National Bank of Abu Dhabi's market value should rise as funding costs fall, according to JP Morgan Chase, which raised its estimate of the bank's share price by 13 per cent yesterday.
JP Morgan said it expected lower funding costs to translate into higher revenues. JP Morgan increased its estimate to Dh17 from Dh15, with an "overweight" assessment on the bank. Shares in Abu Dhabi's second-biggest lender by assets advanced 0.85 per cent to close at Dh11.85, the highest point in more than a week. NBAD's funding costs - the money the bank pays to secure assets through deposits, debt issues or loans from other banks - has hovered between 1.2 per cent and 1.5 per cent in recent quarters, lower than JP Morgan's previous estimate of 1.8 per cent for last year.
JP Morgan said growth in the next two years would be more "benign", though a rising trend in the cost of funding would continue for NBAD and other UAE banks.
A fall in interbank borrowing has played a key factor in the reduction in the cost of funding.
The latest data from the UAE Central Bank showed the Emirates Interbank Offered Rate (Eibor) has reached its lowest point since February, with six-month Eibor rates at 2.3725 per cent.
This means it is cheaper for banks to borrow from one another as liquidity returns to the banking system and cash is more freely available. The Central Bank also revealed that in October deposits had surpassed loans for the first time, another sign of improved liquidity. The last time deposits exceeded loans was in November 2008, just as the global financial crisis was making itself felt.
But some analysts say the high prices UAE banks are paying for deposits offset the lower Eibor rates.
"The weak lending environment that has prevailed leads to competition for deposits," said Raja Ghoussoub, a banking analyst at NBK Capital in Kuwait. "I don't see a material decrease in funding costs. It is too early to talk about a significant drop," Mr Ghoussoub said.