake sale have essentially satisfied the
emirate’s debt maturities for this year. The latest Limitless and Drydocks restructurings although
clouding the overall progress are relatively small and not systemic. Heading into 2016 Dubai is
facing c. $6bn of restructured debt maturities, which involves debt at the Dubai Holding level. We
expect that Dubai’s sovereign wealth fund DIC would sell some more assets that should help to
service the 2016 maturities; however, if market conditions deteriorate notably and access to
capital markets remains constrained for a prolonged period we see some risk that Dubai’s
refinancing challenges will re-emerge considering the relatively high portion of Dubai’s total
external debt which currently amounts to c. $140bn.
CHART 12: Dubai and Abu Dhabi debt maturity schedule
Source: IMF, Commerzbank Research
UAE macro update
The economic outlook is expected to moderate amid lower oil prices: While low
hydrocarbon prices pose a risk to the macro picture, the UAE has sizeable sovereign wealth
fund buffers and a relatively low oil break-even budget level compared to other GCC countries,
which should prevent a sharp drop in economic activity. In addition the UAE has the most
diversified economy relative to its Gulf neighbours. We expect non-oil economic growth to slow
down to 3.4% in 2015 and gradually rebound modestly by 2020, supported by rising capex from
large government projects and private investment linked to Dubai’s Expo 2020. Growth in oilrelated GDP will remain under pressure over the next two years given the global supply glut.
UAE’s latest Purchasing Managers’ Index survey for the month of July rose to 55.8 from 54.7 in
June) which is encouraging as it highlights the resilience of the UAE economy. We expect the
overall fiscal balance to turn negative in 2015 for the first time since 2009 reporting a small
deficit, but the UAE economy should manage to return to fiscal surpluses following
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Emerging Markets | EM Credit Research
implementation of major structural reforms. The current account surplus is also likely to drop in
the single digits but should start recovering once oil prices pick up. Inflationary pressures
persisted throughout the past 18 months with the CPI reaching 4.1% in July. Much of the
acceleration in inflation was driven by increasing rentals although inflationary pressures should
normalise given the softening of the real estate market and lower oil prices. Tourism and
hospitality continue to contribute positively to the UAE’s economy as was reflected by rising
passenger flows in both Dubai and Abu Dhabi airports and relatively high hotel occupancy rates
(Dubai c. 80% and Abu Dhabi c. 77.5%) during the course of 2014.
Gradual removal of subsidies and structural reforms coming at a good time: The latest
reduction in fuel subsidies in the UAE is an important development but is unlikely to have any
major fiscal and inflation impact alone. However, it sends a strong signal that the UAE
government will move forward with other major structural adjustments to offset the impact of
lower oil prices on the fiscal budget. We expect the gasoline and diesel price deregulation reform
that was officially introduced in August 2015 to have a positive, but modest indirect impact on
UAE’s consolidated fiscal accounts. The timing of the fuel reform is favourable as the current low
oil price environment reduces the differential between market and subsidised prices but most
importantly it will set the ground for other reforms. Recent news flow suggests that the
authorities are now seriously considering the introduction of VAT and small corporate taxes as
well as reducing some non-essential government infrastructure projects. Speculation about the
sustainability of the GCC currency peg policies is premature in our view as while such risks have
increased we expect GCC governments to continue defending their currency pegs and take
major structural reforms prior to any consideration of a currency devaluation scenario.
Iran Sanctions – a positive for UAE and particularly for Dubai’s economy: Assuming a
successful completion of Iran’s nuclear agreement with P5+1 the economy in the UAE and
particularly in Dubai, stands to benefit from an easing of sanctions in Iran through increased
trade and financial flows. While the additional oil supplies from Iran pose a modest downside risk
for global oil prices, a removal of the sanctions is also likely to lead to an expansion of demand
from Iran for goods and services from the UAE, which serves as the largest trade hub in the
region. Iran is currently the largest export market for the UAE non-oil economy and accounts for
c. 12% of UAE’s total non-oil exports, although a large part of that includes re-exported goods
that recycle through Dubai’s port. After growing steadily for several years exports to Iran levelled
off and declined with the intensification of sanctions and enforcement efforts since 2010-11.
Nevertheless the UAE is well positioned to benefit from an opening of the Iranian market by
serving as a trans-shipment point considering its close geographic proximity and strong trade
links. An IMF study estimates that a reversal of sanctions could add up to 1 percentage point to
UAE’s real GDP growth over 2016-18 through higher non-hydrocarbon exports alone.
