Share analysis: Ahli United Bank – Banking

The Company

Ahli United Bank (AUB), a full-fledged commercial and investment banking group providing wealth management, retail, corporate, treasury, offshore and private banking services, is Bahrain’s largest commercial bank by market capitalisation and asset base. Incorporated in April 2000, AUB is regulated by the Central Bank of Bahrain under a retail banking licence. The group's businesses consist of its operations in Bahrain; subsidiaries in the UK, Kuwait, Egypt and Iraq; and associates in Oman and Libya. AUB was formed by the merger of United Bank of Kuwait and Ahli United Bank of Bahrain.

AUB's ordinary shares have been listed on the Bahrain Bourse since August 2000, and on the Kuwait Stock Exchange since June 2006, and are actively traded. The bank’s shareholders are fairly diverse and the bank has a free float of 55%. Kuwait’s Public Institution of Social Security is the largest shareholder, with a 17.7% stake, followed by Bahrain’s Pension Fund Commission and the International Finance Corporation, with 10.0% and 3.3% stakes, respectively.

AUB’s businesses include full-fledged commercial and investment banking activities, providing both conventional and Islamic banking products. The bank has attained geographical diversification through its subsidiaries and associates. It has operations in Kuwait (75% stake in AUB Kuwait), the UK (100% stake in AUB UK), Oman (35% stake in Ahli Bank Oman), Egypt (85.4% stake in Ahli United Bank Egypt), Libya (40% stake in United Bank for Commerce and Investment Libya) and Iraq (71.3% stake in Commercial Bank of Iraq). AUB’s stake in AUB Kuwait also indirectly gives it a 75% holding in Kuwait & Middle East Financial Investment Company. In the first quarter of 2013, AUB sold its 29.4% stake in Ahli Bank Qatar to sovereign wealth fund Qatar Foundation for a gain of $213m.

Development Strategy

AUB’s strategy revolves around its vision of establishing an operating presence in each of the GCC countries, with a goal of achieving 10% market share. The bank is planning to create value through acquisitions, and is currently on the lookout for appropriate targets for acquisition in Saudi Arabia and the UAE – the only two GCC countries where it does not yet have a presence.

Realising the importance and growth potential of sharia-compliant banking, AUB is increasingly focusing on this area by developing new products and opening dedicated, sharia-compliant banking branches. Profit from these activities has increased almost threefold in since 2011, reflecting its further growth potential. In line with this strategy, in 2010 AUB’s subsidiary in Kuwait (AUB Kuwait) was converted to a sharia-compliant banking entity.

AUB reported healthy earning growth with net profits attributable to its shareholders of $113.8m in the third quarter of 2014, up 14.8% year-on-year (y-o-y) on the back of healthy net interest income growth and lower provisioning charges. In the first nine months of 2014 the bank’s net profit reached $376.3m, a 30.1% y-o-y increase. Fee income was up 4.5% over the period, to $111.5m.

Improved operating results saw ROAE rise to 15.9%, up from 14.2% the year before, while total assets grew 4.5% to $34.1bn from the end of 2013. The bank reported solid growth in lending of 8.2%, supported by a 10.9% year-to-date increase in customer deposits to $24.4bn. AUB’s asset quality remains strong, with a non-performing loan (NPL) ratio of 2.1%, down from 2.3% at end-2013. Total provision coverage rose from 155.5% to 172.4% and specific coverage improved to 91.5% from 86.1% at end-2013.

Retail revenue-to-assets declined in 2013, driven by increased competition, despite AUB maintaining its retail lending exposure at 31% of total loans. AUB has been shifting its retail lending from personal loans to mortgage loans. This trend is expected to continue, given the sharp contrast in asset quality of the two portfolios. While personal loans have a 3% NPL ratio on average, mortgage lending has been quite robust, with almost negligible delinquencies.