Sceptical analysts rain on UAE lenders' rally

International banks raise concern on share price resilience

Gregor Stuart Hunter

Could April be the cruellest month for banks? The UAE's lenders have rallied since the start of the month but some analysts are concerned that recent gains are overdone.

Emirates NBD is the biggest winner so far, having risen 9.67 per cent to Dh3.63 since the start of the month. National Bank of Abu Dhabi is up 8.83 per cent to Dh10.60, while Union National Bank has risen 6.16 per cent to Dh3.10 in the same period.

But investor disquiet is growing louder, with international banks raising concerns.

In a research note, analysts from Nomura wrote that despite low price-to-earnings ratios when compared with their peers in other markets, the UAE's banks were cheap for a reason.

"We advise investors to stay cautious on the UAE banking sector," they wrote. "The low valuations at which it trades … might look attractive and suggest a potential deep value story.

"However, we struggle to find positive catalysts that could lead to a stock price re-rating. Furthermore, we believe consensus earnings growth estimates are too optimistic and are likely to adjust downwards."

Other analysts were sceptical that banks could sustain their rise.

"My sense is what we're seeing in UAE bank stock prices is expectation of normalising asset quality or core provisioning costs," said Murad Ansari, an analyst at EFG-Hermes.

While some analysts said impairments on bad loans had peaked, other difficulties remained.

"I'm not anticipating provisions to be as much as they were," said Talal Touqan, the head of equity research at AlRamz Securities. "The earnings will no longer be pressured."

But Mr Touqan said picking winners could prove more challenging. "Smaller banks are highly dependent on retail services and nowadays expansion is limited."

The result of increased regulation by the Central Bank, particularly on the size and fees of personal loans, and telemarketing, would have a large impact on banks with a heavier retail focus.

ghunter@thenational.ae