TABLE 2: UAE – Key macro indicators
Russia: Macro Forecasts
2008
2009
2010
2011
2012
2013
2014P
2015F
2016F
Real GDP (%y-o-y)
-4.8%
1.7%
1.6%
4.9%
7.2%
4.3%
4.6%
3.0%
3.2%
Oil & Gas GDP (% y-o-y)
-8.9%
3.8%
6.6%
5.2%
7.6%
2.9%
4.0%
2.0%
2.1%
Non-oil GDP (% y-o-y)
-2.9%
0.7%
2.6%
3.8%
7.1%
5.0%
4.8%
3.4%
3.6%
CPI (%)
1.6%
0.9%
0.9%
0.7%
0.7%
1.1%
2.3%
3.8%
3.0%
Current Account (% GDP)
0.7%
1.7%
13.8%
16.1%
21.3%
18.4%
13.7%
5.0%
5.9%
-13.1%
-1.8%
4.1%
8.8%
10.9%
10.4%
5.0%
-2.9%
0.3%
51.3%
48.2%
39.6%
37.7%
38.7%
44.4%
49.1%
58.7%
56.0%
Fiscal Budget (% GDP)
External Debt (% GDP)
Source: UAE Central Bank, IMF, Commerzbank Research
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Emerging Markets | EM Credit Research
UAE Bank Credit Profiles
1 September 2015
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Emerging Markets | EM Credit Research
Abu Dhabi Commercial Bank (ADCB)
Investment overview
S&P
A
Stable
Moody’s
A1
Stable
Fitch
A+
Stable
ADCB is the fourth-largest bank in the UAE and the second-largest in Abu Dhabi with total
assets of $57bn. Given its large scale and government ownership it is considered a systemically
important institution. ADCB has made notable progress to restore its profitability following a
challenging period in the aftermath of the Dubai real estate crisis; however, credit growth has
remained below the sector average as the bank was in deleveraging mode. On the other hand,
ADCB’s asset quality trends have improved notably and its strong capitalisation and good
relationships with the government support its credit quality.
Shareholder structure
ADCB is 58.1% owned by the Abu Dhabi Government through the Abu Dhabi Investment
Council. Its shares are traded on the ADSE and has a market capitalisation of c. $11.7bn.
Business model and strategy
Originally established in 1985 through the merger of three local banks, ADCB provides
conventional and Islamic banking services and has an asset management arm. ADCB was hit
hard during the financial crisis mainly due to large participations in some of Dubai’s troubled real
estate projects but, with a largely reformed management, it has been able to refocus on the
domestic market and substantially deleverage its balance sheet. Following the divestment of its
stake in Malaysian RHB Capital, ADCB focuses its strategy on the regional markets.
Financial analysis
ADCB reported improving profitability with double-digit growth in operating income (up 12%) and
net profit (up 26%) during H1 2015. The bank’s focus on higher yielding assets and strong
growth in consumer banking have supported its NIM while it managed to generate strong fee
income revenues. ADCB’s profitability KPIs rank among the highest in the UAE banking universe
with the ROAE rising by 330bp to 22% and its ROAA up by 39bp to 2.39% during H1 2015.
ADCB’s net loan portfolio was up by 4% year-to-date in H1 2015 and by 9% year on year.
Deposit growth followed similar growth trends and increased by 4% year-to-date and by 11%
over the same period of last year. More than 80% of the loan growth came from consumer
banking and SME sectors. The bank has managed to improve its funding cost structure and
increased notably the share of low cost current account deposits which now constitute 49% of its
total deposit base. ADCB’s balance sheet, despite its deleveraging efforts, continues to remain
exposed to the more cyclical real-estate and hospitality sectors (33%). Following a challenging
period in the aftermath of the Dubai crisis ADCB managed to strengthen its balance sheet. The
NPL ratio has now improved to 3.1% down from 5.4% at end-2012, and provisioning coverage
stood at a comfortable 139% level as of end June 2015. The conversion of state deposits into
equity along with the sale of the 25% stake in the Malaysian Bank in 2011 have restored ADCB’s
capitalisation ratios following the challenges of the Dubai real-estate crisis. ADCB’s Total CAR
and Tier I ratios stood at a strong 19.8% and 16.1% respectively and rank at the top range in the
overall UAE banking industry. In addition, ADCB’s strong shareholder structure and majority
control by the Abu Dhabi government is a supporting factor and provides comfort over potential
state support.
TABLE 3: ADCB – Key financial indicators
IFRS, AEDm
2010
2011
2012
2013
2014
1H 2015
YTD %
Total Assets
178,271
183,726
180,796
183,142
204,019
212,181
4.0%
Total Loans
122,772
124,754
123,195
138,538
140,562
145,782
4.0%
Total Deposits
106,134
109,171
109,217
115,427
126,011
131,643
4.0%
16.7%
22.5%
23.1%
21.1%
21.0%
19.8%
Total CAR
NIM
2.4%
2.7%
3.1%
3.4%
3.2%
3.5%
ROAE
2.0%
13.8%
11.6%
15.7%
16.1%
22.0%
115.7%
114.3%
112.8%
107.3%
111.6%
110.7%
11.1%
4.6%
5.4%
4.6%
3.1%
3.0%
LTD ratio
NPLs
Source: ADCB, Commerzbank Research
16
1 September 2015
Emerging Markets | EM Credit Research
Abu Dhabi Islamic Bank (ADIB)
Investment overview
S&P
N/R
Moody’s
A2
Stable
Fitch
A+
Stable
ADIB is one of the leading Islamic Banks in the UAE with an aggregate market share of c. 5%.
