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|30 January, 2019

ADCB, UNB shares move in opposite directions post-merger announcement

Analyst says ADCB remains most attractive due to higher dividend yield

Investors monitor screens displaying stock information at the Abu Dhabi Securities Exchange June 25, 2014.

Investors monitor screens displaying stock information at the Abu Dhabi Securities Exchange June 25, 2014.

REUTERS/Stringer

Shares in Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB) moved in opposite directions on Wednesday, a day after both banks announced that they agreed to merge and for the combined entity to acquire Al Hilal Bank. (Read more here).

In a statement to the exchange, the banks said that ADCB will issue 0.5966 ADCB shares for every UNB share held. The merger is expected to take place within the first six months of the year, subject to regulatory and shareholder approvals.

ADCB’s shares rose 1.12 percent on Wednesday, while UNB’s shares dropped 1.7 percent, dragging Abu Dhabi’s index to close 0.56 percent lower.

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ADCB had closed yesterday’s session at 8.92 UAE dirhams ($2.43) per share and UNB was last trading at 5.29 UAE dirhams per share on Tuesday, prior to the announcement being made.

“We believe at the current (Tuesday closing) price, there is not much benefit in switching between ADCB and UNB as they are both trading around their fair value,” Chiro Ghosh, research manager at Bahrain-based investment bank SICO, said in a note.

“However, for investors looking to take fresh exposure, we would recommend taking a position in ADCB, for a higher dividend yield,” Ghosh added.

ADCB announced on Tuesday that its board of directors has proposed a dividend of 0.46 UAE dirhams per share. UNB is yet to declare its dividend for 2018. For 2017, the bank paid 0.2 UAE dirhams per share.

Devesh Mamtani, head of investments and advisory at Century Financial Brokers, told Zawya that the decline in UNB’s shares compared to ADCB is “primarily due to the superior quality of (the) ADCB management.”

Mamtani noted that in addition to the higher dividend yield of ADCB compared to UNB, “the return on equity (RoE) of ADCB is 16.30 percentage while that of UNB is 8.78 percentage, this being a clear indication of ADCB’s ability to  generate more income from the equity available.”

“Also, ADCB’s one year revenue growth is 12.98 percentage while that of UNB is 8.70 percentage,” Mamtani said.

ADCB’s shares have added 10.29 percent so far in 2019, closing at 9.02 UAE dirhams per share on Wednesday, while UNB’s shares have added 9.59 percent, closing at 5.2 UAE dirhams per share.

ADCB announced a net profit of 4.84 billion UAE dirhams for the full year 2018, compared to a net profit of 4.28 billion UAE dirhams for the year 2017, translating into a 13 percent increase. UNB has not reported its yearly earnings results yet

“ADCB has a strong consumer banking business, with a larger expat customer base. On the other hand, UNB has a large branch network, with penetration among UAE nationals and mid corporation,” SICO’s Ghosh said.

“We believe the combined entity would continue to grow its consumer banking business post the merger, with strong cross-selling opportunity,” he added.

The banks said in the statement to the Abu Dhabi Securities Exchange that the Government of Abu Dhabi, through the Abu Dhabi Investment Council, will own 60.2 percent of the combined bank, while other ADCB shareholders will own 28 percent, and other UNB shareholders will own 11.8 percent.

On the effective date of the merger, UNB shares will be delisted from the Abu Dhabi Securities Exchange. The combined bank will retain ADCB’s legal registrations, the statement added.

Al Hilal Bank would be acquired by the combined entity by issuing a mandatory convertible note for up to 117.6 million post-merger ADCB shares, for approximately 1 billion UAE dirhams.

Al Hilal Bank would continue to exist as a separate Islamic entity, retaining its name and brand, while it would be consolidated by ADCB in its accounts.

SICO’s Ghosh said that “Al Hilal bank would cater to Sharia-compliant focused customers, however, its asset restructuring could be a task for the combined entity.

“We see a possibility of ADCB writing off the bad loans acquired from Al Hilal initially, and subsequently adjusting it against the negative goodwill arising from the below book value acquisition,” he added. Al Hilal Bank will be acquired by the combined ADCB-UNB entity for one billion dirhams, which is less than 20 percent of its book value.

Elsewhere in the region, Dubai’s index dropped 1.07 percent on Wednesday, Saudi Arabia’s index was mainly flat, Kuwait’s index gained 0.43 percent, Bahrain’s index added 0.48 percent, while Qatar’s index was mainly flat and Oman’s index gained 1.04 percent.

(Reporting by Gerard Aoun; Editing by Michael Fahy)

(gerard.aoun@refinitiv.com)

Our Standards: The Thomson Reuters Trust Principles

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

© ZAWYA 2019

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