Global Investment House –Kuwait – Commercial Bank International (UAE)
Financial Performance
Commercial Bank International (CBI) posted a net profit (attributable to shareholders) of AED127.3mn in 2008, as compared to AED319.4mn in 2007. Net Interest Income (NII) reported a growth of 60% in 2008 at AED407.4mn as compared to AED255.1mn in 2007, the higher growth in NII is as a result of higher growth in interest income at 21% in 2008 as compared to de-growth of 9% in interest bearing expenses.
At the CMP of AED1.40 (As on 29th March’09) the stock trades at a P/E and P/BV of 16.2x and 1.3x FY08E and 14.6x and 1.1x FY09E earnings. Based on combination of Dividend Discount Model and Gordon Growth Model valuation method we downgrade from our previous recommendation of “BUY” to “HOLD” rating on the stock with a price target of AED1.33, an downside of 5.1% from current levels.
FY08 Performance
The NII reported 60% growth in FY08 as compared to FY07, this was due to 21% growth in interest income and 9% de-growth in interest expenses in FY08. The advances grew by 16% YoY and deposits reported de-growth of 9% in FY08, the interest income grew faster as compared to advances growth mainly due to higher disbursements to services sector, Real Estate and Financial Institutions growing by 82%, 56% and 250% respectively. The sectors have a high risk high return model and loans are sanctioned at higher rate of interest as compared to other segments.
CBI had been very active on the treasury front in the past, but due to global financial crisis it will be difficult for the bank to earn extraordinary gains from the investments. The brokerage income for the bank has reduced by 57% to AED16.6mn in FY08 as compared to AED39.4mn in FY07.
The 57% decrease in brokerage income attributes the sharp fall in equity markets, reducing volumes in the markets and no signs of recovery for the equities. CBI has reported Credit / Deposit (C/D) ratio of 117% in FY08 as compared to 96% in FY07, the higher C/D ratio attributes 5% de-growth in deposits in FY08 as compared to FY07. The lower growth in deposits coupled with cut in interest rates will reprice the deposits faster and bring down the interest expenses for the banks thereby improving the spreads.
CBI has reported AED43.5mn net loss in Q408, the advances s have grown by 0.3% and deposits have reported de-growth of 7.8% in the same period as compared to Q308. The bank has capitalized on the falling interest rates by repricing high cost deposits at a lower cost.
Chart 1: Quarterly movement in NIM
Source: Company Reports, Global Research
As it can be depicted from the chart above, the Net interest margins (post impairment) have been falling consistently across the FY08 quarters, the fall in the margins attributes the central banks cutting the rates resulting in significant repricing of assets and erosion of margins.
Financial Outlook
Chart 2: Financial Forecast
Source: Company Reports, Global Research
We expect net interest income, operating income and net income to report CAGR growth of 6%,14% and 21% respectively in FY08-12E.
CBI will have to rework on replacing its high cost time deposits forming 80% of total deposits, the time deposits are usually priced higher than the demand, current and savings deposits, due to this the lending spreads squeeze and banks are unable to have cushion on any downward movement in interest rates. In FY08 the bank has already taken a significant hit on its margins by 125bps at 2.62% in FY08 from 3.87% in FY07.
We expect conservative CAGR growth in advances and deposits at 7% and 11% respectively in FY08-12E. CBI will face a challenge to report higher credit growth as the demand freezes in UAE as most of the companies are cutting jobs and reducing expenses and delaying expansion plans.
Method Value Weight Weighted Value
DDM 1.32 80% 1.05
GGM 1.38 20% 0.28
Fair Value 1.33
CMP (As on 29th March’09) 1.40
Upside/ Downside -5.1%
Source: Global Research
