Table of Contents
Investment thesis .....................................................................4
Timing should benefit UAE banks...............................................................................4
Sufficient provision coverage, better capitalization.....................................................5
Growth rates to slow down ..........................................................................................6
We expect M&A activity to pick up ............................................................................7
Attractively valued; NBAD is our top pick..................................................................7
Valuations and risks to our estimates ..................................10
CAMEL Ranking – NBAD comes out at the top.......................................................10
NBAD and FGB look attractive vs. CEEMEA peers.................................................11
Gordon growth valuations..........................................................................................13
Key risks to our target prices and ratings...................................................................14
UAE Banking Themes ............................................................17
Banking system structure – growth to slow ........................18
Oil =>GDP growth=>banking assets growth.............................................................18
Strong growth expected to slow.................................................................................19
Leverage discomfort ..................................................................................................21
Liquidity squeeze.......................................................................................................25
Support measures implemented by authorities ..........................................................26
Government supported deposits growth in 4Q08 and 1Q09 ......................................27
Scenario analysis to gauge new deposits required for 100% L/D ratio......................28
Asset quality – expected deterioration below CEEMEA
peers........................................................................................30
Deterioration in asset quality globally .......................................................................30
Evolution of UAE asset quality .................................................................................31
Significant correction in real estate prices .................................................................33
Population decline this year cannot be ruled out........................................................34
Potential repossessions could be expected to rise ......................................................36
Risks increased in personal lending...........................................................................37
UAE credit card defaults rising as per industry participants......................................38
And in the SME sector...............................................................................................39
Corporate lending preferred vs. retail ........................................................................40
Ghosts of crises past – Asian banks crisis..................................................................42
Ghosts of crisis present: Kazakh banks – a case study ..............................................46
Healthy pre-provisioning profits buffer ................................50
Economic indicators during previous highly synchronized recessions......................50
Our estimates of core elements for Abu Dhabi banks................................................51
Drilling down these estimates to pre-provision operating profits ..............................54
Highlights of impairment policies of NBAD, FGB and ADCB.................................55
Capital adequacy – best CARs in CEEMEA space ..............57
Among the best capitalized banks in CEEMEA space ..............................................57
Capital intervention in Q1’09 ....................................................................................58
Consolidation likely in next 4-6 quarters..............................61
Strong potential for M&A activity in UAE banks .....................................................61
We see M&A happening in 4-6 quarters from now...................................................62
Bank consolidation in UAE to date limited vs. MENA overall .................................63
Catalysts for future activity – central bank support is key.........................................64
Top GCC banks .........................................................................................................66
Company Profiles...................................................................69
National Bank of Abu Dhabi ..................................................70
Our preferred stock in UAE banking; initiate with OW ............................................70
Valuation....................................................................................................................70
Key risks to our rating and target price......................................................................71
First Gulf Bank........................................................................73
NPL bearing capacity better vs. peers; initiate with OW...........................................73
Valuation....................................................................................................................73
Key risks to our rating and target price......................................................................74
Abu Dhabi Commercial Bank ................................................76
Issues to address; initiate with Neutral.......................................................................76
Valuation....................................................................................................................77
Key risks to our rating and target price......................................................................77
Appendix .................................................................................79
Key forecasts of the J.P. Morgan economics underlying our estimates.....................79
UAE’s positioning on the global emerging market banking landscape .....................80