Dubai Islamic Bank – 3Q17 Review

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1. TP : AED 7.60 / share Dubai Islamic Bank – 3Q17 Review Recommendation BUY 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 2017e (x) PBv 2017e (x) Dividend Yield (%) DIB UH 6.22 6.29/5.01 4,224 8,369/30,740 4,942.2 58% 16,068 16,495 8.4 1.7 7.4% Price Performance: 1 month (%) 3 month (%) 12 month (%) Source: Bloomberg 1.30 8.74 16.92 Price-Volume Performance 6.5 25000 6.3 20000 6.1 5.9 15000 5.7 10000 5.5 5.3 5000 5.1 4.9 Rating maintained at BUY, with Blended Target Price (TP) increased to AED 7.60 per share from the previous TP of AED 6.10, as growth story of the bank continues flouting sectorwide trends. Our blended price represents a 22% upside to the latest closing price, with an implied PE’17e of 10.3x and PB’17e of 2.0x. Impressive core 9M’17 performance amidst tight cost management 9M’17 operating income of AED 5.57bn was up by 14%YoY on account of a 14%YoY increase in total net Islamic finance income and a 12%YoY increase in other operating income. Operating profit of AED 3.83bn before impairment allowances was up 20%YoY, benefiting from a tightly managed cost base. 9M’17 operating expenses were AED 1.74bn, a slight increase of 1%YoY, which resulted in a further improved cost to income ratio of 30.7% in 9M’17 compared to 34.0% for FY16. We expect the bank to maintain cost-to-income at the current level for 2017 and marginally increase it over 2018-21e. Net profit attributable to shareholders of the bank was up by 18%YoY on account of a 61%YoY reduction in minority interest as the bank acquired part of non-controlling interest earlier in the year. Total net profit was up by 10% at AED 3.30bn. AED '000 Net Finance Income Other operating income Total income Operating expense Operating Profit Provisions Associate income Profit before taxes Taxes Profit before minority interest Minority interest Attributable net profit 9m 2016 9m17 3,404,179 1,501,061 4,905,240 1,719,127 3,186,113 304,024 145,419 3,027,508 16,882 3,010,626 330,057 2,680,569 3,893,160 1,674,901 5,568,061 1,741,439 3,826,622 618,731 113,337 3,321,228 19,845 3,301,383 128,411 3,172,972 YoY 17/16 14% 12% 14% 1% 20% 104% -22% 10% 18% 10% -61% 18% Source: U Capital Research, Company Financials Source: Bloomberg 12-Oct-17 12-Sep-17 12-Jul-17 12-Aug-17 12-Jun-17 12-Apr-17 Vol, '000 (RHS) 12-May-17 12-Mar-17 12-Jan-17 12-Feb-17 12-Dec-16 12-Oct-16 12-Nov-16 0 Px, AED (LHS) Balance sheet continues to grow; Surpassed the AED 2bn mark The total assets of the bank grew by 17%YoY, and 15%YTD to AED 201.2bn, with net financing assets having increased by 18%YoY and 14%YTD to AED 131.3bn. Deposits from customers increased by 18%YoY and 17%YTD to AED 143.5bn. Low-cost CASA deposits comprised 35 % of total customer deposits as of 9M’17. We expect deposit growth to remain in double digit over the forecast period. Asset quality intact Hettish Karmani Head of Research h.karmani@u-capital.net Tel: +968 2494 9034 Ayisha Zia Research Analyst a.zia@u-capital.net NPL and provision coverage ratios were 3.4% and 121% respectively, compared to NPL ratio of 3.9% and provision coverage ratio of 117% as at Dec’16. Cost of risk for 9M’17 was 63bps down from 81bps for 2016. NPL ratio of the bank has consistently been declining over the last few years as legacy loans are re-classified and the bank adopts a more prudent approach to credit growth. Robust Capitalization Capital adequacy ratio remained robust at 16.9% as of September 30, 2017, whilst T1 ratio stood at 16.3%; both ratios are well above regulatory requirement (Min CAR at 12% and Tier 1 at 8%) in the current Basel II regime. Tel: +968 24 94 90 36 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 better-thanexpected growth rates. Net financing assets grew to AED 131.3bn for 9M17, a growth of 14%YTD driven primarily by the continued growth of core businesses. Customer deposits increased by 17%YTD to AED 143.5bn. 