• Global values Fist Gulf Bank at AED19.7 and reiterates its BUY recommendation
Fist Gulf Bank (FGB) - First Gulf Bank (FGB) is one of the largest listed banks in the UAE. It is the 4th largest bank in terms of market capitalisation, the 3rd largest in terms of profitability (2008), the 4th biggest bank by total assets and 2nd largest by total equity. FGB has grown by leaps over the last few years, backed by the government of Abu Dhabi, and making best of the opportunity provided by the fast-growing economy on the back of surging oil prices. Economic and financial conditions are no longer the same. Oil prices have fallen, lending opportunities have dried up, risks have risen manifold and the momentum and willingness to lend has taken a back burner.
Based on the current market price of AED16.1/share (August 18, 2009), FGB is trading at 2009E P/E and P/BV multiple of 7.0x and 1.3x respectively. Our estimated value for this banking scrip is worked out to be AED19.7. According to our fair value the banking scrip offers an upside 23% over the closing price. We therefore reiterate our BUY recommendation on the scrip.
FGB is expected to post a profitability growth of 5%YoY in 2009 reporting profits of AED3.2bn. Profitability in the years following is forecast to pick up significantly, on account of healthy growth in net interest income, strong movement in non-interest income (as fee income grows and investment gains come pouring in with improvements in the markets). We anticipate the bank’s net earnings to nearly double in the next four years exhibiting a 4- year CAGR or 19%.
FGB has exhibited an undeterred growth in its net interest income (NII) over the past, marked by a 4-yr CAGR of 70% till 2008. While further major strides are not anticipated in the upcoming quarters, we nevertheless expect the NII to grow by 49%YoY in 2009 driven solely by volumes while spreads for the full year increase slightly over 2008. Driven majorly by volumes, the NII is expected to stage a CAGR of 22% for the 2008 – 2012 period, reaching a normalized level of growth beyond 2009.
Albeit FGB survived 2008 with minor injuries, mild woes are yet to hit the bank in the current year. Slowdown in the top-line is expected to ensue in the forecast years though remnants of super normal growth from past years may still drive the net interest income in 2009. In the current economic backdrop, FGB has shifted from an aggressive loans disbursement strategy to a more opportunistic one. Prudent lending has also been motivated by a surge in the infected portfolio which was hit hard mainly by corporate lending while retail delinquencies largely on part of expatriates have also emerged as another migraine.
Since infection from previously disbursed loans can only be controlled through curative options, applying preventive measures to to-be-disbursed loans will benefit the bank in the longer term, while also making it a proactive move on part of the bank. Moreover, FGB plans to participate aggressively in loan requirements for government-backed infrastructure projects especially in Abu Dhabi which are safer in terms of risk. In terms of retail loans, the bank will focus purely on lending to the Emirati populace.
We expect the bank to grow its loan book at a 2008 – 2012 CAGR of 15%, leading to a CAGR of 22% in the net interest income of the bank over the forecast period. Moreover, provisions are going to keep earnings growth in strict check in 2009 and 2010 as the NPLs ratio peaks at 2.1% in 2010. After eroding 20% of the total income of FGB in the mentioned years, pressure from infected loans is expected to ease off as the economy improves and the bank reverts to greater lending growth.
We forecast the bank’s non-interest income to contributor no higher than 33% to the total income as against 40% plus in the previous years, driven by high fee & commission income while income from investments (including property) keep a lower and more rationale profile. We have assumed that the bank’s investment portfolio will not offer a return in excess of 5.0% given our conservative stance in projecting highly volatile sources on income.
FGB is not expected to suffer significantly on account of its equity and property investments especially since we believe that the worst is over in terms of the value erosion witnessed in 2008 and 1Q09, leaving little room for further erosion. A greater percentage of the bank’s property investments are in the Abu Dhabi area which has shown greater resilience to downward pressure on prices as compared to Dubai. Moreover, the sheer size of these two asset classes as a percentage of total assets is too small for them to cause any major turbulence in terms of provisioning.
Consequently, we believe that operating conditions of the bank will improve significantly in 2011, while the bank manages a healthy and normalized earnings growth over the forecast period. Net profit is anticipated to double in the next 4 years from AED3bn in 2008 to over AED6bn in 2012 portraying a 19% CAGR for the 2008 – 2012 period.