The bank has demonstrated a dynamic growth trajectory driven by the development of its
Islamic-based retail operations. ADIB’s credit profile benefits from its strong shareholding base
and a leading retail franchise concentrated on the wealthy Abu Dhabi nationals’ clientele. The
bank maintains comfortable liquidity and capitalisation buffers; however, its asset quality remains
challenged and is subject to high related-party concentrations.
Shareholder structure
The bank is controlled (49.6%) by members of the Abu Dhabi Royal Family through EIIC, a
private holding company, while sovereign fund ADIC and UAE General Pension Authority each
hold a 7.6% and 1.2% stake respectively, while the remaining shares are floated.
Business model and strategy
Originally established in 1997 by the Abu Dhabi government, ADIB follows a universal banking
model providing retail, consumer finance and corporate and wholesale banking services in
accordance with Sharia principles. The bank operates through six business units, although the
retail segment remains its largest contributor. ADIB has the strongest retail franchise in Abu
Dhabi and operates a network of 88 branches in the UAE and has international operations in
Egypt, KSA, Qatar, Iraq, Sudan and the UK. ADIB’s strategic priority is to evolve as a top-tier
player in the wider MENA Islamic finance industry. While retail will remain the key driver ADIB is
gradually shifting its focus to corporate banking.
Financial analysis
ADIB’s large retail business provides a relatively resilient revenue base and higher margins than
the sector. The bank’s core operations continued to grow at a healthy pace with operating
revenues and net income rising by 15% and 10% during H1 2015, supported by higher fees &
commissions income and lower provisions. ADIB benefits from one of the lowest costs of funding
among its peers that is attributed to its large deposit base. Deposits continue to dominate the
funding structure, accounting for 89% of total liabilities. The liquidity position is quite healthy with
aggregate liquid assets comprising 21% of the balance sheet and the loan-to-deposit ratio
remains at a comfortable 84%, which provides sufficient buffer for further growth. ADIB reported
one of the strongest growth rates among UAE banks as both its loan book (up 15%) and
deposits (up 13%) expanded above the sector average over the past 12 months. ADIB’s asset
quality remains relatively weaker than other Abu Dhabi banks due to its legacy real estate and
construction loans but it has made good progress and worked out some of these loans. NPLs
improved to 3.5% from its peak of c. 12% in the aftermath of the crisis. At the same time total
provisioning coverage has increased to c. 102%. Management maintains a cautious guidance on
provisioning which implies that it will maintain a conservative policy. ADIB’s capital adequacy
ratio under Basel II dropped by 180bp down to 14% as of end June 2015 and is weaker than the
sector average. The decline was due to its relatively strong credit growth along with the
acquisition of Barclay’s UAE retail operations and the introduction of stricter regulations on the
treatment of risk-weighted assets. The anticipated AED 504mn rights issue should boost capital
while we remain confident that the likelihood of government support remains high.
TABLE 4: ADIB – key financial indicators
IFRS, AEDm
2010
2011
2012
2013
2014
1H 2015
YTD %
Total Assets
75,257
74,335
85,664
103,161
111,904
115,100
2.8%
Total Loans
47,953
48,831
51,197
61,700
73,006
74,537
2.1%
Total Deposits
56,517
55,172
61,326
75,524
84,776
89,084
5.1%
Total CAR
16.0%
17.4%
21.4%
16.9%
14.4%
14.0%
Net Financing Margin
5.4%
5.1%
4.8%
4.1%
4.1%
4.2%
ROAE
20.3%
20.0%
19.0%
15.5%
18.4%
20.8%
LTD ratio
84.9%
88.5%
83.5%
81.8%
86.5%
83.7%
7.1%
11.5%
10.4%
8.3%
4.8%
3.5%
NPLs
Source: ADIB, Commerzbank Research
1 September 2015
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Emerging Markets | EM Credit Research
Commercial Bank of Dubai (CBD)
Investment overview
S&P
N/R
Moody’s
Baa1
Stable
Fitch
A-
Stable
CBD is one of Dubai’s medium-sized second-tier banks with assets of $14bn and a country
market share of 2.5%. Despite its smaller size, the bank has established a good corporate
franchise and has a strong position in trade finance and SMEs. CBD is mainly focused in the
UAE, particularly the Dubai market, while its international presence is undeveloped. CBD’s focus
on the mid-tier corporates results in higher profitability metrics compared to the large corporate
banks, although its asset quality is weaker than its peers. Nevertheless, the partial government
ownership supports its credit profile and the probability of state support.
