The report advises that this change of position is justified by the UAE’s oversold position and by greater visibility on restructuring. However, caution is still required as there are still hurdles ahead. Following 3Q10 results, Rasmala-RBS has rebalanced its UAE bank recommendations, upgrading First Gulf Bank and Abu Dhabi Islamic Bank, and downgrading Dubai Islamic Bank and Abu Dhabi Commercial Bank.
FGB and ADIB upgraded and DIB and ADCB downgraded
Of the four internationally investable stocks covered, the research downgraded two on the basis of their strong performances: DIB and ADCB. ADCB’s 2Q10 results were strong, but not sufficient to justify a 42% increase so far this quarter. FGB was upgraded from Hold to Buy, believing the stock deserves a quality premium despite concerns about property exposure and the impact of competition.
Dubai restructuring on target
The most significant factor driving the positive drift of stock performance in 3Q10 has been the Dubai World restructuring agreement and the resulting positive movement of CDS spreads. The effect of this is limited on Rasmala-RBS models to a 50bp reduction in cost of equity across the board, which raises all target prices by about 5%. The negative risk perceived from Dubai Holding’s restructuring plans prevents the bank from taking a more positive stance at this stage.
Regulatory risk overstated
Regulatory risk stems from two areas: provisioning and Basel III. It is also expected that the central bank may issue guidance on general provisions this year, and that this may negatively affect the stocks with low general provisions, namely ADCB and ADIB. However, Basel III is not expected to have a meaningful impact on their business models.
Positive economic progress deferred
No meaningful improvement was anticipated in the economy in 3Q10, which is just as well because little was evident. Nevertheless, a gradual return to monetary growth is envisaged, but no real recovery in property sector activity, even if liquidity improves sufficiently for the sector to exit stagnation mode. Growth will have to be driven by other areas of the economy.
Monday, September 27- 2010 @ 9:59 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.