UAE bank valuations at lowest level in six months

The share prices of Abu Dhabi and Dubai banks are trading at 7.6 and 7.2 times earnings respectively. Reuters

The valuations of banks on the UAE's stock markets have fallen to their lowest level in six months, despite a recovery in bank capital and earnings.

Emirates lenders are now the cheapest bank stocks in the Middle East relative to earnings, apart from Egypt. But the deep discounts have yet to prompt a wave of buying because of weak liquidity in Abu Dhabi and Dubai.

"There is value in these public companies but in a depressed market it doesn't matter if it's gold, people won't buy it if there is no liquidity," said Mohammed Ali Yasin, the chief investment officer at CAPM Investment in Abu Dhabi.

The share prices of Abu Dhabi and Dubai banks are trading at 7.6 and 7.2 times earnings respectively, heading to their February lows of 6 to 7 times earnings, while the GCC average trades at 9 to 11 times. Only Egypt, rocked by revolution and weak economic growth, trades at a lower valuation, of 6.5 times earnings.

"We're probably very close to the lows for the year," said Saleem Khokhar, the head of equities at the National Bank of Abu Dhabi. "The banks don't deserve these valuations. Egypt's case is not comparable to us, but triggers are needed to bring in liquidity to be able to position in and out of stocks."

Local markets have taken a beating this year, triggered first by the emergence of the Arab Spring, and then Europe's worsening debt crisis along with the downgrading of America's top-tier credit status - all of which have affected investor confidence.

The Abu Dhabi Securities Exchange General Index (ADX) is down 4.9 per cent this year, while Dubai's main measure, the Dubai Financial Market General Index (DFM) has fallen 10.3 per cent, and the FTSE Nasdaq Dubai UAE 20 Index is down 15.4 per cent in the same period.

Traded value on the ADX and DFM have declined by two thirds this year, reaching Dh110 million (US$29.9m) yesterday, down from the Dh300m daily average for the year. Individual foreign investors make up less than 3 per cent of total trading activity, while institutional investors make up 35 per cent.

"Our markets are the last frontier. Foreign investors will be investing in emerging markets, and when all opportunities are exhausted in the emerging markets universe is when investors are looking to look closer to the region," said Rami Sidani, the Dubai-based head of Middle East investments for the British asset management company Schroders.

"Given the current risk aversion, they are not willing to invest in the UAE as an off-index play," he said. "Meanwhile our markets lack smart money institutional investors and pension funds to jump and seize opportunities."

Haissam Arabi, the chief executive at Gulfmena Investments in Dubai, said retail investors made up the majority of trading in the Emirates, so global market sentiment drove liquidity. "You're better off investing in Apple or a US stock," he said.

Meanwhile, the fundamentals of the banking sector in the Emirates are strong.

The economy is forecast to grow 3.9 per cent this year from 1.7 per cent last year, the fastest pace since 2008, according to HSBC estimates.

Mr Arabi said reserves had been reinforced, loan-to-deposit ratios had declined and non-performing loans had passed the peak.

"Banks are the one sector that is showing real recovery in the UAE, as they have reduced provisions, improved their top line and [have] better bottom-line numbers," said Mr Arabi.

The results of the two biggest banks have set a broadly upbeat feel to the earnings season.

Net profits for Emirates NBD, the biggest bank by assets, surged 84.8 per cent to Dh744.4m in the second quarter compared with the same period last year.

National Bank of Abu Dhabi, the second-biggest bank, reported a 2.5 per cent rise in net profits to Dh1.03 billion.