The UAE's stock markets have taken major steps towards reaching maturity and achieving stability, and the level of speculation has declined greatly, according to a new study.
"Markets now reflect the true situation of companies and we no longer hear about shares whose market value is 100 per cent or 300 per cent higher than the book value, as was the case before the global financial crisis," says the report released by Truth Economic Consultants of Abu Dhabi.
"For the first time in years, in 2009, market and book values of several national banks in Abu Dhabi and Dubai were very close and this led to a positive and healthy state of the financial markets," it said.
The study's authors examined eight major banks – five in the Abu Dhabi market and three in Dubai. They concluded that the National Bank of Abu Dhabi (NBAD) was the best bank in the capital though its market value exceeded its book value.
The market value totalled Dh26.9 billion as compared with the book value of Dh22.4bn, recording an increase of 32 per cent. Market value of the shares was at Dh12.4, which was 1.3 times higher than the book value. The number of shares representing the capital totalled 2.174 million.
The market value of First Gulf Bank (FGB) amounted to Dh22bn against the book value of Dh16.6bn, an increase of 33 per cent. The share price rose to Dh16 from Dh12 and the bank's market value exceeded the book value by 1.3 times. The number of shares representing the capital totalled 1.375 million.
The National Bank of Umm Al Quwain's (NBQ) market value totalled Dh5.6bn against Dh3.01bn, an increase of 87 per cent. The share price was Dh3.9 in comparison with Dh2.1, an increase of 90 per cent. The number of shares representing the capital amounted to 1.452 million.
The study concluded that the market value of Abu Dhabi banks covered in the study – NBAD, FGB, Abu Dhabi Commercial Bank, Union National Bank and NBQ – amounted to an approximate Dh68.7bn against Dh69.8bn, a drop of 1.6 per cent.
The Dubai study included Emirates NBD, Commercial Bank of Dubai (CBD) and Mashreq. The market value of CBD stood at Dh6.5bn against the book value of Dh5.3bn – an increase of 22 per cent. The share price climbed to Dh4 from Dh3, a rise of 33 per cent. The number of shares representing the capital amounted to 1.764 million.
The market value of Mashreq totalled Dh14.6bn against the book value of Dh11.8bn, an increase of about 24 per cent. The price of the shares amounted to Dh9.1 against Dh7.36. The number of shares representing the capital amounted to 1.610 million. The market value of the banks totalled Dh37.6bn against a book value of Dh49.2bn, a drop of 24 per cent. The total book value of the banks in both emirates amounted to Dh118.9bn while the market value stood at Dh106.3bn, a drop of 11 per cent.
Ridha Muslim, Director-General of Truth Economic Consultants, told Emirates
Business: "When the market value of banks is close to the book value or not more than 35 per cent higher, the situation is healthy, positive and safe. Before the global financial crisis it was common to see the market value of shares of some banks reach double the book value. This laid a fertile ground for harmful speculation on the country's markets. There was a big gap between the shares' book and market values, and the market value did not reflect the situation of the company.
Realism setting in
"We would see a certain company's share price doubling in a crazy manner although the company was not making big profits. The reason behind this was speculation. In 2009, the first and toughest year of the global financial crisis, we saw a strong positive element as the financial markets started to head for maturity and realism, and turn away from speculation that harmed the markets," he added.
Muslim said there were now real and realistic mechanisms to control financial markets. The narrowing of the gap between the two values last year reflected the success of the monetary policy pursued by the UAE Central Bank and the Securities and Commodities Authority as well as the managements of the Dubai and Abu Dhabi exchanges which set up several regulatory mechanisms.
He attributed the drop in the market value of a number of banks to the global financial crisis that was still affecting the world's stock exchanges. Another reason was the problem of doubtful debts that had resulted from an increase in the value of loans made in the real estate sector and the failure of some investors to continue making repayments. In addition, there was exposure to troubled regional and international companies, most importantly, the Saad and Algosaibi groups of Saudi Arabia.
