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EEMEA Banks Strategy: Pivoting to dividend hikes - BofA Merrill Lynch.

In Hello Goldilocks! Bullish on Asia/EM Equities, BofA Merrill Lynch strategists turned incrementally more bullish on EM as an asset class arguing that tail risks reduced and global growth was proving to be more resilient.

Within EEMEA growth is evident, however, in this report BofA Merrill Lynch highlights growth and higher dividends could increasingly become the base case for investors. Specifically BofA Merrill Lynch sees four reasons to be more positive about excess capital and higher dividends at EEMEA banks. (1) The macro is improving (2) capital ratios are strong (3) the bad debt cycle is improving and (4) currency risks are diminishing, in many EEMEA countries. In an environment where DM growth is lagging notably and interest rate hikes are pushed outwards, BofA Merrill Lynch thinks attractive dividend stories should deserve richer multiples. We buy Komercni, Moneta, DIB, ADCB and Samba for this theme.

BofAML's excess capital framework for EEMEA banks

With an improving climate for dividends in EEMEA, BofA Merrill Lynch has brought together oits EEMEA banks team and launched an excess capital framework. BofA Merrill Lynch assess capital ratios at the banks against the broader "capital climate" of Basel requirements, local regulatory requirements, management targets, bad debt cycles and risks to currency weakness. The analysis reveals segments of EEMEA where the climate is ripe for excess capital to be released, even when accounting for already expected dividends and growth.

A MENA upgrade on excess capital

MENA banks screen particularly well in our framework: high capital ratios, relative resilience of capital to currency weakness and a relatively benign asset quality cycle. Hootan Yazhari likes both UAE and Saudi banks, upgrading POs and dividend expectations of the Saudi banks today (KSA banks (16-Aug)). Our analysis shows that, even with upgraded dividend expectations, capital ratios remain significantly above key benchmark levels at banks in both Saudi Arabia and the UAE.

Attractive dividend stories in EEMEA trade at a premium

UAE banks with dividend yields in excess of the Risk Free Rate are not pricing in the attractiveness of their yields, we think (Chart 1). They trade on relatively low multiples of 7.5x PE 18E vs the 9.1x EEMEA banks average. BofA Merrill Lynch considers the case studies of Pekao and Komercni that saw significant re-ratings as capital ratios rose considerably above regulatory requirements and made way for higher dividends (Komercni re-rated from c9x to a peak of c16x; Pekao from c12x to a peak of c18x, 12m fwd PE).

Buy Komercni, Moneta, DIB, ADCB, Samba for divi theme

EEMEA banks trade on 9.1x PE 18E, below European peers (12.0x) and GEM, LatAM and EM Asia averages (9.7-10.4x). EEMEA banks trade on 1.23x P/TBV 18E for a ROTE of 14.9 per cent. GEM peers are on a higher multiple, 1.35x, with lower ROTEs, 13.3 per cent. Dividend yields are 4.8 per cent on average in EEMEA vs 4.0-4.2 per cent in the other regions. We have Buys on dividend names in CEE (Komercni, Moneta) and MENA (DIB, ADCB, Samba).

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Publication:CPI Financial
Date:Aug 17, 2017
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