Shareholder structure
Originally established in 1969 as a joint venture of Commerzbank, Chase Manhattan and
Commercial Bank of Kuwait, CBD’s shareholding structure has changed over the years. CBD is
currently 20% controlled by the Dubai government and the remaining shares are broadly spread
across a group of prominent UAE businessmen, including the Al Futtaim Family (17.5%).
Business model and strategy
CBD has a good corporate franchise and is strongly positioned in the trade finance sector. The
bank offers both conventional and Sharia-compliant products with a focus on the UAE market.
The business is structured around four segments (corporate, commercial, consumer banks and
Treasury) although the core focus is on SMEs. CBD’s strategic priorities are to improve its asset
quality and loan portfolio and expand its balance sheet by diversifying its product offerings.
Financial analysis
CBD has historically demonstrated better profitability metrics, relative to the large UAE banks,
which is mainly a function of its focus on the higher-yielding SME loans. Corporate & commercial
banking will continue to be the largest contributor (55% of operating income). CBD’s NIM has
hovered in the 3.5% range over the past few years, and above the sector average, however,
intense competition in retail and SMEs may add some pressure on margins. The bank’s KPIs
remain satisfactory with an ROAE of 16.2% and ROAA of 2.5%. CBD's balance sheet reached
AED 52bn (c. $14bn) as of end-June 2015, a 10% increase over year-end 2014 and a solid
21.5% growth rate over the same period in 2014. Most of this growth was driven by the loan
book that expanded by a solid 18% rate during the same period, and above the sector average,
boosted by higher retail volumes but also reflecting the acquisition of loans from Royal Bank of
Scotland’s UAE branch. The bank has historically been funded by deposits (81% of total
liabilities) which advanced by a healthy 11% rate so far in 2015. As a result of a slower deposit
growth relative to the loan book CBD’s loan-to-deposit ratio edged up closer to 107% and above
the sector average. While, CBD’s liquidity position is deteriorating it remains fairly comfortable
with liquid assets comprising c. 20% of the balance sheet. While CBD’s balance sheet remains
burdened by legacy troubled loans, the bank’s asset quality metrics continue to improve and cost
of risk is falling. CBD’s NPL ratio has now eased down to 6.4% and its provisioning coverage
strengthened at 101%. The bank’s Total CAR ratio stood at a strong 17.9% with a Tier 1 ratio at
16.7% which compare favourably with both domestic and regional peers. In addition, CBD has
repaid in full all of the AED1.8bn subordinated Tier 2 deposits that it received from the MoF in
the aftermath of the Dubai crisis.
TABLE 5: CBD – key financial indicators
IFRS, AEDm
2010
2011
2012
2013
2014
1H 2015
YTD %
Total Assets
38,508
38,241
39,297
44,476
46,879
51,583
10.0%
Total Loans
27,165
28,596
29,575
33,117
32,129
37,990
18.2%
Total Deposits
29,209
28,423
28,052
30,942
32,161
35,640
10.8%
Total CAR
22.1%
23.1%
23.2%
19.8%
18.1%
17.9%
NIM
3.7%
3.5%
3.4%
3.4%
3.5%
3.4%
ROAE
13.9%
13.0%
12.5%
15.3%
16.7%
16.2%
LTD ratio
93.0%
94.3%
96.3%
105.8%
99.9%
106.6%
8.9%
16.7%
13.0%
10.0%
9.2%
6.4%
NPLs
Source: CBD, Commerzbank Research
18
1 September 2015
Emerging Markets | EM Credit Notes
Dubai Islamic Bank (DIB)
Investment overview
S&P
N/R
Moody’s
Baa1
Stable
Fitch
A
Stable
With assets of c. $40bn Dubai Islamic Bank is the world’s first full Islamic bank and the largest
Islamic bank in the UAE holding a c. 5% market share. DIB has been forming partnerships with
other banks, both domestically and in international markets. DIB’s credit profile is supported by
its leading Islamic banking franchise and solid deposit base benefiting from a cheaper cost of
funding. DIB has reported one of the strongest growth rates and remains well positioned to
benefit from positive prospects of Islamic Banking in the GCC. More recently the bank has made
good progress to improve its high NPLs linked to Tamweel’s troubled real-estate loans.
Shareholder structure
The Government of Dubai has been DIB’s largest stakeholder since 1998 holding a 27.9% stake.
The remaining is floated with only a 6.9% large stake held by Mr. Saeed Ahmed Lootah.
Business model and strategy
Originally set up in 1975, DIB is the third-largest Islamic bank worldwide offering a wide range of
Sharia-compliant services to consumer, wholesale and institutional clients. The business
strategy is focused on expanding and preserving its Islamic finance leadership in the GCC
region. DIB is aiming to increase its corporate lending to UAE companies that seek to expand in
the region and diversify its retail product offerings. The branch network, comprises over 90
branches across the UAE and it has a presence in Jordan, Sudan, Pakistan and Turkey.
