Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

First Abu Dhabi Bank PJSC / Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/qatar-national-bank-qpsc" target="_blank" data-smartkarma-citation="entities:27700:1" rel="noopener">Qatar National Bank QPSC (QNBK QD)</a> , <a href="https://www.smartkarma.com/entities/al-rajhi-bank" target="_blank" data-smartkarma-citation="entities:27038:1" rel="noopener">Al Rajhi Bank (RJHI AB)</a> , and <a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a>  are the largest banks, by market capitalization,  in the middle east. You pay top dollar for the pleasure of holding these banks. It is as if risks just did not exist. After all, they are self-styled "National Champions". We do not doubt that they may have their merits and advantages but are they so much better than anywhere else? They must share their impregnability or secret sauce with the likes of Jamie Dimon and Brian Moynihan who command much cheaper franchises: franchises that may not be so cheap in the current environment. </p><p><a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a> does carry risks. In fact, its DSIB-Balance Sheet may not be so well balanced. Almost a fifth of its loan portfolio is dedicated to CRI: the gift that keeps giving. Another third of its credit book (and increasing fast) is focused on the government and public sector. Another 14% of Loans are channeled into the financial sector. Energy makes up another 9%. The Balance Sheet is bloated by cash (21% of Assets) and commands a sizable amount of "investments" at 16% of Assets. For a "National Champion" it is perhaps surprising that  international loans and deposits represent 25% and 21% of Group loans and deposits, respectively. The bank says that it is growing strongly in India and Hong Kong. In Loan Capital Markets, FAB seems to specialise in Chinese and African deals.</p><p>UAE -like anywhere else- carries risks. The economy is dependent on mining and construction as well as restaurants and hotels: even more so Abu Dhabi. The PMI is highly correlated to Brent Crude despite diversification efforts. AA-rated Abu Dhabi, like FAB UH, likes investments too: Sovereign foreign assets account for 185% of GDP. Would these be risk-free too?</p><p>To say that FAB has being growing at a fair clip in recent years is an understatement. Since 2016, Assets have ballooned by 235%. Derivatives have soared by 715%. Securities (including derivatives) have climbed by 461%. Loans, by contrast, have expanded by "just" 160%. While Deposits have risen by 248%, wholesale funding has jumped by 308% over this period. If I have learnt anything in my time as an analyst, it is to be very distrustful of explosive asset growth. It tends to generate distortions, and is difficult to manage in terms of KPIs. FAB suffers not just from unbalanced growth but from "Asset bloat" which does not generate value and can result in share price under performance.</p><div><p><a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a> commands a subpar PH Score™ of 3.1, an overbought RSI signal, and a FV of 25%: shares thus find themselves in the bottom decile of our VFM rankings.</p></div><div><div><div class="content-highlight">
<p>The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. </p>
<p>With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.</p>
</div></div></div><div><div><div class="content-highlight"><p>VFM rankings position <a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a>  in the bottom quintile of opportunity globally. </p></div></div></div><div><div><p>Trading at a 30% premium to BV, with a Franchise Value,  Earnings Yield,  and Total Return Ratio of 25%, 9%, and 1x, respectively, shares do not appear attractive. We recognise that a Dividend Yield of 6.3% for an AA-rated entity might not be the worst investment in the world if there is no cut: there is a bond equivalent or utility argument. However, putting all the pieces of the jigsaw together, we see shares under performing and believe in this case that the PH Score™ can act as a headwind.</p></div></div>

Qatar National Bank QPSC (QNBK QD) , Al Rajhi Bank (RJHI AB) , and First Abu Dhabi Bank PJSC (FAB UH)  are the largest banks, by market capitalization,  in the middle east. You pay top dollar for the pleasure of holding these banks. It is as if risks just did not exist. After all, they are self-styled "National Champions". We do not doubt that they may have their merits and advantages but are they so much better than anywhere else? They must share their impregnability or secret sauce with the likes of Jamie Dimon and Brian Moynihan who command much cheaper franchises: franchises that may not be so cheap in the current environment. First Abu Dhabi Bank PJSC (FAB UH) does carry risks. In fact, its DSIB-Balance Sheet may not be so well balanced. Almost a fifth of its loan portfolio is dedicated to CRI: the gift that keeps giving. Another third of its credit book (and increasing fast) is focused on the government and public sector. Another 14% of Loans are channeled into the financial sector. Energy makes up another 9%. The Balance Sheet is bloated by cash (21% of Assets) and commands a sizable amount of "investments" at 16% of Assets. For a "National Champion" it is perhaps surprising that  international loans and deposits represent 25% and 21% of Group loans and deposits, respectively. The bank says that it is growing strongly in India and Hong Kong. In Loan Capital Markets, FAB seems to specialise in Chinese and African deals.UAE -like anywhere else- carries risks. The economy is dependent on mining and construction as well as restaurants and hotels: even more so Abu Dhabi. The PMI is highly correlated to Brent Crude despite diversification efforts. AA-rated Abu Dhabi, like FAB UH, likes investments too: Sovereign foreign assets account for 185% of GDP. Would these be risk-free too?To say that FAB has being growing at a fair clip in recent years is an understatement. Since 2016, Assets have ballooned by 235%. Derivatives have soared by 715%. Securities (including derivatives) have climbed by 461%. Loans, by contrast, have expanded by "just" 160%. While Deposits have risen by 248%, wholesale funding has jumped by 308% over this period. If I have learnt anything in my time as an analyst, it is to be very distrustful of explosive asset growth. It tends to generate distortions, and is difficult to manage in terms of KPIs. FAB suffers not just from unbalanced growth but from "Asset bloat" which does not generate value and can result in share price under performance.First Abu Dhabi Bank PJSC (FAB UH) commands a subpar PH Score™ of 3.1, an overbought RSI signal, and a FV of 25%: shares thus find themselves in the bottom decile of our VFM rankings.
The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 
With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.
VFM rankings position First Abu Dhabi Bank PJSC (FAB UH)  in the bottom quintile of opportunity globally. Trading at a 30% premium to BV, with a Franchise Value,  Earnings Yield,  and Total Return Ratio of 25%, 9%, and 1x, respectively, shares do not appear attractive. We recognise that a Dividend Yield of 6.3% for an AA-rated entity might not be the worst investment in the world if there is no cut: there is a bond equivalent or utility argument. However, putting all the pieces of the jigsaw together, we see shares under performing and believe in this case that the PH Score™ can act as a headwind.

First Abu Dhabi Bank PJSC

First Abu Dhabi Bank: Fab Asset Growth