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Renaissance Capital: UAE banks are a bright spot in EMEA.

Renaissance Capital initiate coverage on First Gulf Bank (FGB), Dubai Islamic Bank (DIB) and National Bank of Ras Al-Khaimah (RAK Bank) with a BUY rating and respective TPs of AED 17.7, AED 9.5, and AED 11.2.

"Of the three banks, we believe RAK Bank has the most attractive consumer franchise today, but FGB has the most potential to drive innovation and change. Near term, DIB has the best growth outlook, in our opinion, and is our top sector pick.

"The UAE continues to show a relatively attractive macro picture, in our view, comprising large fiscal savings, strong population growth, and the GCC's strongest non-oil economic base. We see limited risk of system shocks, while the IMF expects real GDP growth to average 3.2 per cent in 2015-16, (4.5 per cent for non-oil growth).We forecast avg. y/y deposit and asset growth of 13.6 per cent and 12.2 per cent, respectively, over 2015-17. The peg to the dollar provides some defence against adverse FX moves, while Fed action should, on balance, benefit bank margins.

"Our 2015-17 forecasts indicate average credit growth of 9.3 per cent until 2017 for the three banks, driven by comfortable liquidity, ongoing deposit growth, solid capital levels (system Tier 1 c.16 per cent), and on the demand side, private sector growth, state-led infrastructure and competition. We forecast median EPS growth of 10.7 per cent for 2015-17E, and median RoAE of 20.2 per cent. On a like-for-like (LfL) basis (in US dollars) we think the forecast growth and returns screen well against EMEA peers.

"We think the evolution of banking is likely to be all about technology, mobile and digitisation, given the smaller but wealthier population and high mobile and internet penetration levels. Of the three banks we initiate coverage on in this report, we believe RAK Bank has the most attractive consumer franchise today, but FGB has the most potential to drive innovation and change in the long run.

"We initiate coverage on FGB, DIB and RAK Bank with a BUY rating and respective TPs of AED 17.7, AED 9.5, and AED 11.2. The average upside potential is 37 per cent. Our top pick is DIB for near-term growth and relative valuations. Our valuations are based on a Gordon growth model (GGM), with a median CoE of 11 per cent, RoAE of 20 per cent and a terminal growth rate of three per cent. Key downside risks to our forecasts and valuations include sharper margin compression, lower growth and higher provision costs. Structurally, the UAE remains exposed to prolonged weakness in oil prices."

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Publication:CPI Financial
Geographic Code:7UNIT
Date:Jun 8, 2015
Words:454
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