Mashreq Bank is one of the oldest and largest private banks in the UAE. The bank has seven revenue generating business lines, the main contributors being retail and corporate, which collectively accounted for 62% of the total revenue in 2007. Originally established as Bank of Oman in 1967 in Dubai, it is 87% owned by the Al Gurair family with the remaining 13% free floating.
Currently, the bank’s seven subsidiaries deal in Islamic and conventional financing, brokerage, insurance and investment services. The bank provides retail, commercial, treasury and capital markets, besides other support divisions such as credit risk management, risk review and corporate affairs. The diverse range of products and services offered include credit cards, consumer lending, trade finance, project finance, electronic funds transfer at points-of-sales, automated teller machines, call center, treasury, correspondent banking, online banking and GSM banking.
Business segments
Mashreq’s corporate banking division has been delivering exceptional growth in terms of revenues on the back of growing demand for credit. In addition, it introduced new product lines such as wealth management, business finance, cash management and structured finance to further bolster revenues from this segment. New initiative and renewed focus towards corporate banking segment resulted in an increase of 40.9% in revenues in 2007. The corporate banking segment accounted for 30% of the total revenues in 2007.
Mashreq has one of the most liquid balance sheets with a strong deposit franchise. The bank’s capital adequacy ratio was 17.8% at the end of 2007 as against the industry average of 14.4%. The bank is adequately capitalized and well positioned to support strong growth in risk-adjusted assets.
Asset quality
Mashreq has done a commendable job in ensuring that asset growth is not at the cost of asset quality. It has one of the highest coverage ratios in the sector, which stood at 284.7% at end of 2007, and has adequately protected itself to mitigate the risk of deteriorating asset quality, in case of an economic downturn. Despite a growth of 25.7% in the loan book, the NPL/gross loans declined to 1.0% in 2007.
Non-interest income
Non-core income continues to register strong growth on the back of increasing business volumes, buoyant capital markets and underwriting profits on insurance. The significant improvement in fees and commission income was driven by healthy growth in business services, which is in line with the management’s strategy to increase its fee related income. Going forward, we believe that the clearing agent, asset management, broking, corporate advisory, IPO financing and insurance segments are likely to be the key focus areas giving a further fillip to fee income growth.
Q2 2008 results analysis
Sequentially, Mashreq Bank’s balance sheet size remained flat at $25.6 billion in Q2 2008, although it was up by 33.2% year-on-year. The changing composition of asset mix in favor of loans resulted in net loan to assets ratio increase from 47.4% in Q1 2008 to 54.5% in Q2 2008. Aggregate loan book (including Islamic advances) increased by 15.0% quarter-on-quarter and 54.8% year-on-year to reach $14 billion in Q2 2008. The Islamic loan segment registered strong growth, up by 65.0% quarter-on-quarter and 277.6% year-on-year to $1.5 billion.
Income from core banking activities increased by 66.7% year-on-year to $131.6 million in Q2 2008 due to change in asset mix. The non-interest income grew by 26.2% year-on-year to $230.7 million in Q2 2008 on the back of $44 million gain on revaluation of investment properties. Adjusted for the revaluation gain, the non-fund income grew by only 2.2%. Fees and commission income increased by 4.4% year-on-year to $84.4 million, which is much lower compared to its peers.
Valuation
The National Investor (TNI) forecasts that Mashreq’s net profit is likely to grow at a compound annual growth rate (CAGR) of 21.5% during 2007-2011. In order to arrive at a fair value, we applied two valuation approaches: a long-term EVA model and a Warranted Equity Valuation. Taking the average of the one-year forward valuations implied by these two approaches, we set our target price for Mashreq at $68.9 per share, a downside of 9.6%.
At the current market price of $76.2, the stock is trading at 16.9x 2008E and 13.6x 2009E earnings. On a PB multiple, the stock is trading at 3.5x 2008E and 2.8x 2009E book value. On our target price, the implied PB multiple is 3.1x 2008E and 2.6x 2009E book value. The implied PE multiple at our target price is 15.3x 2008E and 12.3x 2009E earnings.
Mihir Marfatia is a bank analyst at The National Investor (TNI)
The National Investor (TNI) is a privately owned regional investment and merchant banking group. The firm comprises six strategic business units covering investment banking, private equity, asset management, real estate, principal investments and investment research. In addition, the firm has an associate company, Gulf National Securities Centre (GNSC), which provides brokerage services as a registered member of the Abu Dhabi Securities Market (ADSM), the Dubai Financial Market (DFM), and Dubai International Financial Exchange (DIFX).
