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NBAD, QNB are flagship banks
11 April 2011
It is significant that Qatar and UAE are two of the wealthiest states, most politically stable countries in MENA. This is the reason I am so partial to their flagship banks Qatar National Bank (QNB) and National Bank of Abu Dhabi (NBAD).
QNB was a phenomenal performer for us since I recommended it in this column at QR125 last summer. In essence, Qatar captivated me because it offered phenomenal GDP growth (the IMF forecasts 25 per cent nominal growth, the highest in the world) a proactive and fabulously wealthy government, a surge in per capita income and LNG exports, a solidly pro-West diplomatic stance, no internal political risk and, above all, the highest bank loan growth in the GCC.
The QNB trade made as much as 80 per cent for some readers as the bank’s valuation surged since my original recommendation. QNB, the de facto government bank in Qatar, dominates an unassailable one third share in both loans and deposit, is Doha’s LNG project finance merchant banker, has an incredible 23 per cent post right issue capital adequacy ratio. QNB is unquestionably still a valuation rerating candidate though the recent Qatar Central Bank ruling that forces commercial banks to divest their Islamic finance subsidiaries will hit the strategic earnings power of the franchise. QNB is also the lowest risk bank in Qatar, since it is 50 per cent owned by the sovereign wealth fund QIA, has the lowest funding cost and NPL in the emirate.
This means it is prudent to accumulate a position in Qatar Islamic Bank, or QIB, the leading Shariah-compliant bank in the emirate, which will benefit most from the inevitable rise in Islamic loans, debt (sukuk) and project finance pricing. QIB will also increase its market share from the conventional banks, though I prefer to buy in the QR75-80 range on any correction in Doha.
NBAD is the flagship bank of the government of Abu Dhabi and a Dh7 billion operating income franchise that gives it both economies of scale and a funding cost advantage in international capital markets.
NBAD shares have been hit since the political crisis in Egypt culminated in the resignation of President Mubarak. NBAD has confirmed $400 million in loan exposure to Egypt and Libya, primarily to banks and multinationals. NBAD’s Egypt branch network is self funding. NBAD shares have been gutted since the shares peaked at 10.8 in September 2009. The Japanese investment bank Nomura notes that the UAE Central Bank ruling will hit consumer lending volumes and fee income at commercial banks. Obviously, this ruling is going to hit the profitability of all UAE commercial banks, who are saddled with corporate risk bad property loan books and no real net credit growth. The UAE Central Bank rulings, Nomura estimates, will hit bank net interest rate margins as well as fee income, though NBAD’s retail/mortgage loan book is less than a fifth of total loans, much lower than First Gulf Bank, ADCB or Emirates NBD. I believe NBAD shares will range trade between Dh9-Dh11.
Geopolitical risk in the Middle East has had a seismic impact on investor psychology and the valuation metrics in financial markets. One victim of the historic events since January is that the IPO market remains shut for companies from the Middle East. Topaz Energy and Marine an oil service firm controlled by an Omani conglomerate, was forced to cancel its planned $500 million IPO in London. It is significant that Topaz Energy blamed the “investment climate” and “market sentiment” for the cancellation of the IPO.
This suggests Middle East companies cannot price deals though Prada plans a $11 billion IPO this summer and the Glencore IPO will be a winner on the LSE! Godzilla is right. Size matters! The Golar LNG IPO is a compelling play on natural gas tankers.
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