The DIFC-based investment bank's analysts said 'a new era of growth [is] not reflected in valuations'. Arqaam said, "We remain strongly Overweight on UAE banks. We believe the recent re-rating of the sector merely prices in a normalisation of the operating environment and does not yet fully capture a new era of growth." Arqaam expects strong EPS growth (15.8 per cent in FY 13e), driven by (i) an uptick in commercial momentum (ii) strong F&C income generation and (iii) lower cost of risk. "We see continued support for the UAE banks from the strong dividend outlook and enhanced asset quality and liquidity, accompanied by a surge in lending (Expo 2020 to add one per cent pa), increased FOLs, MSCI inclusion and a reduction in very high equity risk premiums. "We add UNB and ENBD to our Core Buy portfolio on the increased growth outlook and low valuations, and put NBAD in our Core Sell portfolio as we expect its RoRWA to contract further (despite less stringent caps on single-party exposures). We are more geared towards the Dubai play recovery with DIB, CBD, MASQ and ENBD in our Core Buy Portfolio; in Abu Dhabi we play FGB and UNB and also recommend Rakbank (41 per cent discount to Capitec). "Commercial momentum continues to pick up: We forecast an impressive net loans pickup of 9.8 per cent for FY 14e and 9.7 per cent for FY 15e after 10.1 per cent for FY 13e (7.8 per cent YtD already achieved). Net loans of the listed UAE banking sector expanded in Q3 13A by 9.2 per cent y/y and 1.9 per cent q/q, bang in line with our estimates. Growth was broadly based on a 10.6 per cent pickup in retail, 11.9 per cent in sovereign and 9.9 per cent in corporate lending. " The UAE Central Bank (CB) has fine-tuned regulations with negligible impact on growth: The CB has fine-tuned clauses related to large exposure limit and the mortgage cap rules, softening their impact on the prospects for growth in lending activity in the UAE , with only ENBD and NBS currently in breach. Cost of risk is tapering off as the clean-up phase is now behind us: We are more optimistic on asset quality evolution in the UAE , as banks have cleaned up their books, adopted a conservative provisioning approach that has led to increased provision coverage. New NPL formation has slowed down and a pickup in business momentum has started. "Despite the strong outlook, we still prefer a selective approach to play UAE , with DIB, CBD, MASQ, ENBD, FGB, UNB and RAKBANK in our Core Buy portfolio: The UAE banks trade at a P/E15e of 8.6x (12 per cent discount to sector), P/tNAV14e 1.4x (6 per cent discount to sector) and P/PPP15e of 5.7x (20 per cent discount to sector). Even after the recent strong rally, we still see 26.3 per cent on average upside. We add ENBD (P/tNAV14e of 1.0x while it is still able to report double-digit RoTE, best geared for risk normalization, lowest P/PPP of sector) and UNB (compelling multiples with a P/E15e of 6.7x and P/tNAV14e of 1.0x, with accelerating loan growth to 10 per cent) to our Core Buy portfolio."
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