Abu Dhabi Islamic Bank – 3Q17 Review

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1. TP : AED 4.20 / share Abu Dhabi Islamic Bank – 3Q17 Review Accumulate Recommendation Bloomberg Ticker Current Market Price (AED) 52wk High / Low (AED) 12m Average Vol. (000) Mkt. Cap. (USD/AED mn) Shares Outstanding (mn) Free Float (%) 3m Avg Daily Turnover (000) 6m Avg Daily Turnover (000) PE 2018e (x) PBv 2018e (x) Dividend Yield (%) ADIB UH 3.77 4.1/3.4 749 3,252/11,943 3,168.0 60% 1,974 2,347 6.3 0.9 6.3% Price Performance: 1 month (%) 3 month (%) 12 month (%) Source: Bloomberg 0.53 3.29 8.65 Price-Volume Performance 4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2 3.1 6000 5000 4000 Rating upgraded to Accumulate, with Blended Target Price (TP) increased to AED 4.20 per share from the previous TP of AED 3.80, as the bank reduces its cost of risk and pursues balance sheet optimization. Our target price represents an 11.4% upside to the latest closing price, with an implied PE’18e of 6.97x and PB’18e of 1.10x. Non-Financing income jumps 34%YoY in 9M’17; Provision expense declined by 13% Net profit attributable to shareholders reached AED 1.69bn in 9M’17, up by 13%YoY on a 34%YoY increase in other operating income and a 13%YoY decrease in provision expense. Operating profit of AED 2.32bn before impairment allowances was up 5%YoY, benefiting from a controlled cost base. 9M’17 operating expenses were AED 1.86bn, an increase of 3%YoY, which resulted in a further improved cost to income ratio of 44.4% in 9M’17 compared to 45.5% for FY16. Income statement (AED'000) Net financing income Other income Total income Operating expense Operating Profit Provisions Profit before taxes Taxes & Zakat Profit before minority interest Minority interest Net profit 9M 2016 2,937,658 1,006,292 4,018,430 1,813,125 2,205,305 717,830 1,510,379 11,947 1,498,432 965 1,497,467 9M 2017 2,834,588 1,348,331 4,182,919 1,864,757 2,318,162 623,446 1,716,201 23,245 1,692,956 1,092 1,691,864 YoY 17/16 -4% 34% 4% 3% 5% -13% 14% 95% 13% 13% 13% Source: U Capital Research, Company Financials 3000 2000 1000 Vol, '000 (RHS) Source: Bloomberg 9/30/2017 8/31/2017 7/31/2017 6/30/2017 5/31/2017 4/30/2017 3/31/2017 2/28/2017 1/31/2017 12/31/2016 11/30/2016 10/31/2016 0 Px, AED (LHS) Funding structure continues to improve Despite its fast loan growth in recent years (9% CAGR between 2012 and 2016), ADIB has strengthened its funding structure, with its loan-to-deposit ratio falling to 79.9% as of 9M’17 from 89% in 2011. This compares well with the UAE banking system average of ~91%, owing to a greater increase in granular retail deposits. Supported by a solid retail network, ADIB sourced most of these deposit inflows from the bank's growing retail customer portfolio, which represented around 62.4% of total deposits as of 9M’17. In the current context of low oil prices and tightened liquidity, we expect such a granular deposit base to provide the bank with a resilient funding and liquidity profile, particularly as the bank projects a more moderate loan growth than in the last five years. Asset quality metrics not alarming yet need to be watched Hettish Karmani Head of Research h.karmani@u-capital.net Tel: +968 2494 9034 Ayisha Zia Research Analyst a.zia@u-capital.net Tel: +968 24 94 90 36 With regard to the improvement in asset quality, it is worth noting that ADIB's non-performing loan (NPL) ratio has fallen to 5.1% as of 9M’17 from a peak of 11.5% as of December 2011. However, in 2016, NPL ratio stood at 3.9% of gross financing asset. Additionally, total provision coverage on impaired loans fell from 114.5% in 9M’16 to 82% in 9M’17, with specific provision coverage falling from 42.2% in 2016 to 37.5% in 9M’17. Robust Capitalization Total equity (including Tier 1 capital instruments) was AED 16.1bn for 9M’17. This represents an increase of 3.5% YoY and a 3-Yr CAGR of 6.3%. ADIB’s capital adequacy ratio under Basel II principles now stands at 16.28% with the Basel II Tier 1 capital ratio at 15.68% and a common equity tier 1 ratio of 10.06%, well above Central Bank of the UAE’s prescribed minimums of 12% for capital adequacy and 8% for Tier 1 under Basel II. P.O.BOX 1137, PC 111 – CPO, Sultanate of Oman l CR No. 1279406 l Tel: +968 2494 9000 l Fax: +968 2494 9099 l Email: info@u-capital.net l Web: www.u-capital.net 1
