Assessing Risk
Ultimately, these markets have been classified as emerging markets for a reason, so it’s important to understand how some of the key risk factors relate to broader benchmarks of the Financials sector around the world.
• Recent Performance: Many are paying attention to the UAE and Qatar markets today because of their recent performance. For the year ending February 28, 2013, First Gulf Bank was the low performer of the three (75.5%), Abu Dhabi Commercial Bank was in the middle (92.5%), and Dubai Islamic Bank was the top performer (198.2%). As a point of contrast, U.S. financials6 had a great year last year, but their returns didn’t even crack 30%.7
• Valuation: Of course, given these performance differentials, it is easy to come to the conclusion that these three UAE banks would be much more expensive than U.S. financials8, but that would be incorrect. As of March 19, 2014, U.S. financials were trading at approximately 14.0x, developed international market financials9 were trading at approximately 14.6x and emerging markets financials10 were trading at approximately 8.5x. To compare, Abu Dhabi Commercial Bank was trading at 11.2x, and First Gulf Bank was trading at 12.9x as of this time. While these banks certainly aren’t showing the depressed multiples seen in the larger EM financials, such as those located in China,11 which are trading at a P/E ratio of 5.1x, they are actually less expensive than U.S. financials on a price-to-earnings ratio basis. Dubai Islamic Bank registered a P/E multiple of 14.7x, which is basically in line with developed international market financials.12
• Leverage: One measure of risk for a bank is leverage , in essence the level of the bank’s assets relative to its equity. Many might logically assume that because these banks are in the UAE, there is a close association with Dubai, and since Dubai’s real estate wasn’t immune to the global financial crisis of 2008–09, these banks are still highly leveraged. However, what we found was surprising:
UAE Banks Not Necessarily Highly Leveraged
Each of these banks has lower leverage than the average level for U.S. financials, not to mention EAFE Financials or EM Financials. We recognize, of course, that leverage is only one measure of a bank’s exposure to risk but show this merely to counter the line of reasoning that since these firms are in close proximity to Dubai, they must be highly leveraged.
An Exciting Time for UAE Equities
There were times in the not-too-distant past when more accessible emerging market countries had lower accessibility than they do at present—each has been moving along its own continuum. UAE equities could be at an inflection point on their path, leading to potentially greater access for foreigners and increased liquidity in the near future.
1Holdings subject to change.
2Source: MSCI. Constituents for the MSCI Emerging Markets Index from Qatar and UAE are expected to be announced on 5/14/14.
3Source: First Gulf Bank’s Investor Presentation, dated March 2014.
4Source: Abu Dhabi Commercial Bank; 1/26/14 press release.
5Source: “Dubai’s Mashreq Ups Foreign Ownership Limit to 49%,” Reuters, 2/17/14.
6Refers to the performance of the S&P 500 Financials Index.
7Source: All performance sourced from Bloomberg, calculated from 2/28/2013 to 2/28/2014. High double-digit returns were achieved primarily during favorable market conditions. Investors should not expect that such favorable returns can be consistently achieved. A company’s performance, especially for very short periods, should not be the sole factor in making your investment decision.
8Refers to the MSCI EAFE Financials Index.
9Refers to the MSCI Emerging Markets Financials Index, which is designed to measure the combined equity market performance of the Financials sector of emerging market countries.
10Refers to the MSCI China Financial Sector Index, which is a free float-adjusted market capitalization-weighted equity index designed to measure the performance of the Chinese equity market.
11Source: All P/E ratios in this bullet point are sourced from Bloomberg, as of 3/19/14.
Important Risks Related to this Article
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