Bahrain-based investment bank SICO has raised its target price on First Abu Dhabi Bank, citing stronger conditions, but maintained its 'Neutral' rating on the stock, arguing that the benefits of the likely improvement in its performance has already been priced into its stock.

A note published on Tuesday by banking analyst Chiradeep Ghose increased SICO's target price on FAB to 15 UAE dirhams ($4.08) per share, up from 12 dirhams previously. The stock closed on Sunday down 8 fils to 14.40 dirhams per share.

Ghose's note stated that the reason for the uplift in its target price is that it expects the bank's balance sheet to continue its recent growth. It anticipates loan book growth of 8 percent for the bank this year, in line with management guidance. It also expects sustainable growth of around 7 percent over the next three years, which is marginally higher than the forecast rate of 5-6 percent for the rest of the United Arab Emirates' banking sector.

It pointed to the 50 billion UAE dirham stimulus package announced by the Abu Dhabi government in June - some 20 billion dirhams of which is due to be spent next year.

"We expect FAB to be the prime beneficiary of the spending, owing to its large balance sheet size and strong public sector relationship," Ghose's note said.

It also expects the bank's operating expenses to fall. FAB's management has already said that it expects additional savings of 300 million dirhams per year as a result of the merger between its two legacy banks last year, and although this is likely to be offset by ongoing integration costs next year, these should eventually subside.

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Ghose's note also said that it expects lower provisioning charges taken against likely bad debts to feed into a lower cost of risk, thereby helping its bottom line. It has revised its estimate of the bank's cost of risk downwards to 0.54 percent for this year, down from 0.76 percent for its previous estimate. It has also reduced its estimate for the bank's cost of risk next year to 0.56 percent, from 0.65 percent previously.

Ratings agency Moody's said in a report earlier this month that the outlook for the UAE's banking sector remains stable, citing a gradually recovering economy, strong capital ratios, solid funding lines and resilient profitablity. It predicted GDP growth for the UAE of 2.9 percent next year, up from 2.2 percent in 2018, stating that the improving economy will stimulate credit growth.

The agency's  said that at the end of June this year, FAB had a 23 percent share of the UAE's loans market (ahead of Emirates NBD with 21.1 percent and Abu Dhabi Commercial Bank with 11 percent) and a 25.6 percent share of the deposits market (ENBD 19.9 percent, ADCB 10.2 percent).

The sharp drop in oil prices experienced on international markets on Friday impacted most Gulf markets on Sunday, with Saudi Arabia's exchange dropping by 1.25 percent, Abu Dhabi's market closing 0.77 percent lower, Qatar's stock exchange down 0.74 percent, the Muscat Securities Market falling by 0.63 percent and the Dubai Financial Market down 0.56 percent. Kuwait's Premier market finished flat, and the Bahrain Bourse was the only market to finish in the black, posting a gain of 0.67 percent.

(Writing by Michael Fahy; Editing by Shane McGinley)
(michael.fahy@refinitiv.com)

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