• Global values Ahli United Bank at US$1.37 and recommends a HOLD on the stock
Global Investment House – Ahli United Bank – Results Update - Ahli United Bank (AUB) came up with good results for the year 2007 with the bank reporting a consolidated net profit of US$296.3mn for the year, an increase of 42.8% over the consolidated profit of US$207.5mn reported in the previous year. During 2007, the bank acquired a 35% stake in Alliance Housing Bank S.A.O.G. (AHB) Oman, marking AUB's entry into the Sultanate of Oman.
The bank secured an updated 'A-' long term rating with stable outlook and 'A-2' short term rating from Standard & Poor and Fitch during 2007, while receiving a higher 'A' long term rating with a stable out look and 'A-2' short term rating from Capital Intelligence.
Based on the current market price of US$1.34 per share (as on May 25, 2008), AUB is trading at (2008E) P/E and P/BV multiples of 14.8x and 2.5x, respectively. Our estimated value for this banking scrip is worked out to be US$1.37 based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip offers an upside of 2.2% on the closing price of US$1.34 per share; we therefore recommend a “HOLD” on the scrip.
Financial Performance
During 2007, the total assets of AUB increased by 10.8% to reach US$23.0bn at the end of Dec-2007 as compared to US$20.8bn in the previous year. The growth in total assets was mainly driven by the growth in the loan book and increasing investment in associates (acquiring stake in banks, which is part of the bank’s strategy). The total funding of the bank increased by 8.0% in 2007, from US$18.3bn in 2006 to US$19.8bn at the end of 2007.
The bank’s total deposit (includes customer deposits and deposits from banks and other FIs) increased by 8.6% to reach US$17.8bn in 2007 from US$16.4bn in 2006. The bank’s loan book continued to surge and increased by 35.5% in 2007 to reach US$12.2bn at the end of 2007. It is worth noting that the bank’s loan book has increased at a CAGR of 59.0% from 2004 to 2007. Favorable economic conditions resulted in strong demand for credit, both from the corporate as well as from the consumer segment. Net loans and advances grew at a CAGR of 60.7% for the period 2004 to 2007. The bank’s gross loan and advances to total customer deposits increased from 91.6% in 2005 to 113.2% at the end of 2007.
During the last few years, the bank's asset quality has improved significantly. Gross Non-Performing Loans (NPLs) as a percentage of gross loans declined from a high of 6.1% in 2003 to 1.2% in 2007, which is also one of the lowest among its peers. This indicates that the growth in the loan book was not at the cost of quality. The conservative credit risk policies and recovery efforts has helped the bank in improving its credit risk during the last three year from 2005-2007.
AUB is well capitalized to support growth in risk-adjusted assets. As at end 2007, the bank’s Capital Adequacy Ratio (CAR) stood at 16.2% as compared to 14.8% at the end of 2006. The bank’s capital adequacy ratio is well above the Basel requirement of 8% and also above the minimum required rate of 12% by the Central Bank of Bahrain (CBB).
The total income (interest and non-interest income) grew by 35.3% to reach US$666,8mn in 2007 as compared to US$492.9mn in 2006. However the bank was able to control its operating expenses which increased by 21.6% in 2007. As a result, cost to income ratio of the bank came down from 39.8% in 2006 to 35.8% in 2007, whereas the operating expenses to average assets declined marginally from 1.13% in 2006 to 1.09% in 2007
The net profit of the bank increased by 42.8% to reach US$296.3mn in 2007 as compared to US$207.5mn reported in the previous year. Due to the improved profitability of the bank, the bank’s return ratios (return on average equity (ROAE) and return on average assets (ROAA)) have improved in the past few years. ROAA increased from 1.2% in 2006 to 1.4% in 2007, whereas ROAE increased from 14.3% in 2006 to 18.7% in 2007.
AUB came up with good numbers for the first quarter of 2008 with the balance sheet size increasing by 9.1% to reach US$25.1bn at the end of 1Q-08 as compared to US$23.0bn reported at the end of 2007. Total customer deposits of the bank increased by 13.5% and reached US$12.2bn at end of 1Q-08 as compared with US$10.8bn at the end of 2007. As a result, the contribution of total deposits (customer deposits and deposits from banks and other FIs) to total assets increased from 77.1% at the end of 2007 to 79.1% at the end of 1Q-08.
The net interest income of the bank increasing by an impressive 34.9% to reach US$97.6mn for the quarter as compared US$72.4mn reported during 1Q-07. The total operating income of the bank excluding provisioning increased by 52.6% to reach US$210.0mn as compared to US$137.4mn reported in 1Q-07.
The bank’s cost-to-income ratio has come down to 32.7% in 1Q-08 from 35.2% in 1Q-07 due to synergies achieved as a result of pan GCC presence and also investments in technology. Consequently, the earnings of the bank continued to improve with the bank reporting net profit for 1Q-2008 at US$94.3mn, a healthy growth of 36.8% over US$68.9mn reported for 1Q-2007.
AUB has emerged itself as one of the best banks in Bahrain. In addition, AUB has increased its presence in Kuwait, Qatar, Oman, Egypt, Iraq, and UK. The bank is looking at good opportunities with the next core target for the bank to enter Saudi Arabia, UAE, Iran and Switzerland. The bank has and is expected to continue to explore new opportunities in this region either by acquiring or merging with the local banks in these respective countries. The bank will also continue to focus on its core areas of business which include retail and corporate banking in the Kingdom.
We believe that AUB is well positioned in the Bahraini market to further continue its growth momentum witnessed in the last few years. This will be further complemented by the Governments’ thrust towards economic and infrastructural development that is likely to benefit the banking sector as a whole. In our opinion, the outlook for the bank is positive on the back of buoyant core banking activities.
