Abu Dhabi Commercial Bank (ADCB) was once one of the more cutting-edge banks in the Emirates, but its derivatives exposure and aggressive lending left it chastened.
Since the financial crisis, its focus has been on worthy but dull core business such as retail and commercial lending. It turns out investors rather like that kind of restraint these days.
While the rest of the sector showed little movement yesterday, ADCB rose 3.75 per cent to Dh2.49 a share on an "overweight" rating by Morgan Stanley. In a note on the banking sector, Morgan Stanley set a target share price of Dh2.60 for ADCB. Analysts cited the growing availability of credit in the UAE along with a decline in provisions throughout the country's banking sector. "This year is definitely looking better than last year," said Murad Ansari, an analyst at EFG-Hermes. Banks' provisioning for exposure to defaulting conglomerates including Dubai World and the Saad and Al Gosaibi groupshad been largely addressed, he said.
"On top of that, [ADCB has] the Royal Bank of Scotland (RBS) retail operation, which can add a good amount in terms of profitability," Mr Ansari said. ADCB bought RBS's retail operations in the UAE last year. Traders also said ADCB's shares rose in anticipation of a liquidity boost from the expected sale of its 25 per cent stake in the Malaysian lender RHB Capital.
But the growing strength of the UAE economy was the biggest reason for optimism.
"In view of the bank's strong bottom-line growth witnessed during the last two quarters of 2010, we are updating our rating from underweight to overweight on ADCB," Taib Securities said in a research note.
"Banks remain well-capitalised with capital adequacy ratios well above the Central Bank's stipulated level, eliminating any liquidation risks. We believe that the UAE banking industry is likely to witness gradual increase in credit disbursal, which will manifest in strong top-line and bottom-line growth."
Although its forecast for UAE banks was upbeat, Morgan Stanley warned that risks remained: "Our forecasts could prove too high if loan growth does not recover or cost of risk does not stabilise."