"Also, some companies in the US and Europe went bankrupt and the UAE Central Bank had to set aside allocations for doubtful debts representing 2.5 per cent of the value of bank loans and facilities. This affected the results of the banking sector while liquidity (M1, M2 and M3), and consequently, the banks provided fewer loans," he said.
Muslim highlighted the need for the Central Bank to support the banking sector through monitoring and regulatory means, mainly the reduction of reserves imposed on banks to the lowest percentage possible.
He said banks should be allowed to reduce the percentage of doubtful debt to less than one per cent from 2.5 per cent of the size of loans and facilities, and should be allowed to issue treasury bonds that are repayable over five to seven years and which can be used to provide liquidity in the local market.
Curbs on speculation
Muslim said the banking sector should restructure the senior level management to ensure it can shoulder its responsibilities. "We are in a phase where we need managers qualified to take difficult decisions in difficult circumstances."
New bank products offering lower risk and larger credit facilities should be introduced. Dr Humam Al Shamma, Analyst at Al Fajer Securities said the close correlation between the market and book values of the banks was positive for the sector and the financial markets. "The market value of companies listed on stock markets dropped last year," he added. "Also book values in the banking sector did not go up during 2009 because of the allocations set aside for doubtful debts."
"The closeness between book values and market values in the banking sector does not have a big effect on stock markets. Markets went down largely in the recent past and market and book values came closer to each other. This closeness largely curbed speculation. Markets in the current situation cannot easily respond to speculation. Also, major investors no longer have a strong desire to illegally manipulate markets," he said.
"Markets are now more capable of reflecting real values. Undoubtedly, this is the best case where markets can mature in a good manner and legislation regulating the markets is enacted," he added.
EFFORTS ON TO BRIDGE UAE LOANS-TO-ASSETS GAP
The UAE banking sector is still largely cohesive and is committed to Central Bank standards, Senior Financial Analyst Wadah Al Taha told Emirates Business. He added that there was a big improvement in the control of liquidity and there were attempts to close the gap between loans and assets.
Al Taha said: "We need a deep reading of the rise or drop in the market value of banks in comparison with the book value, and there are several factors that give us the real picture of each bank's performance. The most important of these is liquidity and profitability as well as the loan-to-asset ratio and the rates of activity, revenues and growth."
He said that multiple profitability doubled 17 times in 2008 and the return on the ownership right was close to 19 per cent. But this year, company and bank profits dipped and the return was nine per cent at the moment.
Al Taha said that the important issue for banks was to close the gap between loans and assets and figure out how to repay loans and accumulated debts. Before 2008, banks had gone overboard with loans and this led to huge private debt, he added.
Private debt cannot grow beyond 20 per cent, according to the International Monetary Fund, but in the UAE banking sector, it reached 40 per cent, the highest among the GCC states, Al Taha pointed out.
He said when a large percentage of liquidity was out in 2008, estimated at some Dh180 billion by experts, the banking sector experienced a shortage of liquidity, and the loan-to-asset ratio in some banks reached 147 per cent. The total loan-to-asset ratio in the UAE banking sector was 110 per cent. It is now down to 103 per cent – the figure in January was Dh467bn – but the gap still exists, he said. (Abdel Hai Mohamed)
TOP BANKS: THEIR BOOK AND MARKET VALUES
- The National Bank of Abu Dhabi (NBAD) was judged the best bank in the capital by Truth Economic Consultants though its market value exceeded its book value in 2009. The market value was Dh26.9 billion as compared with the book value of Dh22.4bn – an increase of 32 per cent. Market value of the shares was at Dh12.4, which was 1.3 times higher than the book value. The number of shares representing the capital totalled 2.174 million
- The market value of Dubai's Mashreq totalled Dh14.6bn against the book value of Dh11.8bn, an increase of about 24 per cent. The price of the shares amounted to Dh9.1 against Dh7.36. The number of shares representing the capital amounted to 1.610 million
- The market value of First Gulf Bank amounted to Dh22bn against the book value of Dh16.6bn, an increase of 33 per cent. The share price rose to Dh16 from Dh12 and the bank's market value exceeded the book value by 1.3 times. The number of shares representing the capital totalled 1.375 million.