Financial analysis
While competition in Dubai’s retail and corporate banking sectors has been rising DIB has some
flexibility to offset margin pressure benefiting from its solid liquidity position and strong franchise
in the Islamic finance sector. The bank’s net interest margin hovered at around 3.4% over the
past few years, in line with the sector average. Historically, DIB has sustained better liquidity
than peers, supported by its solid Shariah-compliant deposit base and has a sound funding
structure dominated by deposits which account for almost 87% of non-equity liabilities. Reliance
on wholesale funding is very low (7% of liabilities). Customer deposits advanced by a solid 18%
so far in 2015, matching loan growth. The strong loan growth pattern of the past few years has
led to a higher loan-to-deposit ratio than historically: this stood at 97% as of end-June 2015;
however, liquid assets comprise a high 20% of the balance sheet. DIB’s asset quality has been
heavily burdened by troubled exposures in Dubai’s real estate and construction loans also linked
to its subsidiary Tamweel but it has made good progress to clean up its balance sheet. DIB’s
NPLs (impaired loans + 90 days past-due loans) dropped to 6.2% from its 13.8% peak in 2011,
while provisioning coverage reached a more comfortable 86% from its 43% lows. We take
comfort as most of the troubled loans are secured and collateralised by the properties. DIB’s
provisioning coverage ratio including collateral stands at 133%. As of end-June 2015, DIB’s Tier
I and Total CAR ratios stood at a healthy 16.8% and 17.1% respectively; however, its stronger
growth than the sector average continues to deplete its capital base. DIB has already issued two
perpetual hybrid tier 1 capital eligible sukuk that boosted its capital and is contemplating another
Tier I perpetual sukuk before year end. Overall the government shareholding participation and
DIB’s leading Islamic banking position ensure systemic support if needed.
TABLE 6: DIB – key financial indicators
IFRS, AEDm
2010
2011
2012
2013
2014
1H 2015
YTD %
Total Assets
89,884
90,588
98,698
113,289
123,887
146,699
18.2%
Total Loans
57,171
51,507
55,183
56,071
73,977
87,137
18.0%
Total Deposits
63,447
64,930
66,726
79,061
92,345
109,158
18.4%
Total CAR
17.8%
18.3%
17.4%
18.2%
14.9%
17.1%
Net Financing Margin
3.2%
3.5%%
3.3%
3.4%
3.6%
3.7%
ROAE
6.0%
10.9%
12.6%
13.8%
17.9%
19.8%
LTD ratio
90.1%
85.0%
88.2%
70.9%
98.1%
97.2%
NPLs
12.2%
13.8%
12.9%
11.1%
8.0%
6.2%
Source: DIB, Commerzbank Research
30 January 2015
19
Emerging Markets | EM Credit Research
Emirates NBD (ENBD)
Investment overview
S&P
N/R
Moody’s
Baa1
Positive
Fitch
A+
Stable
ENBD is the second-largest bank in the UAE with total assets of $106bn, accounting for a 20%
share in loans and 19% share of country deposits. It is also the fourth-largest bank in the MENA
region, after QNB, NCB and NBAD. The group was formed in 2007 by the government-led
merger of Emirates Bank International and National Bank of Dubai, in an effort to prevent
systemic risks from the sizeable asset exposures to the troubled Dubai GREs. ENBD’s credit
profile is underpinned by its leading domestic franchise in Dubai and very high probability of
government support. Legacy troubled Dubai GRE exposures have weighed negatively on its risk
profile as reflected by a small premium of ENBD’s bonds to peers such as NBAD and FGB but
the bank’s asset quality has been improving and the premium steadily tightened.
Shareholder structure
ENBD is majority-owned by the Dubai government, which holds a 55.6% stake through SWF
ICD. Its strong ties with the Dubai government provide the comfort of state support.
Business model and strategy
ENBD follows a universal banking model operating under five different business segments and
also offers Islamic banking services. Consumer banking is the largest revenue contributor
followed by corporate banking. ENBD’s geographical focus is mainly in the domestic UAE
market but has some smaller operations in MENA and international offices in Asia and the UK.
The bank’s strategic focus is to improve asset quality and optimise its balance sheet. The recent
stricter regulations on GRE exposures may encourage ENBD to expand its market share in the
private corporate and SME sectors.
Financial analysis
ENBD’s profitability has benefited lately from the recovery of Dubai’s economy that resulted in
strong revenue growth rates. The bank’s net income surged by 41% in H1 2015 aided by lower
provisions while operating revenues reported healthy dynamics supported by rising volumes on
higher yielding products and cheaper cost of funding. The pace of consumer lending has slowed
down but the Islamic finance division continues to grow at double-digits. During H1 2015,
ENBD’s deposits increased by a healthy 6%, with a large share of new deposits being zero-cost
current and savings accounts that support the funding base. The loan-to-deposit ratio has
moderated at 93%, below the sector average, and in line with management’s targeted range.
