Global values Abu Dhabi Islamic Bank at AED8.7 and recommends a BUY on the stock.

Global Investment House - Kuwait - Abu Dhabi Islamic Bank (ADIB) - Investment Update -Abu Dhabi Islamic Bank PJSC (ADIB) was established and incorporated as a public joint stock on 20 May 1997 in Abu Dhabi, UAE by the Government of Abu Dhabi pursuant to the UAE Federal Companies Law (as amended), Ministerial Decree No. (103) of 1997 and Amiri Decree No. (9) of 1997. It is a full-service Shariah-compliant bank with retail, commercial, and corporate divisions. ADIB also operates a treasury division and an investment banking division which manage the bank's surplus liquidity, foreign exchange services and investment products business. In addition to operating its own business divisions and subsidiaries, ADIB is also a major investor in Bosnia Bank International (27% stake) which provides Islamic banking services to its customers in Bosnia and Abu Dhabi National Takaful PJSC (23% stake) which provides Islamic insurance products and services. ADIB currently operates 43 branches in the UAE through 1,228 employees with a network of 72 ATMs linked across the UAE.

ADIB exhibited a net profit growth of 35%YoY in 2007 following a steadily normalizing growth curve. Albeit the bank's growth has decreased ever since its peak in 2005, escalation in the bottom-line (2003-2006 CAGR of 66%) is still remarkable and therefore demands investor attention. Net Commission Income has been the primary driver behind profitability with incremental Net Commission Income contributing 56% of the incremental total income in contrast with a contribution of just 33% in the previous year. Both Net Commission Income and Non-Commission Income exhibited robust growth with the former surging 35%YoY in 2007 and at a 2003-2007 CAGR of 56% while the latter grew 63%YoY in 2007 and at a 2003-2007 CAGR of 66%. As was the case in many banks, the Net Commission Income was propelled by volumetric growth alone. The effect of the spreads tapering-off slightly, was countered by a 19%YoY surge in Financing and Investing Assets.

Non-Commission income of ADIB had a resounding effect coming from both investment income and fee, commission and forex income, both growing substantially by 35% and 78% respectively in 2007. Investment income was duly supplemented by gains from sale of investment properties, which exhibited windfall appreciation over the previous year and constituted over two-thirds of the investment and other income. The growth in investments and financings assets was aided by customer deposits which were augmented by 24%YoY and grew at a healthy 2004-2007 CAGR of 46%.

Albeit, the asset quality of the bank has deteriorated since 2003, it is interesting to note that the provisions to gross financing assets ratio, is still very low when compared to its peers and affirms robust asset quality.

ADIB's payout ratio (inclusive of Bonus) has averaged at 46% over the last 4 years and reached a high of 58% in 2005. Payouts have been given in the form of cash dividends with bonus coming in only one instance, that is in 2005 when no cash was given. Cash dividends per share have increased at a 2004-2007 CAGR of 42% but are expected to decline owing simply to the stock split and the conversion of Sukuks. While this conversion may have a trivial diluting impact on the dividends earned by investors, the stock split will not have a similar effect on the cash returns.

ADIB exhibited a stunning 48%YoY growth in its bottom-line in the first quarter of the current year. Net Commission Income grew a supernormal 67%YoY on account of a substantial decrease in distribution to depositors and Sukuk holders. Despite YTD stagnancy in deposits, total financing & investing assets presented a 10%YTD growth which bodes well for the top-line of the bank. Furthermore, a rise in investment properties was also seen during the quarter which jumped 53%YTD. Non-Commission Income also grew by a substantial yet sustainable 30%YoY on the back of higher fee, commission and FX income and gains on investments and other income. Higher administrative and personnel costs coupled with rising provisions that doubled over the year, partially offset the surge in the top-line which still managed to exhibit stellar growth.

With a global vision, strong presence in the UAE with a stronger one in its own Emirate, sprouting opportunities for development plans in Abu Dhabi exceeding US$200bn and the unfaltering patronage of the Government of Abu Dhabi, all add up to compel us to have a positive view regarding the bank. Key areas of potential growth for the bank are its international operations, the high-yielding retail & commercial segment and the personal loans sub-segment. Furthermore, a great chunk of advisory and fee income from mega infrastructure projects being undertaken in Abu Dhabi may fall in ADIB's lap given its affiliation with the Government of Abu Dhabi and the Abu Dhabi Investment Council.

ADIB is expected to register a 50%YoY profit growth in 2008 while the same is expected to rise at a 2007-2011 CAGR of 29%. Net Commission Income and Non-Commission Income is forecast to maintain a growth trajectory (2007-2011 CAGR) of 22% and 25% respectively. Since spreads are anticipated to taper-off slightly till 2009 and then onwards increase, the growth in the bottom-line as per our assumptions, will follow a similar path. As with other banks, volumetric growth is anticipated to be the 'key' word with Financing & Investing assets forecast to grow at a 4-yr (2007-2011) CAGR of 21%.

Based on the current market price of AED6.4/share (as on May 08, 2008), ADIB is trading at a 2008E P/E and P/BV multiple of 11.0x and 2.2x respectively. Our estimated value for this banking scrip is worked out to be AED8.7 based on the DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers an upside of 36%; we therefore recommend a BUY on the scrip.

[c] 2008 Al Bawaba (www.albawaba.com)