Global values Mashreq Bank stock at AED101.52 and recommends a ‘REDUCE’
Global Investment House – Kuwait - Mashreq Bank – Investment Update - In view of the difficult macroeconomic environment and deteriorating liquidity situation in the second half of the year, the profitability of Mashreq Bank declined during 2008. The balance sheet size of Mashreq Bank reached AED93.2bn at the end of 2008, a lower growth of 6.4% over the balance sheet size at the end of 2007. It is important to note that all the growth came in the first quarter of 2008. For the rest of 2008, balance sheet size was almost constant or even declined.
Our estimated value for this banking scrip is worked out to be AED101.52 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers a downside of 17.5% at the closing price of AED123.00 per share (as of May 27, 2009). We therefore recommend a REDUCE on Mashreq Bank at the current price level.
Gross loan portfolio (including Islamic products) of the bank increased from AED36.4bn in 2007 to AED56.2bn in 2008, a significant growth of 54.2%. The net loan book increased from AED35.3bn in 2007 to AED55.0bn in 2008, a growth of 55.8% during the year. Contribution of net loans to total assets was 59.0% in 2008, up sharply from40.3% in the previous year. This was due to sharp rise in loans and advances and also decline in the balances with Central Banks which was down 68.9% YoY to reach AED6.3bn.
Lending growth has been strong for the bank; however NPL level has been managed well. Gross non-performing loans (NPLs) of the bank, in fact, declined from AED383.1mn in 2007 to AED364.2mn in 2008. Gross NPLs as a percentage of gross loans declined from 1.1% in 2007 to 0.6% in 2008. However we expect this ratio to go up in coming months on account of deterioration in economic scenario.
Total interest income of the bank (including Islamic) increased from AED4.0bn in 2007 to AED4.8bn in 2008, an increase of 18.9%. The growth in interest income was mainly driven by the growth in loan volume as yield on interest earning assets declined to 6.5% in 2008 from 7.5% in 2007. The decline in yield was expected in view of declining interest rate scenario. However bank’s yield on interest earning assets is comparatively higher than its peers because of its greater focus on lucrative retail segment.
Total interest expense of the bank decreased from AED2.8bn in 2007 to AED2.7bn in 2008, a decrease of 4.3%. Cost of funds decreased from 4.9% in 2007 to 3.7% in 2008. Cost of funds of the bank is higher than some of the domestics peers since the share of low cost deposits is comparatively low and also due to lower share of government deposits. As the decline in cost of funds was sharper than the fall in yield on interest earning assets, Mashreq Bank’s net spread increased from 2.6 % in 2007 to 2.8% in 2008.
Mashreq Bank’s net profit declined by 13.6% to reach AED1.6n, down from AED1.9bn in 2007. Return on average equity decreased from 22.4% in 2007 to 16.7% in 2008. Similarly, return on average assets declined from 2.6% in 2007 to 1.8% in 2008.
Balance sheet size of Mashreq Bank decreased by 2.8% as compared to 2008 to reach AED90.7bn at the end of March 2009. Customer deposits (including Islamic deposits) increased by 6.0% to AED54.5bn at end of March 2009 as compared with AED51.5bn at the end of year 2008. As a result, the contribution of customer deposits to the total liabilities and equities increased from 55.2% in 2008 to 60.2% at the end of Q1-2009. Due to banks was down 24.7% during the period to reach AED9.3bn. During Q1-2009, gross loan book reached AED55.2bn, an YTD decline of 1.8% from the year-end 2008. Net Loans decreased by 2.1% YTD to reach AED53.9bn in Q1-2009, down from AED55.0bn in 2008.
Gross non-performing loans (NPLs) increased from AED364.2mn in 2008 to AED483.6mn in Q1-2009, an increase of around 33%. Therefore NPL to gross loans ratio increased to 0.9% at the end of Q1-2009 up from 0.6% at the end of 2008. We expect NPL level to rise in the face of difficult economic scenario. The investment portfolio of the bank stood at AED12.5bn at the end of Q1-2009, down from AED13.4bn in 2008. The investment portfolio continued to witness losses during Q1-2009.
Net profit for the period AED484.1mn, up 4.0% from AED465.3mn in Q1-2008. Return on average equity (RoAE) was 19.0% for the period Q1-2009 whereas return on average assets (RoAA) was 2.1%.
We expect the growth rate of the bank to slow down considerably in coming years in contrast with high growth rates achieved in the past years. This is not surprising given the slowdown witnessed across-the-board. Dubai has been highly impacted by this slowdown as it was depending mainly on non-oil sectors like real estate, construction, tourism, retail to drive growth. All of these non-oil sectors have experienced a significant slowdown in Dubai.
One of our key concerns areas is quality of assets which we project to deteriorate in coming quarters in view of the economic slowdown especially Dubai which is highly impacted as compared to other Emirates of UAE. We have started to see some impact as gross NPLs as a percentage of gross loans have gone up in 1Q-2009. Though Mashreq Bank has been conservative in its approach, we are a bit concerned about the high retail exposure of the bank in the current scenario. Dubai has witnessed significant job losses over the past few quarters and this might impact the retail portfolio of the bank.
We have started to see some signs of market stabilizing both internationally and regionally. Though it is very early to say that market will enter a high growth phase in near future, we believe that market might have found a bottom. However on the macroeconomic front, we still continue to witness adverse economic indicators. As per IMF forecast, UAE’s economy is expected to contract by 0.6% in 2009. We believe it will take some more time before we see normal liquidity level in the banking system. However things have improved since 4Q-2008 when the liquidity dried up after speculative money betting on revaluation of Dirham went out of UAE banking system. Though Government has taken several positive steps to infuse liquidity into the system, it will take some time to show the impact.
In view of the difficult economic environment, we believe most of the banks including Mashreq Bank will focus on factors like monitoring of credit quality, setting up effective risk management systems and rationalizing cost bases etc. Mashreq Bank needs to rationalize its operating expenses which have grown at a higher pace in recent times. Therefore expansion plans are expected to take a back seat in 2009 and 2010.
Table: Investment Indicators
Latest Price Shares in Issue ('000) Market Cap 52-week price range
AED123.00 161,026 AED19.81bn AED122.90 – 254.55
Year Operating Income (AED’000) Net Profit (AED’000) EPS (AED) BVPS (AED) ROAE P/E (x) P/BV (x)
2010 F 4,120,234 1,995,206 12.4 77.8 16.8% 9.9 1.6
2009 F 3,696,835 1,679,279 10.4 69.9 15.7% 11.8 1.8
2008 A 3,621,576 1,642,830 10.2 62.5 16.7% 23.5 3.8
2007 A 3,542,101 1,900,632 11.8 59.7 22.4% 18.2 3.6
Price for future years are based on market price in the DFM as on May 27, 2009
Source: Mashreq Bank, DFM and Global Research
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