ENBD has also been a frequent user of private placements under its EMTN program and we
expect that the bank will maintain good access to the international capital markets. ENBD’s
asset quality has been challenged by large legacy troubled loans to Dubai GREs. However,
following the reclassification of Dubai World’s exposure to performing loans ENBD’s NPL ratio
has dropped to 7.4% from its peak of 14% in the aftermath of the crisis. At the same time
provisioning coverage including the Dubai World exposure stood at c. 110%. ENBD has one of
the strongest capital ratios among UAE banks with the total CAR and Tier I ratios at 21% and
18% respectively supported by recent private placement issues and slower credit growth.
Overall, ENBD’s current capitalisation levels provide an adequate cushion and its systemic
importance and government ownership imply a high probability of state support.
TABLE 7: ENBD – key financial indicators
IFRS, AEDm
2010
2011
2012
2013
2014
1H 2015
YTD %
Total Assets
286,078
284,613
308,296
342,100
363,015
388,110
7.0%
Total Loans
196,223
203,140
218,161
238,300
246,050
256,200
4.0%
Total Deposits
199,972
193,314
213,928
239,600
258,350
274,375
6.0%
19.8%
20.5%
20.6%
19.6%
21.1%
21.0%
Net Interest Margin
2.5%
2.7%
2.4%
2.6%
2.9%
2.8%
ROAE
7.0%
7.1%
7.0%
8.3%
11.6%
21.0%
LTD ratio
98.1%
105.1%
101.9%
99.5%
95.2%
93.4%
NPLs
10.0%
13.8%
14.3%
13.9%
7.9%
7.4%
Total CAR
Source: ENBD, Commerzbank Research
20
1 September 2015
Emerging Markets | EM Credit Research
First Gulf Bank (FGB)
Investment overview
S&P
N/R
Moody’s
A2
Stable
Fitch
A+
Stable
FGB is the third-largest bank in the UAE with total assets of $60bn, a leading banking franchise
and 10% average market shares in loans and deposits. FGB’s credit profile exhibits some of the
best characteristics among UAE banks, with strong asset quality, resilient profitability and the
best cost-efficiency indicators in the system. Its robust capitalisation and high profile shareholder
structure are additional credit strengths. FGB looks well placed to defend its core profitability
given its high concentration in Abu Dhabi government-related entities and UAE Nationals.
Shareholder structure
FGB is 65% controlled by members of the Abu Dhabi ruling family and the remaining shares are
listed on the ADX with a market capitalisation of c. $17bn.
Business model and strategy
Established in 1979, FGB has gradually transitioned from a corporate into a full-service universal
bank offering retail, debt capital markets and investment banking services. Retail operations
remain the largest revenue contributor and the bank offers Islamic banking and real estate
services. The bulk of the business is based in the UAE, through a network of 21 branches, and
has overseas operations in Singapore, Qatar, Hong Kong, South Korea, Libya, the UK and in
India. FGB’s strategic priorities are to sustain organic growth focusing on its core corporate and
retail activities in the UAE and expand its investment banking and Islamic finance operations.
Financial analysis
FGB continues to report healthy earnings and despite increased lending to lower-margin
government business it managed to sustain its NIM at c. 3.4%, one of the highest margins in the
UAE. The bank’s earnings base is fairly diversified with fees & commissions income accounting
for c. 30% of operating revenues. In addition, FGB has a very efficient cost structure, with a costto-income ratio at a low 24%, below the industry average (c. 30%). FGB reported healthy ROAA
and ROAE of 2.7% and 17.1%, respectively and we expect profitability ratios to remain
defensive as the bank plans to optimise its capital structure. Although FGB has high related
party exposures it also benefits from large government deposits. However, the current low oil
price environment increases the risk of lower government deposit inflows as the bank has
already reported a modest drop on its Q2 2015 deposits. The loan book is well diversified across
various sectors and exposure to GREs is not material. The loan book continues to grow above
the sector average (up 16% in the last 12 months ending June 2015) as the bank increases its
share on GREs and mid-tier corporates. FGB’s capitalisation has historically been supported by
healthy internal earnings generation and its solid shareholder structure that is controlled by the
ruling family. Capitalisation levels are quite robust with Total CAR at 18.7% and Tier 1 at 17.5%,
as of end-June 2015 and it was the first bank to repay in full its AED 4.51bn Tier II notes to the
MoF. Overall refinancing risks appear easily manageable. FGB’s asset quality metrics remained
healthy with the NPL ratio at 2.6% and provision coverage at 116% as of end June 2015 while
cost of risk continued to drop to a post crisis low of 80bp. The strong growth pace has led to
tighter liquidity with the loan-to-deposit ratio rising to 106% modestly above the sector average.
