• Global values Mashreq Bank stock at AED221.38 and recommends a ‘REDUCE’Global Investment House - Mashreq Bank – Investment Update – November 2008 - Mashreq Bank demonstrated improved performance during 2007. Its balance sheet size reached AED87.6bn at the end of the year, a significant growth of 54.4% over the balance sheet size at the end of 2006. The bank showed a strong growth during the 3-year period 2004-07 coinciding with the economic boom in the country. During this period, total assets of the bank had grown at an impressive CAGR of around 40.0%.
Our estimated value for this banking scrip is worked out to be AED221.38 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers a downside of 18.0% at the closing price of AED270.00 per share (as of Oct 09, 2008, the last trading date). We therefore recommend a REDUCE on Mashreq Bank at the current price level.
Financial PerformanceDuring 2007, customer deposits (including Islamic deposits) increased from AED34.7bn in 2006 to reach AED48.3bn, a growth of 39.3%. Deposit base as a percentage of total balance sheet declined from 61.1% in 2006 to 55.1% in 2007. The bank’s gross loan portfolio (including Islamic products) increased from AED30.3bn in 2006 to AED39.4bn in 2007, a growth of 30.0%. The net loan book increased from AED29.4bn in 2006 to AED38.3bn in 2007, a growth of 30.4% during the year. Contribution of net loans to total assets was 43.8% in 2007, down from 51.8% in the previous year. This was due to a significant increase in the balances with Central Banks which increased more than eight-fold to reach around AED20bn.
The bank’s total interest income increased from AED2.6bn in 2006 to AED3.9bn in 2007, an increase of 49.5%. Interest income from loans and advances to customers constituted the majority of total interest income and contributed 68.8% of total interest income in 2007, down from 77.8% in 2006. Interest income from loans and advances to customers was up 32.1% during the year to reach AED2.7bn, from AED2.1bn in 2006.
Cost of funds increased from 4.4% in 2006 to 4.9% in 2007 and is higher than some of the domestics peers since its share of low cost deposits is comparatively low and also due to the lower share of government deposits. As the increase in the yield on interest earning assets was less than the cost of funds, Mashreq Bank’s net spread declined from 2.7% in 2006 to 2.6% in 2007. Similarly, net interest margin declined from 2.4% in 2006 to 2.2% in 2007.
Chart 1: Margins Source: Mashreq Bank
Mashreq Bank’s net profit grew by 21.0% to reach AED1.9bn in 2007, up from AED1.6bn in 2006. Return on average equity increased from 21.5% in 2006 to 22.4% in 2007. However, the return on average assets declined from 3.0% in 2006 to 2.6% in 2007.
Balance sheet size of Mashreq Bank increased by 7.3% as compared to 2007 to reach AED94.0bn at the end of September 2008. Customer deposits (including Islamic deposits) increased by 7.0% to AED51.7bn at end of September 2008 as compared with AED48.3bn at the end of year 2007. Due to banks was up 10.4% during the period to reach AED14.8bn.
The total operating income of Mashreq Bank reached AED3.0bn in 9M-2008, a jump of 23.0% from the corresponding period in the previous year. Net interest income reached AED1,329.4mn in 9M-2008 i.e. up 62.1% from AED820.2mn in 9M-2007. Net fee and commission income was up 22.9% YoY during the period to reach AED985.9mn as compared to corresponding period in the previous year. Investment income of the bank was down 86.5% YoY during the period which is attributed to significant decline in capital markets during the period. Other income of the bank was significantly up by around 81.6% YoY during the period. Other income of the bank for the period included a gain of AED161.7mn from revaluation of investment properties. Keeping in view the growth in loan book, the bank increased its provision for NPLs to AED270.2mn, up from AED203.0mn in 9M-2007. Net profit for the period AED1.5bn, up 12.3% from AED1.4bn in 9M-2007. Return on average equity (RoAE) was 20.5% for the period 9M-2008 whereas return on average assets (RoAA) was 2.2%.
Mashreq Bank is among the few banks in UAE which is neither owned by the government nor any ruling families. It has a long history of over 40 years and is the second oldest commercial bank in UAE. Traditionally the bank has a strong presence in retail banking and trade finance segments. In fact Mashreq Bank was one of the early entrants to retail business in the early 1990s and had a first-mover advantage in the segment. The contribution of retail segment to total operating income of Mashreq Bank is among the highest in the UAE banking sector.
Compared to its peers, Mashreq Bank has been conservative in its approach and has a lower risk appetite than its peers. This is evident from its comparatively low exposure to real estate, higher provisioning level and strong risk management systems. Though it might have resulted in lower growth in loan book as compared to its peers, we believe this might turn out to be a strength in the event of a slowdown in the real estate sector as witnessed currently.
Table 1: Investment IndicatorsLatest Price Shares in Issue ('000) Market Cap 52-week price rangeAED270.00 146,387 AED39.5bn AED219.69 – 280.00 Year Operating Income (AED’000) Net Profit (AED’000) EPS (AED) BVPS (AED) ROAE P/E (x) P/BV (x) 2009 F 4,792,452 2,449,941 16.7 82.4 21.5% 16.1 3.32008 F 3,975,815 2,052,876 14.0 73.2 20.2% 19.3 3.72007 A 3,542,101 1,900,632 13.0 65.7 22.4% 18.2 3.62006 A 2,680,834 1,570,640 10.7 50.4 21.5% 14.9 3.2Price for future years are based on market price in the DFM as on Oct 09, 2008 (the last date of trading) Source: Mashreq Bank, DFM and Global Research