Dubai

On the back of recent global volatility, GCC regional markets still remain under correction territory, with DFM shedding the most from this year’s highs (-6 per cent), followed by Qatar (-4.2 per cent), Tadawul (-2.3 per cent), Oman (-2 per cent) and ADX (-1.4 per cent). Well, not surprising at all as we believe that no markets is truly immune to a global correction.

Historically, GCC equity markets were impacted by the spill over/disruption from global and regional markets. The spill over effect in the past were significant regardless of the degree of foreign participation. The regional markets are predominantly retail driven, and like any rational individual the initial reaction is to cut the losses and stay out until conviction reappears. Such volatility during earning season can be more painful, as a weaker results gets penalised more than required, however good ones unlikely to get their due. Finding bargains in a falling market is not easy, as fundamental/value stories will stop to play to its full potential, resulting in a sentiment driven market. However these corrections then become interesting for risk taking investors, as they could find some fundamental plays with juicy entry points. We note that GCC banking valuations 1.3x 2018 book and 10.5x 2018 earnings is not overdone, like elsewhere in the world, suggesting limited downside. Typically in the regional markets, initial sell-off are retail driven, however the institutional investors set to catch the rally first. At large the initial sell-off is broad-based without any rational /fundamental stops — most liquid stocks tend to get largely impacted. However, more likely than not, the selective rationalisation will pan out post the initial dips, and regional/sector/stock differentiation will play out, resulting in an orderly approach to the situation on hand.

In the UAE, fourth quarter results of Dubai-based banks came better than market expectations, while Abu Dhabi banking sector saw broadly muted growth in net profit for 2017 (and came slightly shy of market expectation). However, it is interesting to note that ADX banks are up 7.5 per cent YTD while DFM banks are just up 3 per cent. This trend is quite astonishing despite better than expected results from DIB/ENBD/ CBD versus less assuring results from Abu Dhabi banks such as UNB, RakBank and ADCB. However, the key difference was Abu Dhabi banks surprised the market positively on dividends while both DIB and ENBD came broadly in line with the market/ similar to last year numbers. UNB came with similar DPS despite a huge earnings miss, Rakbank and FAB came out with a phenomenal dividend payout of 62 per cent and 72 per cent of earnings respectively, while ADCB inched up their DPS by two notches. We failed to see such impactful dividends announcement among the Dubai banks, which is possibly one of the reasons for this divergent performance. The second reason for the underperformance, especially for DIB is announcement of capital increase via rights, which was not well received by the market. Cash calls are less popular with shareholders in this region, at least the initial reaction is always negative. Management’s motive for raising money by selling new shares — normally at a discount to mollify investors — is very often another major cause for discontent. Let’s not forget we are predominantly a retail driven market;

historically the market has been a buyer of bonus shares and sellers of rights as the panic of dilution kicks in, and return on incremental capital takes a back seat. Accordingly, we expect to see some near term weakness for DIB, and the positive reaction to the fundamental growth is likely to get pushed post rights issue. On the other hand, we expect revival in profitability for majority of the Abu Dhabi banks coming from — a better growth cycle and tampering down risk cycle. We anticipate pick up in lending growth on the back of revival of government spending this year (firm oil price to support revival in spending plans). We also believe risk cycle appears to have peaked for majority of the banks, and we could see some relief on new NPL formation, and hence beginning of normalisation of cost of risks. Additionally, the willingness and ability of these banks to pay higher dividends will see the Abu Dhabi banking index performing better than DFM banking index in 2018.

Aarthi Chandrasekaran is Vice-President of Shuaa Capital. She may be reached at im@shuaa.com