IPO frenzy termed main driving force behind UAE banks' profits

DUBAI — The IPO frenzy currently being witnessed in the UAE, coupled with other non-interest income in the form of capital gains and brokerage fee income, have been main driving force behind strong growth in the UAE banks' profits during the first half of 2005.

By A Staff Reporter

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Published: Mon 25 Jul 2005, 10:44 AM

Last updated: Thu 2 Apr 2015, 4:43 PM

"It is remarkable to see how the first half 2005 net profits for most of the banks we cover exceed full year profits from the previous year. However, the recent slashing of brokerage fees by the market regulator will have an effect on non-interest income moving forward, which has played an important role so far in boosting banks' net profits and growth. Moreover, earnings growth is likely to deteriorate over the medium term as the IPO pipeline dries up, with the probability of sustaining such phenomenal growth rates being low going forwards," comments Tammam Barbir, banking sector analyst at EFG-Hermes, the region's leading full service investment bank.

According to the firm's reports, which cover a basket of UAE banks, shares in Mashreqbank and Commercial Bank of Dubai (CBD) offer the greatest potential with EFG-Hermes maintaining short term and long term buy recommendations for both.

CBD's H1 2005 net profit increased 66 per cent to Dh249 million from Dh150 million for the same period last year. Commenting on the bank's performance, he said: "The bank's strong growth is not reflected in the share price, and CBD continues to be "ignored" with the share price under performing market peers. We see no reason to justify such a lackluster performance with the bank posting strong results that are in line with market peers."

Mashrebank's net income increased from Dh338 million during H1 2004 to Dh677 million during H1 2005, with the results continuing to reflect the bank's philosophy of aggressively growing non-interest sources of income and booking high loan loss provisions relative to income before provisions.

The bank's shares are among the most tightly held, with a bid-offer spread above 10 per cent. "Increasing the number of free float shares through a stock split or selling a part of the Al Ghurair family's 87 per cent stake could act as a catalyst to increased movement in the share price," he said.

Another short term 'buy' recommendation was given to Abu Dhabi Commercial Bank (ADCB), which posted a 178 per cent increase in H1 2005 net profits to Dh844 million. The bank witnessed a remarkable surge in fees and commissions, driven by subscription fees from two IPOs (Abaar and Surooh Real Estate), but also a widening in spreads as the bank is increasing its exposure to high yielding assets. ADCB has been amongst the most aggressive banks in rolling out new products or forming alliances, with the resulting increased operating expenses are more than covered by one-off IPO gains.

National Bank of Abu Dhabi (NBAD) is beyond any doubt the clear beneficiary of the appreciation in the prices of financial assets, impressive trading activity on the local bourses and the unprecedented IPO boom. The bank reported a 166 per cent rise in H1 2005 net profit of Dh1, 338 million, compared to Dh503 million posted during H1 2004.

"Earnings from investment banking operations, the main earnings generator for the bank, will be heavily challenged as brokerage commissions have been halved, prices of financial assets have fallen sharply and the number of IPOs coming on stream is likely to diminish. Consequently, the likelihood of the bank reporting negative earnings growth over the medium term or even a slowdown in earnings growth over the short term is now greater. We therefore maintain our short term neutral and long term reduce recommendations," Barbir said.

EFG-Hermes' coverage gave a short term accumulate recommendation and a long term reduce recommendation to both First Gulf Bank (FGB) and Union National Bank (UNB).

FGB's first half profits for 2005 have surpassed full year 2004 profits by 90 per cent. The bank's H1 2005 net income stood at Dh349 million compared to Dh111million for H1 2004. "The strong results for Q2 2005 — both net interest income and IPO fees — are partly the result of the effect of the IPO of Sorouh Real Estate, for which FGB was the lead manager. We believe that underlying earnings will experience strong growth on the back of an expected increase in the loan to deposit ratio. However, we still believe that earnings will deteriorate as the IPO pipeline dries up," he said.

Strong growth in non-interest income helped UNB report a 131 per cent increase in H1 2005 profits to Dh523 million. "Our concern centres on the quality of non-interest income, the effect of declining spreads on the back of rising interest rates, coupled with the impact of increased exposure to government and public sector companies on profitability. Moreover, the effect of the planned expansion is yet to be seen given the highly competitive market."

EFG-Hermes has a short and long term reduce recommendation on Emirates Bank International (EBI). The trend of rapid credit growth that has been a characteristic of EBI was broken in second quarter of 2005, with the loan to deposit ratio declining from a sector high of 165 per cent in Q1 2005 to 135 per cent in Q2 2005.

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