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 136,076 9,083 126,993 136,551 93% 7,533 (614) (2,561) 3,222 Current FY17e 145,877 10,790 135,087 150,097 90% 7,342 (875) (2,276) 4,135 Var, % 7% 19% 6% 10% -3% -3% 43% -11% 28% Source: U Capital Research We are also expecting cost-to-income ratio to be maintained between 31% +/- 1%, resulting in net profit improvement on the back of consistently improving total income due to credit growth and improving NIMs. TP offers an upside of 22% to CMP; Implies PE’17e of 10.3x and PB’17e of 2.0x Our target price offers an upside of 22% compared to the current market price. The bank is trading at 1.7x book value, but we believe that given its quality of earnings, as indicated by its superior Roe, and indomitable growth story, it can easily command a higher price. The bank’s valuation is primarily driven by its strong core operating performance which warrants sustained dividend payouts over the forecast period. Additionally, 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. Future Plans The bank is looking to continue to expand its technological capabilities to ensure that it can benefit from the FINTECH revolution, and to provide the best customer experience with convenient product and services. With an 8% market share of the UAE credit, DIB stands to benefit from the scale, positioning and the financial strength of its operations. The bank aims to bolster its international presence further in its focus geographies to now include South East Asia, East Africa and Far East Asia. 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 Total Operating Income Provi s i ons expens e Opera ti ng Expens es Profit Before Taxation Ta xa ti on, Mi nori ty Interes t & Profi t on Sukuk 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 2015 2016 2017e 2018e 2019e 2020e 5,520 1,057 4,463 1,295 455 1,750 6,521 1,875 4,646 1,425 513 1,939 7,614 2,479 5,135 1,623 585 2,208 8,339 3,021 5,319 1,681 606 2,287 9,560 3,536 6,024 1,904 686 2,590 10,720 4,054 6,666 2,107 759 2,867 6,212 410 2,223 3,855 889 2,966 6,584 392 2,297 4,072 954 3,118 7,342 875 2,276 4,358 705 3,654 7,605 1,019 2,358 4,420 708 3,713 8,614 1,184 2,713 4,932 734 4,198 9,533 1,344 3,051 5,376 758 4,618 13,415 5,085 21,897 105,179 7,960 97,220 12,282 149,898 4,713 109,981 12,948 6,808 16,655 4,546 25,126 124,150 9,183 114,968 13,676 174,971 10,418 122,377 15,041 7,211 28,285 4,546 25,126 145,877 10,790 135,087 16,069 209,113 12,778 150,097 17,673 7,211 28,735 5,433 30,029 167,029 12,354 154,675 18,399 237,271 14,630 171,861 20,236 7,211 30,503 6,165 34,072 187,908 13,899 174,009 20,699 265,449 16,459 193,343 22,765 7,211 32,001 6,897 38,119 206,698 15,289 191,410 22,769 291,196 18,105 212,678 25,042 7,211 4,942 7,072 9,340 21,354 209,113 4,942 8,511 9,880 23,333 237,271 4,942 10,402 10,326 25,670 265,449 4,942 12,446 10,772 28,160 291,196 12,991.4 1,289.5 (71.7) 11,630.2 28,285 6,261.5 6,158.4 347.2 450.3 28,735 6,864.4 5,282.7 186.4 1,768.1 30,503 6,993.2 5,161.6 (333.7) 1,497.9 32,001 Pa i d-up Ca pi ta l 3,954 4,942 Reta i ned Ea rni ngs 4,564 5,641 Other Res erves 6,930 9,340 Sha rehol ders ' Equi ty 15,448 19,923 Total Equity & Liability 149,898 174,971 Cash Flow Statement Ca s h from opera ti ons (2,437.8) 3,847.7 Ca s h from i nves ti ng a cti vi ti es 4,751.4 3,580.1 Ca s h from fi na nci ng 4,286.6 2,972.2 Net cha nges i n ca s h (2,902.5) 3,239.8 Ca s h a t the end of peri od 13,415 16,655 Key Ratios Return on Avera ge As s ets 2.2% 1.9% Return on Avera ge Equi ty 20.1% 17.6% Recurri ng Income/Opera ti ng Income 92.7% 92.2% Interes t Ea rni ng/Fi na nci ng As s ets Yi el d 4.5% 4.4% Cos t of Funds 0.9% 1.4% Net Sprea d 3.6% 3.1% Cos t to Income Ra ti o 35.8% 34.9% Net Loa ns to Cus tomer Depos i ts 88.4% 93.9% NPLs to Gros s Loa ns 4.1% 3.8% NPL Covera ge 117.3% 117.8% Cos t of Ri s k (bps ) 33.3 26.5 Equi ty to Gros s Loa ns 12.5% 13.8% Di vi dend Pa yout Ra ti o 60.0% 71.3% Adjus ted EPS (AED) 0.75 0.63 Adjus ted BVPS (AED) 3.32 3.47 Ma rket Pri ce (AED) * 5.6 6.2 Di vi dend Yi el d, % 8.0% 7.2% P/E Ra ti o (x) 7.5 9.8 P/BV Ra ti o (x) 1.7 1.8 Source: U Capital Research, Company Financials * Market price for 2017 and subsequent years based on closing price of Oct 12, 2017 1.9% 17.7% 92.0% 4.7% 1.5% 3.2% 31.0% 90.0% 4.0% 111.9% 54.3 12.7% 62.3% 0.74 3.76 6.2 7.4% 8.4 1.7 1.7% 16.6% 92.0% 4.8% 1.6% 3.2% 31.0% 90.5% 4.1% 109.2% 58.0 12.0% 62.2% 0.75 4.05 6.2 7.5% 8.3 1.5 1.7% 17.1% 92.0% 4.8% 1.6% 3.2% 31.5% 90.3% 4.2% 107.9% 59.2 11.7% 61.3% 0.85 4.43 6.2 8.4% 7.3 1.4 1.7% 17.2% 92.0% 4.8% 1.7% 3.2% 32.0% 91.0% 4.2% 106.6% 60.3 11.6% 60.8% 0.93 4.85 6.2 9.1% 6.6 1.3 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