Stocks have been heavily punished, as if we were heading
for an earnings shock. Growth has peaked and risks
mount, but nothing to justify a crash, in our view. Despite
TP cuts, we see bargains as risks look more than priced in.
Sector review
UAE
3 December 2008
UAE banks
Cold winds blow, but value
emerges: the right time to step in?
Banks
Key ratios
Bank B’berg Price
(AED)
TP
(AED)
Rec
NBAD NBAD UH 10.65 11.40 HOLD
ADCB ADCB UH 2.67 2.63 HOLD
FGB FGB UH 9.18 16.58 BUY
UNB UNB UH 3.32 4.77 BUY
Prices as at 30/11/08
Trading multiples (x)
2008F
PER
2009F
PER
2008F
P/BV
2009F
P/BV
NBAD 6.8 7.0 1.7 1.4
ADCB 6.6 6.5 1.2 1.1
FGB 4.3 4.3 1.0 0.9
UNB 4.1 4.9 0.8 0.8
TPs cut, on our downward revision of asset growth, rising cost of funds,
and as we accelerate impairment charges on worries over high real estate
exposure and ‘speculative’ personal lending. We also increase our discount
rates to reflect rising bond yields, CDS spreads and sector-specific risks.
Not a ‘goodbye’ story. Risks are exaggerated, in our view, and look
more than priced in. The market prices in an average implied equity discount
rate of 19.1% for Abu Dhabi banks – which we consider excessive – and
implies as if UAE banks are heading for an earnings and/or loan quality
shock. New real estate loans, including mortgage finance, initiated in 1H08
(25% of real estate loans) – the riskiest component in the loan books – are
more than 3.5x covered by equity and excess provisions. Moreover, our
stress-test analysis suggests that even with aggressive downward
assumptions (including increasing an NPL level to some 20% of 2008F’s
loan book; impaired over 2009-13F), a number of banks can still survive.
Our universe trades at historic lows and cheaper relative to peers,
with 2009F PER and P/BV of only 5.7x and 1.0x. Our TPs’ average implied
2009F PER and P/BV stand at 7.2x and 1.3x respectively.
FGB remains our top pick. FGB offers the highest potential upside
(+80.6%), based on our DDM valuations and we believe it has been penalised
excessively for its real estate exposure, even though this exposure does not
deviate significantly from the peer average. FGB’s high NIM, strong fee income
base, adequate Tier 1 capital, conservative NPLs provisioning and low
operating leverage should all help it withstand the storm and continue
outperforming. UNB is a BUY, while ADCB (ex-Buy) and NBAD are HOLD.

Contents
Executive summary 3
Remain positive on UAE banks’ valuations and overpriced risks..............................3
Our top pick remains FGB.........................................................................................4
What might the market be pricing in?........................................................................5
Overpriced risks ........................................................................................................5
UAE underperformed EMEA and EM........................................................................6
Stress testing: what if the scenario is severe? ..........................................................7
UAE banks offer upside relative to EMEA peers.......................................................9
Investment case 11
Banking stocks are heavily punished ......................................................................11
Loans: peak in the growth cycle? ............................................................................12
As the economy is highly leveraged vs peers .........................................................12
… leading government to guide banks on loan growth and capital adequacy ........13
High real estate exposure the main risk… ..............................................................14
Speculative borrowers, layoffs and income contraction also a worry......................15
Margins under pressure: UNB better positioned on shorter durations of its loan book .15
Major changes in our assumptions..........................................................................16
We remain buyers of FGB and UNB .......................................................................17
Risks........................................................................................................................19
What caused the panic? 21
Liquidity: negative on growth and margins ..............................................................21
High real estate exposure .......................................................................................23
Valuations summary 27
DDM suggests average 32% upside for our peers; FGB the highest upside of
80.6% ......................................................................................................................30
Comparative valuations: a reality check 34
The right time to get into UAE banks? 38
(1) Trading at historic lows…...................................................................................38
(2) Growth prospects remain viable ........................................................................39
FGB and UNB are on our ‘BUY’ list.........................................................................40
Companies 43
Abu Dhabi Commercial Bank ..................................................................................45
First Gulf Bank.........................................................................................................53
National Bank of Abu Dhabi ....................................................................................65
Union National Bank (UNB).....................................................................................77
Disclosures Appendix 87