Time to rotate into UAE banks. Monetary policy will likely shift from a support to a drag for GCC banks, with the US Fed widely expected to cut rates this week. This could limit appetite for the most highly-rated markets such as Saudi and Kuwait banks (Figure 5). Potential easing of foreign ownership limits in the UAE could drive passive inflows that have been the principal price drivers in the region in recent years. UAE banks are also typically less aggressively priced than their neighbours (Table 1, Figures 1-4). Further top-down support for this view (notably for Dubai names) is provided in our recent strategy research here.
Estimated net profit impact of 100bps interest rate cut
Note: (sample median, average of disclosed sensitivities and the 1-year repricing mismatch of assets and liabilities). Source: Company filings, Tellimer Research
Kuwait: NBK Q2 results were 4% below our expectations and 5% below consensus. Revenues were weaker than our forecast, and only partly offset by lower cost of risk. We trim our 2019f by 2% and 2020f by 6% (Table 2). We also bring our cost of equity assumption into line with our Saudi coverage (i.e. reduce it from 11.3% to 11.0%). Our KWD0.95 target price and Hold rating are unchanged. KFH results were 5% ahead of consensus; although the quality of revenues was worse, cost efficiency improved. A key recent share price driver has been anticipation of the merger with AUB; while there may be sizeable synergies in Kuwait, we think execution will not be straightforward.
Oman: Bank Muscat profit was 3% below our estimate but 4% above consensus. Key variances to our numbers were weaker dividend income and higher taxes, partly offset by lower risk costs. We have shaved our forecasts by 1% but our OMR0.54 target price and Buy rating are unchanged (Table 3). Bank Muscat is a top sector dividend yield play.
UAE: FAB, ENBD and DIB all beat consensus expectations (ADCB missed). We see FAB management continuing to sweat assets to improve ROE; there is scope for public sector lending to grow. ENBD is investing in technology and its Saudi distribution network. The key event near-term is the Denizbank acquisition, which we think generates limited operational synergies and raises the risk profile of the business, but ultimately allows the bank to compete in four large markets (UAE, Egypt, Turkey, Saudi). DIB indicated it is not seeing stress in its real estate loan portfolio; moreover, we think some NPLs could move into performing status by year-end. ADCB completed its merger with UNB, and its acquisition of Hilal Bank, on 1 May. Q2 results were hit by weaker revenues and integration costs.
Qatar: QNB results were 2% above consensus (stronger net interest income and lower tax charge offset higher risk costs). At CBQ the beat was more substantial (14%, on qoq margin expansion, FX income, operating efficiency), while balance sheet de-risking continues. Masraf Al Rayan recorded a small (2%) miss on higher funding costs.
Saudi Arabia: Saudi banks have been uncharacteristically late in reporting results this quarter. We think this reflects a possible switch in accounting policy, which will result in zakat being deducted from earnings rather than just from equity. This will likely result in a c10% hit to earnings, and a corresponding reduction in ROEs. Although this change does not affect our fundamental valuations (which already account for zakat) it will inflate already high valuation multiples and reinforces our view that there is currently little fundamental reason to hold these stocks. Earnings preview here.