• Global values Dubai Islamic Bank at AED11.2 and recommends a BUY on the stock
Global Investment House – Kuwait – Dubai Islamic Bank (DIB) -Dubai Islamic Bank (DIB) is a UAE based bank offering a range of Islamic commercial banking as well as investment banking services including advisory and asset management. It is the world’s first full-service Islamic bank ranking as the 3rd largest Islamic bank in the world, the largest Islamic bank in the UAE and the 5th largest amongst all banks in the UAE. DIB was incorporated in 1975, in the Emirate of Dubai, by a decree issued by the then Ruler of Dubai, H.H. Sheikh Rashid bin Saeed Al Maktoum. After incorporation, DIB was subsequently registered under the Commercial Companies Law No. 8 of 1984 (as amended) as a public joint stock company. It is regulated by the UAE Central Bank. DIB currently operates 48 branches in the UAE through 2,000 employees with a network of 136 ATMs linked across the UAE.
Recent mega deals carried out by DIB include:
- US$3.52bn Sukuk issue for Nakheel (Dubai World)
- US$3.5bn Sukuk issue for PCFC (Govt. of Dubai)
- US$2bn Sukuk issue for Dubai Civil Aviation for expansion project of Dubai International Airport
- US$600mn Government of Malaysia Sukuk
- US$600mn Pakistan Sovereign Sukuk
- US$550mn Sukuks for Emirates Airlines
- US$530mn Lead Arranger for Qatar Gas II
DIB managed a bottom-line growth of 60%YoY in 2007 driven primarily by a similar surge in Net Commission Income (NCI) and a 23% jump in Non-commission Income. The growth in the NCI was driven purely by volumetric augmentation while spreads remained relatively unchanged. The gross Financing and Investing assets blew the lid with a 38%YoY rise while spreads increased marginally by 6bps over the previous year. Albeit, Fee, commission and Forex income registered a 12%YoY decline in 2007, it was more than compensated for by the principal non-Commission Income driver, Income from Investment & Development Properties, which exhibited a stunning 45%YoY climb.
The volumetric growth in the bank’s lendings was facilitated through a 36%YoY rise in its customer deposits which produced a growth closely inline with its 3-year CAGR and is a consequence of incessantly high money supply (M2) growth and effective deposit mobilization carried out by DIB’s branch network. The bank also chose to issue Sukuks worth AED2.8bn which finance 3% of its assets.
The asset quality of DIB has improved over the years, regardless of the fact that Provisions provided for have increased, which is a phenomenon associated with high growth in lendings. This can be gauged from a declining Provisions/gross Financing assets ratio depicting that provisions have not increased as fast as the financing and investment portfolio.
DIB’s payout ratio (inclusive of bonus) has gone as high as 85% and averaged at 61% in the last 3 years, which bodes well for its investors. DPS (cash) has increased over the preceding 3 years and doubled in 2007 when compared to 2005. A great portion of DIB’s payouts have been in the form of bonus shares, which the bank has issued regularly over the previous 3 years.
DIB earned a gross AED969mn (net of depositor’s share: AED617mn) in 2007 which had an impact of AED0.21/share (of the total unadjusted EPS of AED0.83), hence forming 25% of the total profits. Since this is a one-off windfall gain arising out of transfer of interest in Deyaar Development Company P.S.C. to Deyaar Development PJSC for consideration other than cash, it will dampen the earnings for 2008. Furthermore, recently news has come forward regarding a fraud case in Deyaar Development PJSC. With a 43% stake in this associate, a negative impact on DIB may be expected in terms of provisions for impairments, if so required.
DIB with is size, robust financial profile, professional management and its eye for innovation in Shariah-compliant products is expected to manifest itself as an even greater entity than what it already is. Horizontal diversification across many countries and dissimilar economies will hedge it against any economic downturn in one or more economies. After making its presence felt in Pakistan, Sudan and Bosnia (amongst many other countries), the bank is eyeing the North African region and the Far-East to expand its operations or existence. Driving its primary growth from operations in the UAE, DIB has not only positioned itself as a heavy-weight local player but also as a key participant amongst global Islamic banks. With a vast experience in issuance of Sukuk bonds, DIB is a name recognized not only by corporate across the world but also by the Governments.
Profitability
Asset Growth
DIB is expected to post a 34%YoY growth in its Net Income before extraordinary items, in 2008 and maintain a 2007-2011 CAGR of 17%. The Net Income after extraordinary items is however anticipated to be dampened given the extraordinary gains from transfer of interest in subsidiary realized in 2007; leading to a growth of 1%YoY. The bottom-line is forecast to be driven by the Net Commission Income, surging at an uncompromising 4-year CAGR of 28% accompanied by Non-Commission Income swelling at a 4-year CAGR of 22%. While spreads are expected to taper-off slightly and remain at a 4-year average of 2.6%, the actual growth is expected to be driven by volumes whereby we anticipate Financing & Investing assets to grow at a 4-year CAGR of 24%, inline with a similar growth in the bank’s deposit base. Furthermore, with payout ratios forecast to remain at 62-65% with an improving bottom-line, absolute dividends will also improve at a 4-year CAGR of 25%. Therefore based on staggering volumetric growth, global expansion, superior fee income from Investment banking operations especially from Sukuk advisory and possible emergence of a story regarding sell-off of partial stake in international subsidiaries/associates, which collectively translate into burgeoning profits, we remain bullish on this banking scrip.
Based on the current market price of AED9.2/share (as on May 08, 2008), DIB is trading at a 2008E P/E and P/BV multiple of 12.5x and 2.7x respectively. Our estimated value for this banking scrip is worked out to be AED11.2 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers an upside of 22%; we therefore recommend a BUY on the scrip.
