UAE banks outperform lenders in US and emerging markets, EFG Hermes says

With strong fundamentals, the banking sector has bright prospects for future growth

Emirates NBD is among top banking picks for EFG Hermes. Ravindranath K / The National

Share prices of major UAE lenders have outperformed banks in the US and other emerging markets, driven by strong fundamentals and prospects of future growth.

The “share price composite” of lenders in the Arab world’s second-largest economy is up 2 per cent year-to-date, which does not truly reflect the nine-month profit growth of 26 per cent, EFG Hermes said in a research note on Tuesday.

The rush of initial public offerings in the country has kept investors — who usually hunt yields in banking stocks — has overshadowed trading in banking stocks and diverted funds to new listings.

“While this [rise in stock prices] may seem low, on a relative basis, UAE banks have outperformed US banks (-18 per cent year-to-date) and EM banks (-10 per cent),” EFG Hermes analysts Shabbir Malik and Omnia Kadry said in the report.

“We believe that the IPOs that occurred this year in the UAE, particularly those offering high dividend yields, took some shine off UAE banks.”

While UAE banks’ stocks collectively are up modestly, individual stocks from the sector have outperformed with significantly larger margins, with Abu Dhabi Islamic Bank rising 34 per cent since the beginning of the year, Abu Dhabi Commercial Bank up 11 per cent and Dubai Islamic Bank jumping 7 per cent over that period, EFG Hermes analysts said.

Banks in the UAE are among the highest dividend-paying stocks and are usually targeted by retail and institutional investors hunting yields.

However, they have not garnered the usual attention in recent quarters amid a flurry of IPOs in the country.

Unlike global markets that have had subdued investor sentiment amid soaring inflation and rising recession fears, investors have been flocking to buy into fresh listings in Dubai and Abu Dhabi.

Overall, there were 24 IPOs in the first half of this year in the Mena region, where the UAE was the biggest IPO market in terms of aggregate value of deals, EY data indicated.

Americana, operator of the KFC and Pizza Hut franchises in the Middle East, has increased the size of the retail component of its IPO in the UAE to accommodate investor demand.

Last week, Schools operator Taleem raised $204 million through its public float in a deal that was more than 18 times oversubscribed. Emirates Central Cooling Systems Corporation’s $724 million IPO transaction was 47 times oversubscribed.

The Dubai Financial Market is up about 5 per cent year to date, while the Abu Dhabi - FTSE ADX General Index is up around 23 per cent since the start of this year.

EFG Hermes said despite the relatively subdued stock market performance of lenders, the fundamentals of the UAE banking composite it tracks, remain solid.

There is ample liquidity, with the third-quarter loans to deposit ratio of 74 per cent for banks in the EFG Hermes coverage universe.

“Most of them are well-capitalised, and their valuations … are relatively low,” EFG Hermes said.

“We are likely to see the full-year impact of higher NIMs [net interest margin] in 2023, which should drive revenue growth.”

Dubai’s Emirates NBD, ADIB, and DIB are top picks for EFG Hermes.

“We like ENBD as it has a multi-faceted growth model and is well positioned to raise its dividend. ADIB offers a sector-leading return on equity (2023 estimate at 21 per cent) and earnings growth of 16 per cent,” EFG Hermes analysts said.

“DIB is a levered play on Dubai’s macro [economy], with a strong position in mortgages, and trading at attractive multiples.”