The value case for Abu Dhabi bank shares

UAE banking sector assets exceed those of Saudi Arabia and Egypt, respectively the largest consumer economy and the most populous state in the Arab world.

The UAE is also unique since Dubai’s role as a tourist, aviation, retail and financial hub is matched by Abu Dhabi’s estimated $2 trillion in sovereign wealth fund assets and 100 billion barrels of proven crude oil reserves. The UAE banks are unquestionably proxies for the most vibrant, diverse, globally integrated and well managed economy in the Arab world.

The oil price crash has led to lower non-oil GDP growth and slower loan growth in UAE banks. The UAE bank loan/deposit ratio is now 97 per cent, down from 108 per cent at the height of the credit crisis. EIBOR money market curves no longer show any evidence of liquidity stress. The Dubai property market peaked in April 2014 and home values have fallen by 20 per cent even as property transactions have more than halved in this period.

The post-Crimea/Ukraine banking sanctions on Russia and the collapse of the rouble have had a negative impact on Russian tourism (400,000 arrivals in 2013) and property ownership in Dubai.

While most UAE banks reported blowout Q1 earnings, softer credit demand, slower loan growth, declines in securities brokerage fees, trade finance, loan guarantees and remittances will trim earnings growth.

However, UAE bank shares peaked last April and now offer attractive risk/reward calculus. This is finally a sector where value metrics create attractive trading and investment opportunities in 2015 to 2016.

National Bank of Abu Dhabi (NBAD), thanks to its Abu Dhabi government ownership pedigree, has the lowest funding cost and highest asset quality of any UAE bank. However, earnings growth in NBAD will be lower than ADCB and UNB. That said, NBAD offers value below Dhs12 for a Dhs14 target.

ADCB could well be the best performing bank share in 2015 to 2016. The sell off since October creates an attractive entry point for Abu Dhabi’s second largest money centre bank. ADCB trades at nine times earnings and 1.6 times price/book value, cheap for a bank that can deliver a return on equity (ROE) of 18 per cent and a return on assets of 2 per cent. The ADCB dividend yield is also an attractive 6.8 per cent, the nonperforming (NPL) loan coverage ratio is 137 per cent and the Basle Tier One capital ratio is 17 per cent, making ADCB one of the safest banks in the Middle East. This bank has the potential to deliver at least a 20 per cent total return in the next 12 months, particularly as its weight in the MSCI emerging market index rises.

Union National Bank (UNB) is the only major bank in the UAE owned by both the Abu Dhabi and Dubai governments. The bank is among the cheapest in the UAE, trading at 8.4 times its earnings. UNB shares have risen a stellar 17 per cent in the past three months but the bank has an underleveraged balance sheet, significant potential for accelerated loan growth, cost restructuring and a higher dividend payout. My buy/sell zone for UNB is Dhs6 to Dhs8 in 2015.

Outside UAE banks, Sharjah’s Air Arabia is the most attractive low cost carrier in the GCC, the Arab world and possibly even the emerging markets, given the current woes of Air Asia and Pegasus.

The financial crisis in Russia has resulted in a decline in yields but passenger traffic is still robust at a 10 per cent annual rate.

Air Arabia has one of the youngest fleets in the Arab world and its current 39 plane fleet could rise to 50 in the next two years. Air Arabia is inexpensive at 12 times earnings, a 6 per cent dividend yield and a free cash flow yield higher than 9.5 per cent. High fuel costs, wars in the Middle East and another swoon in the euro could provide even cheaper entry points for Air Arabia, possibly as low as Dhs1.4.