2. Key Revisions to Estimates We have adjusted our estimates for FY17 net loans & deposits, as the recent performance of the bank indicates slower-thanexpected growth rates. Net financing assets grew to AED 78.37bn for 9M17, a decline of 2%YTD. Customer deposits increased by 0.3%YTD to AED 99.09bn. UAE’s system wide credit growth has slowed to 0.91%YoY as of August’17 vs. 5.35%YoY as of Dec’16. AED mn Gross Loans & Financings Loan Loss Reserve & Reserve Interest Net Loans & Financings Deposits from Customers LTD Total Operating Income Provisions expense Operating Expenses Attributable Net Profit* Earlier FY'17e 119,164 39,098 80,066 100,138 80% 5,618 -1,018 -2,556 1,875 Current FY17e 122,368 43,610 78,758 99,486 79% 5,538 -871 -2,496 1,971 Var, % 3% 12% -2% -1% -1% -1% -14% -2% 5% Source: U Capital Research *Post Zakat, Taxes, Profit on Tier 1 Outlook We are estimating ADIB’s net profit to increase to AED2.18bn in 2017 (2016: AED1.95bn), supported by operating income at AED 3.042bn (2016: AED 2.90). Net financing income is expected to clock in at AED3.75bn (2016: AED 3.92bn). Non-funded income is expected to be at AED 1.78bn (2016: AED 1.43bn). We believe that operating expenses will be maintained at +3.1%, implying a cost/income ratio of 45.1%in 2017, versus 45.5% in 2016. Impairment is decreasing to AED 870mn (2016: AED 970mn). We believe that the estimated -10%YoY reduction in impairment expense and +18%YoY growth in non-funded income are primarily driving ADIB’s net profit growth in 2017. We expect contraction in financing income, and therefore any positive surprise on that front is an upside risk to our valuation. The downside risk to our forecast arises from too optimistic an expectation of cost of risk decline. The bank has been pursuing international growth opportunities, with the growing acceptance of Islamic banking worldwide; ADIB is increasingly turning its attention to replicating its business model through systematic geographic expansion. ADIB’s international expansion began in Egypt with the acquisition via a joint venture structure of National Bank of Development followed by the establishment of Iraq, UK, Saudi Arabia operations and will continue with the new operations in Qatar and Sudan. ADIB is also in the process of applying for banking licenses in a range of other countries. TP offers an upside of 11.4% to CMP; Implies PE’18e of 6.97x and PB’17e of 1.10x Our target price offers an upside of 11.4% compared to the current market price. The bank is trading at 1.09x book value, but we believe that given its improving earnings profile, as indicated by its 9M’17 performance, and cautious growth strategy, the bank is trading at a discount to its fair value. Its strong core operating performance, which warrants sustained dividend payouts over the forecast period, primarily drives the bank’s valuation. Furthermore, market conditions are expected to improve as macroeconomic environment eases with fiscal consolidation, stronger global trade and higher Dubai Expo 2020 investment. The UAE will see non-oil GDP growth hitting 3.3%1 this year. Real GDP growth is expected to be 1.34% in 2017 and 3.36% in 20182, on improvement in oil prices. 1 2 IMF estimates IMF estimates 2