TABLE 8: FGB – Key financial indicators
IFRS, AEDm
2010
2011
2012
2013
2014
1H 2015
YTD %
Total Assets
140,758
157,480
175,034
198,200
212,168
219,059
3.2%
Total Loans
95,628
104,720
114,644
125,600
139,700
148,900
6.6%
Total Deposits
98,742
103,474
119,305
138,000
141,272
140,321
-0.6%
Total CAR
22.9%
21.5%
21.3%
17.5%
17.5%
18.7%
3.6%
3.8%
3.8%
3.7%
3.6%
3.4%
ROAE
14.7%
13.9%
14.2%
15.8%
17.3%
17.1%
LTD ratio
96.8%
101.2%
96.1%
91.0%
99.9%
106.1%
3.7%
3.4%
3.3%
3.3%
2.5%
2.6%
NIM
NPLs
Source: FGB, Commerzbank Research
1 September 2015
21
Emerging Markets | EM Credit Research
Mashreq Bank (Mashreq)
Investment overview
S&P
BBB+
Stable
Moody’s
Baa2
Stable
Fitch
A
Stable
Mashreq is one of the key second-tier banks and the largest private bank in the UAE. With a
balance sheet of c. $31bn Mashreq holds close to 4.5% market share by assets, and a 4% share
in loans. Mashreq’s heavy concentration in Dubai resulted in a notable deterioration in asset
quality, although following de-leveraging efforts the bank managed to stabilise the risks on its
balance sheet. Over the past three years Mashreq exhibited strong lending growth dynamics
above the system average as it shifted its focus on to the higher margin SME sector. Mashreq’s
credit profile benefits from its diversified revenue base, solid capitalisation, and a high probability
of financial backing from its main shareholder group.
Shareholder structure
Mashreq is majority controlled (87%) by the Al Ghurair family, one of Dubai’s most prominent
business families with a diverse portfolio of investments.
Business model and strategy
Established in 1967, Mashreq is the largest private bank in the UAE and one of the oldest banks
in the country. The bank has a diversified business model although the main focus is on retail
and corporate banking activities. Primarily focused on the UAE market where it has an extensive
network of 44 branches, Mashreq also has smaller operations in MENA and overseas offices in
Hong Kong, London, New York and Mumbai. Mashreq is gradually shifting its strategy, aiming to
grow its market share in the higher margin SME market and the healthier Abu Dhabi corporates
and is also targeting the high net-worth retail customer base.
Financial analysis
Mashreq’s operating income increased by 5.7% during H1 2015 driven by strong net interest
income (up 13.6%), while the bottom line expanded by 11.6% supported by lower provisions.
Key profitability indicators remain in line with the sector average with an ROAA at 2.4% and an
ROAE at 15.7% while the net interest margin is at the upper end of the sector average at 3.1%.
Mashreq’s diversified revenue base combined with its large share of retail operations mitigate
earnings volatility; however, because of its extensive branch network it has a relatively high cost
structure with a cost-to-income ratio at c. 40%. After three years of strong growth Mashreq’s
growth dynamics moderated in H1 2015 as the loan book expanded marginally (0.7%). Personal
loans account for c. 30% of the aggregate loan portfolio with the remaining balance from
corporates. On the other hand deposit growth demonstrated healthier dynamics with customer
funds rising by 10% during H1 2015 which consequently led to a stronger loan-to-deposit ratio
that dropped to c. 78%, one of the lowest rates among UAE banks. The bank’s balance sheet is
very liquid with total liquid assets comprising almost 30% of the balance sheet. Due to its heavy
exposure in Dubai Mashreq has been hit by various rounds of restructurings in the aftermath of
the 2008 crisis. The bank’s NPL ratio peaked at 15% back in 2011, but recovered notably ever
since with the latest reported NPL at a comfortable 3.7% level while provisioning coverage has
also improved at c. 138%; however, we note that Mashreq reclassified part of its troubled loan as
performing loans. In line with other UAE banks Mashreq continues to report adequate
capitalisation ratios with the Tier I and Total CAR at 15.2% and 16.5% respectively as of endJune 2015. Furthermore, the bank’s equity share is high while the presence of the Al Ghurair
family in the shareholding structure provides comfort of support.
