“Strong profits have been a function of the performance of the equity markets on both the Abu Dhabi Securities Market (ADSM) and the Dubai Financial Market (DFM), IPO financing and subscriptions, and asset growth in a rising interest rate environment,”
comments Tammam Barbir, banking sector analyst at EFG-Hermes, the region’s leading full service investment bank.
He adds, “The principle risk facing most of the banks under our coverage is market risk: a reversal of the upward momentum of the local equity markets as well as a decline in the profitability accruing to banks from upcoming IPOs. The true test for the market will be when banks report their earnings for 2Q06; market risk will be high then given the large scope for negative earnings surprises, given the levels reached by both the real estate and equity markets.”
According to the firm’s reports, shares in Mashreqbank (MASQ) and Commercial Bank of Dubai (CBD) bank offer the greatest potential with EFG-Hermes maintaining short term and long term buy recommendations for both.
MASQ reported a 101% increase in 9M05 net profit of AED 1,092 million compared to AED 543 million reported during the same period of 2004.
“We believe that MASQ launching two funds in 2Q05 resulted in strong subscription fees in that quarter, helping explain the huge jump in non-interest income during 2005. We have increased our forecasted profit figure by 2.5%, and think that the actual 2005 profit figure for MASQ could come above our expectations principally on the back of stronger than expected fees and commissions,” observes
CBD, on the other hand, reported a 55% rise in 9M2005 net profit to AED 365 million compared to AED 236 million during 9M2004. “The bank continues to deliver a consistent set of financial results and is on track to meet our expectations for the full year. This is explained by the absence of the “IPO effect” artificially boosting both interest and non-interest income,” says Barbir.
Short term and long term accumulate recommendations were given to both Union National Bank (UNB) and First Gulf Bank (FGB). UNB reported a 190% increase in 9M05 net profit of AED 917 million compared to AED 316 million reported during the same period in 2004. Contrary to most banks, the results for the three month period during September 2005 revealed continued growth in net interest income and non-interest income.
“Economic growth and geographic penetration is allowing UNB to grow its balance sheet at double digit growth rates. We now expect net profit to reach AED 1,359 million in 2005, up from previous forecasts of AED 651 million. The actual profit figure for 2005 could exceed our expectations as a result of the revenues accruing from the recent DANA Gas IPO for which UNB was on the receiving banks,” notes Barbir.
As for FGB, the bank reported a 357% increase in 9M05 net profit of AED 715 million compared to the AED 156 million reported of the same period in 2004. The huge increase in net interest income is explained by the strong asset growth in a rising interest rate environment, but more so because of increased IPO financing.
“Economic and business developments during 3Q05 meant that the capital base was too small to support current levels of balance sheet growth, let alone future expected levels of growth. A rights issue was therefore necessary to boost the capital base. We expect net profit to reach AED 1,057 million and AED 1,489 million in 2005 and 2006 respectively,” explains Barbir.
EFG-Hermes maintained a short term buy recommendation and long term neutral recommendation for Abu Dhabi Commercial Bank (ADCB). The bank reported a 174% increase in 9M05 net profit of AED 1,425 million compared to AED 520 million reported during the same period in 2004. The results for the three month period ending September 2005 however were characterized by strong growth in interest income and hence net interest income when compared to 2Q05, but a slowdown in non-interest income.
“The underlying changes being made in the form of setting treasury and investment banking joint ventures, the establishment of new business lines and the continued launch of products and services will all increase core revenues, a much needed source of revenue when IPO activity starts to slow down. We believe that actual 2005 profit figure for ADCB will come above our expectations of AED 1,739 million, principally on the back of the stronger than expected fees and commissions,” notes Barbir.
Short term accumulate and long term neutral recommendations were given to Emirates Bank International (EBI). The bank reported a 96% increase in 9M05 net profit to AED 1,153 million compared to AED 588 million reported during the same period in 2004. All business segments have experienced strong growth, though the performance of the bank’s investment and funds management division could be regarded as a mixed blessing.
“We see EBI as a play on economic growth given its diversified business segments. Consequently, we foresee continued growth in the bank’s main banking activities on the back of continued economic growth. We now expect EBI to report a net profit figure of AED 1,600 million for 2005, compared to our previous forecast of AED 963 million after the bank reported stronger than expected growth in non-interest income,” says Barbir.
Both National Bank of Abu Dhabi (NBAD) and National Bank of Dubai (NBD) received short term and long term neutral recommendations. NBAD reported a 153% increase in 9M05 net profit to AED 2,029 million compared to AED 803 million reported during the same period in 2004.
Barbir notes, “NBAD has become more of a market than an economy play given the rising importance of investment banking operations to NBAD’s profitability. Consequently, the risks associated with the bank not maintaining the current level of earnings growth are high due to the cyclical nature of investment banking. However, we believe that NBAD will emerge again as an economy play, thus offering strong growth potential with regards to domestic banking operations on the back of the UAE economic growth effect.”
He adds, “We have introduced changes to our forecast and now expect a net profit figure of AED 2,731 million for 2005 compared to our previous estimate of AED 2,232 million.”
NBD reported a 39% increase in 9M05 net profit to AED 864 million, compared to the AED 623 million reported during the same period in 2004. This is the result of the bank not taking part in any of the IPOs that have taken place so far in 2005.
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