3. Key Financials (AED mn) Income Statement Fi na nci ng Income Interes t Expens e/Pa yment to Depos i tors Net Interest/Financing Income Fee & Commi s s i on Income Other Income Total Non-Interest/Financing Income 2014 2015 2016 2017e 2018e 2019e 4,133 628 3,505 739 332 1,071 4,388 617 3,771 885 458 1,343 4,529 608 3,921 840 589 1,429 4,331 578 3,753 1,050 735 1,785 4,332 637 3,695 1,041 729 1,770 4,478 709 3,769 1,067 747 1,814 4,576 758 2,071 1,754 335 1,420 5,114 820 2,374 1,940 307 1,633 5,350 970 2,448 1,968 285 1,682 5,538 871 2,496 2,206 236 1,971 5,465 904 2,459 2,136 228 1,908 5,583 959 2,535 2,128 227 1,901 18,758 6,270 6,429 98,058 25,052 73,006 7,441 111,904 18,629 4,742 8,736 114,650 36,246 78,403 7,867 118,378 19,778 4,246 10,460 118,931 38,958 79,973 7,832 122,290 25,466 1,805 10,301 122,368 43,610 78,758 8,105 124,436 29,383 1,850 10,559 125,428 44,701 80,727 8,298 130,816 31,838 1,896 10,823 128,563 45,818 82,745 8,494 135,797 5,476 84,776 10,234 3,374 3,106 94,927 7,508 3,433 5,154 98,814 5,673 2,863 5,189 99,486 5,673 3,137 5,447 104,436 5,673 3,215 5,635 108,036 5,673 3,296 Pa i d-up Ca pi ta l 3,000 3,168 Reta i ned Ea rni ngs 1,245 1,859 Other Res erves 3,799 4,376 Sha rehol ders ' Equi ty 8,044 9,403 Total Equity & Liability 111,904 118,378 Cash Flow Statement Ca s h from opera ti ons (2,175.4) 5,291.8 Ca s h from i nves ti ng a cti vi ti es 481.0 2,421.3 Ca s h from fi na nci ng (806.7) (2,998.8) Net cha nges i n ca s h (3,463.2) (128.2) Ca s h a t the end of peri od 18,758 18,629 Key Ratios Return on Avera ge As s ets 1.3% 1.4% Return on Avera ge Equi ty 18.3% 18.7% Recurri ng Income/Opera ti ng Income 92.7% 91.0% Yi el d on Fi na nci ng As s ets 4.12% 4.95% Cos t of Funds 0.67% 0.63% Net Sprea d 3.45% 4.33% Cos t to Income Ra ti o 45.3% 46.4% Net Loa ns to Cus tomer Depos i ts 86.1% 82.6% Non Performi ng Loa ns (AED mn) 757 1,289 Loa n Los s Res erve 2,753 2,995 NPLs to Gros s Loa ns 0.8% 1.8% NPL Covera ge 363.7% 232.3% Cos t of Ri s k (bps ) 83.3 92.6 Equi ty to Gros s Loa ns 8.2% 8.2% Equi ty to Tota l As s ets 7.2% 7.9% Di vi dend Pa yout Ra ti o 46.7% 47.1% Adjus ted EPS (AED) 0.47 0.52 Adjus ted BVPS (AED) 2.68 2.97 Ma rket Pri ce (AED) * 5.57 3.94 Di vi dend Yi el d 4.0% 6.2% P/E Ra ti o (x) 11.8 7.6 P/BV Ra ti o (x) 2.1 1.3 Source: U Capital Research, Company Financials * Market price for 2017 and subsequent years based on closing price of Nov 01, 2017 3,168 2,487 4,131 9,786 122,290 3,168 3,426 4,357 10,950 124,436 3,168 4,334 4,543 12,045 130,816 3,168 5,238 4,751 13,157 135,797 7,099.5 2,815.2 (3,135.3) 1,149.0 19,778 6,530.8 36.8 (806.3) 5,687.7 25,466 5,111.0 380.3 (813.8) 3,916.9 29,383 3,634.1 389.8 (788.8) 2,455.4 31,838 1.4% 17.5% 89.0% 4.86% 0.60% 4.26% 45.8% 80.9% 1,732 3,733 2.3% 186.1% 104.1 8.2% 8.0% 46.2% 0.53 3.09 3.80 6.5% 7.2 1.2 1.6% 19.0% 86.7% 4.67% 0.55% 4.11% 45.1% 79.2% 1,782 4,499 2.3% 175.6% 93.9 8.9% 8.8% 39.8% 0.62 3.46 3.77 6.6% 6.1 1.1 1.5% 16.6% 86.7% 4.71% 0.59% 4.11% 45.0% 77.3% 1,826 5,291 1.5% 175.6% 98.3 9.6% 9.2% 39.8% 0.60 3.80 3.77 6.4% 6.3 1.0 1.4% 15.1% 86.6% 4.75% 0.63% 4.11% 45.4% 76.6% 1,872 6,109 1.5% 175.6% 101.7 10.2% 9.7% 39.8% 0.60 4.15 3.77 6.3% 6.3 0.9 Total Operating Income Provi s i ons expens e Opera ti ng Expens es Profit Before Taxation Ta x, Mi nori ty Interes t & Sukuk profi t pa i d Attributable Net Profit Balance Sheet Ca s h Ba l a nces Depos i ts wi th Ba nks & FIs Inves tment Securi ti es Gros s Loa ns & Fi na nci ngs Loa n Los s Res erve Net Loa ns & Fi na nci ngs Other As s ets Total Assets Depos i ts from Ba nks & FIs Depos i ts from Cus tomers Other Borrowi ngs Other Li a bi l i ti es 3
4. Recommendation BUY Greater than 20 % ACCUMULATE Between +10% and +20% HOLD Between +10% and -10% REDUCE Between -10% and -20% SELL Lower than -20% Ubhar Capital SAOC (U Capital) Website: www.u-capital.net PO Box 1137 PC 111, Sultanate of Oman Tel: +968 2494 9000 Fax: +968 2494 9099 Email: research@u-capital.net Disclaimer: This report has been prepared by U Capital Research and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness, and it should not be relied upon as such. The company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from use of this report or its contents. All opinions and estimates included in this document constitute U Capital Research’s judgment as at the date of production of this report and are subject to change without notice. This report may not be reproduced, distributed or published by any recipient for any purpose. 4