NBK Capital upgrades NBAD to buy

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NBK Capital said on 29 December that it had upgraded its recommendation for shares in National Bank of Abu Dhabi (NBAD) to buy from hold despite cutting their fair value assessment.

“We have cut our fair value by 19 per cent to AED 9.50 per share, which is 19 per cent higher than the last closing price; therefore, we change our recommendation from hold to buy,” NBK Capital said. “The key reasons for the cut to our fair value are the weakening sector-wide fundamentals, including slower loan growth and revenues. That said, we believe that the impact of the sector slowdown is likely to be milder on NBAD than on its peers, as we think the bank is better positioned in terms of liquidity and in terms of its corporate-centric balance sheet (total non-personal loans account for 84 per cent of overall loans).”

NBAD said it expected loan growth to slow to 4 per cent in 2016 from 8 per cent forecast in 2015, followed by a compound annual growth rate (CAGR) of around 6 per cent over 2017-19, in line with the sector.

“We expect cost growth to broadly realign with revenue growth in the forecast horizon (for the first time in many years), as the management believes that the cost efficiency synergies will likely play out starting next year,” NBK Capital said. “All in all, we expect the bank’s net profit to decline marginally (2 per cent) in 2016, but to pick up thereafter, resulting in a CAGR of around 7 per cent for 2017-19. The key downside risks to our view could come for higher-than-expected provisioning and cost growth.”

NBK Capital said NBAD has an advantage over peers in terms of balance sheet liquidity, suggesting that it has more headroom to grow. Its deposit base is more diversified than its peers, with one-third of deposits coming from outside the UAE.

“The bank still faces a risk of decreasing public-sector sector deposits (36 per cent of total deposits), but the increasing significance of the international business should partially compensate any further drawdown of public-sector deposits,” NBK Capital said. “We forecast revenue growth will remain positive in 2016; (the) non-interest income strategy (is) working. Despite the expected slowdown in loan growth in 2016, we forecast positive revenue growth in that year driven by increasing NIMs (non-interest margins) and decent non-interest income growth (+4 per cent).

NBAD said investors should favour UAE banks with a relatively strong asset quality profile such as NBAD, which has the lowest NPL ratio in the sector.