TABLE 9: Mashreq – key financial indicators
IFRS, AEDm
2010
2011
2012
2013
2014
1H 2015
YTD %
Total Assets
84,846
79,241
76,383
83,010
105,840
112,280
6.1%
Total Loans
41,211
37,695
41,408
48,727
58,046
58,450
0.7%
Total Deposits
51,254
45,417
47,453
54,117
68,488
75,329
9.9%
Total CAR
22.7%
22.6%
19.3%
18.2%
16.6%
16.5%
NIM
2.6%
2.4%
2.6%
2.9%
3.2%
3.1%
ROAE
6.9%
6.8%
10.3%
9.4%
15.7%
15.7%
LTD ratio
80.4%
83.0%
87.3%
90.0%
84.8%
77.6%
NPLs
11.7%
14.8%
9.4%
6.4%
3.7%
3.7%
Source: Mashreq, Commerzbank Research
22
1 September 2015
Emerging Markets | EM Credit Research
National Bank of Abu Dhabi (NBAD)
S&P
AA-
Stable
Moody’s
Aa3
Stable
Fitch
AA-
Stable
Investment overview
NBAD is Abu Dhabi’s flagship bank, acting as the private banker to the Abu Dhabi government.
With assets of $106bn, NBAD is the largest bank in the UAE with a c. 15% market share in
country loans and deposits. NBAD has a record of resilient earnings, given its focus on the more
promising Abu Dhabi market and benefits from a high share of government deposits. NBAD’s
credit profile looks stronger in terms of asset quality and profitability as well as a very high
probability of state support and therefore its bonds trade with a tighter premium to its UAE peers.
Shareholder structure
NBAD is majority controlled by the Abu Dhabi government which holds a 70.5% stake through
the sovereign wealth fund Abu Dhabi Investment Council (ADIC). NBAD is the highest rated
financial institution in the GCC and also ranks among the highest rated banks worldwide.
Business model and strategy
NBAD’s business model is centred around Abu Dhabi’s corporate and public sectors and has
strong business ties with the government and public sectors. NBAD has the largest international
presence among UAE banks with operations in MENA and Europe and plans to enhance its
presence in Asia. International assets collectively account for 20% of the group’s profits.
Financial analysis
NBAD has a record of resilient earnings and stronger growth dynamics than the sector average.
However, the ongoing low yield environment continued to weigh on margins with its NIM
hovering in the 2% range over the past few quarters. Key profitability indicators moderated with
an ROAA of 1.5% and an ROAE of 14.4% and we see no upside over the near to medium term.
NBAD’s medium-term targets include a 15% ROE while keeping its cost to income ratio at 35%.
Credit growth remained robust as the loan book expanded by almost 20% during the last 12
months ending June 2015. The implementation of the Central Bank limits to curtail large lending
exposures to GREs may have some impact on growth but its diversified operations and
international expansion plans should offset such pressure. Unlike other UAE banks, NBAD had
limited exposure to the troubled Dubai GREs and as a result, it maintained lower NPLs than the
sector average. The level of NPLs stands at a comfortable 2.6%, and provisioning coverage is
strong at 112%. NBAD has a very liquid balance sheet with liquid assets comprising c. 40% of
the total. Deposits growth has contracted in H1 2015 (dropping 8% during Q2 2015) due to an
outflow of government deposits and, as a result, the loan-to-deposit ratio spiked to c. 95% from
80% at end-2014. While we expect government deposit outflows to continue, especially if the low
oil prices persist, NBAD should remain the government’s preferred deposit holder and manage
to find alternative funding sources. NBAD is well capitalised with the Tier I and Total CAR ratios
at 15.4% and 16.6% respectively as of end-June 2015 although its capital ratios are lower than
the sector average reflecting the strong growth rates of the past few years. Its sovereign
shareholding base implies a very high probability of state support. In anticipation of the transition
to Basel III standards NBAD has recently issued its inaugural additional Tier 1 perpetual bond
that was priced at the lowest coupon level among all other AT1 offerings in the GCC.
Refinancing risk looks easily manageable: NBAD has proven its capacity to raise external funds
even during challenging times.
TABLE 10: NBAD – Key financial indicators
IFRS, AEDm
2010
2011
2012
2013
2014
1H2015
Total Assets
211,427
255,667
300,599
325,061
376,098
392,606
4.4%
Total Loans
136,833
159,522
164,599
182,500
194,279
217,852
12.1%
Total Deposits
123,131
151,817
190,303
229,497
243,185
230,121
-5.4%
22.6%
20.7%
19.9%
17.8%
16.4%
16.6%
Total CAR
NIM
ROAE
Loan-to-deposit ratio
NPLs
2.6%
2.5%
2.2%
2.0%
1.9%
2.0%
16.5%
14.7%
13.9%
15.1%
15.4%
14.4%
111.1%
105.1%
86.5%
80.0%
80.1%
95.0%
2.3%
2.9%
3.2%
3.3%
3.1%
2.6%
YTD %
Source: NBAD, Commerzbank Research
1 September 2015
23
Emerging Markets | EM Credit Research
Notes
24
1 September 2015
Emerging Markets | EM Credit Research
Notes
1 September 2015
25
Emerging Markets | EM Credit Research
Notes
26
1 September 2015
Emerging Markets | EM Credit Research
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