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Strong recovery expected in UAE bank valuations

Report says industry offers good value despite mixed news from realty market

Gulf News

Dubai: Despite the high non-performing assets and heavy provisioning and impairments slicing off more than 30 per cent of the operating profits and credit growth estimated only at about four per cent this year, analysts expect strong recovery for the UAE's banking sector in the medium term.

The UAE banking industry offers good value, in spite of mixed news from the property market, reports of rescheduling loans and questions about the stability of asset quality, according to a report from Rasmala Investment Bank (Rasmala) and Royal Bank of Scotland (RBS).

"After five years of asset inflation, mission drift and speculation, the critical question now for the UAE banks is whether the Dubai business model is broken.

"If it is not, which we consider to be most likely, then we expect to see a rebound in ROEs (return on equity) from the current 10.7 per cent sector average back to a minimum of high teens by 2012-13," said Raj Madha, author of the report.

Weighed down

The UAE's banking sector valuations have been weighed down by factors such as existing balance sheet risk, the rescheduling/restructuring risks related to Dubai Inc. and the broader structural risks.

"Although growth looks elusive, we think returns for the sector are set to recover strongly once provisioning settles down," Madha said.

Currently the UAE's banking sector valuations are driven down by balance sheet risk and short-term prospects relating to investments and exposure to the Dubai's property sector.

Analysts argue that there is more to Dubai than property, and more to the UAE than Dubai.

Many parts of the economy remain healthy, including Dubai's traditional strengths of tourism, trade, travel and logistics.

Dubai's free zones are also a hub for knowledge economy industries such as financial advisory, media and, perhaps, technology.

There are several industries that have been crowded out by the expanding property bubble.

Lack of transparency

In addition, Abu Dhabi is planning infrastructure and energy sector investments amounting to Dh180 billion.

"The lack of transparency and flow of negative information coming from the economy during the crisis knocked investor confidence," said Khaled Masri, Head of Brokerage at Rasmala.

"However the UAE banking market is of great importance across the region and we are seeing promising signs of recovery."

"The survival of the Dubai business model is the key driver for almost all the banks in the UAE and not just the Dubai-based banks for three reasons.

"Firstly, most of the Abu Dhabi-based banks have significant operations in Dubai. Additionally, many of the Abu Dhabi-based corporates have significant operations in Dubai.

"Finally, many Abu Dhabi-based investors have investments in Dubai.

"No less importantly, the same could be said the other way around.

"In short, the economies are fully integrated.

"We believe that the risk of systemic problems has declined significantly, and the prospect of a post-crisis Dubai economy is emerging.

"With this in mind, we believe that the market implied discount rate is too high and the sector offers value.

"In addition, if our core scenario continues to evolve, we expect discount rates to decline further, and value in the banks to become clearer."

The Rasmala RBS research recommends Emirates NBD and Abu Dhabi Commercial Bank stocks ADCB as they are trading at 33 per cent and 37 per cent discount to the sector averages.

National Bank of Abu Dhabi, although trading at a premium of 45 per cent to the sector average, offers solid value compared to GCC banks in general, with little to no risk and a sustainable ROE of 20 per cent.

  • Dh180b to be invested in energy sector by Abu Dhabi
  • 45% NBAD's trading premium over sector average
  • 20% sustainable return on equity offered by NBAD