• Global values Emirates NBD stock at AED4.80 and recommends a ‘BUY’
Global Investment House – Kuwait - Emirates NBD – Investment Update - Emirates NBD performed well for most part of the year 2008; however the investment losses and higher provisioning during the 4Q-2008 impacted the profitability for the entire year 2008. The balance sheet size of Emirates NBD reached AED282.4bn at the end of 2008, up 11.3% from AED253.8bn at the end of 2007. Most of the growth came in the first half of the year. In fact the balance sheet size of the bank declined during the second half of the year on account of difficult macroeconomic environment and deteriorating liquidity situation.
Our estimated value for this banking scrip is worked out to be AED4.80 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value, the banking scrip offers an upside of 68.3% at the closing price of AED2.85 per share (as of May 18, 2009). We therefore recommend a BUY on Emirates NBD at the current price level.
Financial Performance
During 2008, net loans (including Islamic) reached AED208.9bn, a growth of 25.5% over the loan book size at the end of 2007. At the end of 2008, net loans and advances as a percentage of customer deposits stood at 128.7%, up from around 118.3% in 2007 thereby putting further pressure on liquidity.
The total operating income of Emirates NBD reached AED8.4bn in 2008, a jump 18.8% from 2007. Interest income for the year was AED12.3bn, up 7.2% YoY. The growth in interest income was driven mainly by the growth in loan volume as yield on interest earning assets declined to 5.7%, down from 6.7% in 2007. The decline in yield was expected in view of declining interest rate scenario.
Total interest expense of the bank decreased from AED7.4bn in 2007 to AED6.5bn in 2008, a decrease of 12.4%. Cost of funds decreased from 4.1% in 2007 to 2.8% in 2008. As the decline in cost of funds was sharper than the fall yield on interest earning assets, Emirates NBD’s net spread increased from 2.6% in 2007 to 2.9% in 2008. Similarly net interest margin increased from 2.4% in 2007 to 2.7% in 2008. We believe the improvement in net interest margin was mainly due to re-pricing of loans by Emirates NBD taking advantage of credit crunch. The margin also improved on account of differential US$ and AED interbank rates and hedging on Treasury positions.
Net profit for the year was AED3.7bn, down 6.7% from AED3.9bn in 2007. Though the growth in the net interest income of the bank was healthy, net profit declined on account of lower non-interest income and higher provisioning. Return on average equity (RoAE) was 14.5% for 2008 on whereas return on average assets (RoAA) was 1.4%.
Emirate NBD’s asset size remained almost constant at the end of Q1-2009 at AED281.4bn as compared to 2008. Customer deposits increased by 5.0% to AED170.5bn at the end of Q1-2009 as compared with AED162.3bn at the end of year 2008. As a result, the contribution of customer deposits to the total liabilities increased to 60.6% at the end of Q1-2009 up from 57.5% at the end of 2008. Net profit for the period AED1.3bn, up around 5.3% from AED1.2bn in Q1-2008. The growth in net profit was lower than that of operating profit on account of a decline in share of profit of associates. Return on average equity (RoAE) was 19.6% for the period Q1-2009 whereas return on average assets (RoAA) was 1.8%.
Outlook
Given the deteriorating economic scenario and adverse credit environment over the past few quarters, the performance of Emirates NBD during Q1-2009 was above our expectations. This was mainly due to improvement in net interest income on the back of widening net interest margin. The declining interest rate scenario during the first quarter of the year worked in favor of the bank resulting in higher net interest margin. The net interest margin is expected to decline in the coming quarters as bank expects a shift in deposits from low cost current and savings account into higher cost time deposits. Though we expect net interest income to improve in 2009 as compared to last year, non-interest income will be lower.
The bank’s capital ratios have improved to a healthy 16.2%, an increase from 11.4% at the end of 2008. This improvement is primarily due to the conversion of the Ministry of Finance’s deposits to Tier II capital. However the bank still needs to raise Tier I capital to meet Central Bank directives that stipulates that Tier I Capital need to be 11% from June 2009.To meet this requirement, Emirates NBD is looking to issue at least AED3.5bn Tier I perpetual securities during Q2-2009 by the way of perpetual securities.
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 continued to rise in 2008 and also in 1Q-2009. At the end of 2008, exposure of Emirates NBD to real estate and construction sectors was 19% of total loan portfolio, which continues to be a source of concern.
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 Emirates NBD will focus on factors like monitoring of credit quality, setting up effective risk management systems and rationalizing cost bases etc.
