Equity | United Arab Emirates | Banks

16 August 2010

Dubai Islamic Bank

Hold
Target price

Shortfall on quality
Net attributable income for 2Q10 was ahead of our numbers, but revenues did not recover as strongly as expected, and goods costs and provisioning numbers were required to salvage the result. Pending further information on the sustainability of the different variances, we view the result as moderately weak.
Key forecasts
FY08A Reported PTP (Dhm) 1,723 1,730 0.42 0.42 0.23 4.47 0.88 12.1 20 FY09A 1,130 1,207 0.28 0.26 0.14 7.25 0.84 7.58 13.6 FY10F 1,018 1,022 0.24 0.24 0.14 7.95 0.82 7.6 11.9 FY11F 1,221 1,225 0.28 0.28 0.17 6.62 0.79 8.95 13.9 FY12F 1,613 1,617 0.37 0.37 0.19 5.01 0.75 9.91 17.5

Dh1.97
Price

Dh1.87
Short term (0-60 days)

n/a
Market view

No Weighting

Price performance
(1M) Price (Dh) Absolute (%) Rel market (%) Rel sector (%)
Aug 07 12 10 8 6 4 2 0 DISB.DU DFM General Index Jul 08

Reported net profit (Dhm)

(3M) 2.24 -16.5 -2.7 -5.4
Jul 09

(12M) 2.43 -23.0 -2.1 -13.7

Reported EPS (Dh) Normalised EPS (Dh) Dividend per share (Dh) Normalised PE (x) Price/book value (x) Dividend yield (%) Return on avg equity (%)
Accounting standard: IFRS Source: Company data, Rasmala forecasts

1.97 -5.1 -3.1 -3.0

year to Dec, fully diluted

DIB reported overall slightly weak 2Q10 results Headline and attributable income, at Dh301m, was 13% ahead of expectations, although comprehensive income at Dh145m was down 71% yoy, 47% qoq and 46% below our expectations. The main difference was the booking to income of historical revaluation gains and a cash flow hedging reserve. Broadly speaking, revenues underperformed forecasts by AED31m, although this weakness was offset by better-than-forecast deductions. Balance sheet growth flat Unsurprisingly to us, loans declined, although the 2% qoq reduction was slightly weaker than we had expected. However, the positive increase in liquidity, courtesy of the new Salam personal lending product, was definitely a surprise, suggesting to us a level of traction on raising retail deposits. Nevertheless, variances were small and are unlikely to indicate a further liquidity increase, although DIB should enjoy limited benefit from an LDR ratio of 77%. Weak revenues, but costs declined 7% and provisioning rose just 1% qoq Revenues of Dh761m in 2Q10 were up 4% qoq, but fell 4% short of our forecast of Dh792m. The main impact came from the continued decline in fees and commissions after adjusting for the Dh23m exceptional item. Spreads bounced back 23bp from weak 1Q10 levels to 3.81%, but net interest income, which rose 8% qoq, still fell 2% short of our expectation. Cost control was impressive, undershooting our forecasts by Dh26m, although we await confirmation that this is sustainable. Also, provisioning was Dh38m lower than we expected, although the absence of quarterly NPL numbers muddies any interpretation.

Market capitalisation

Dh7.10bn (US$1.92bn)
Average (12M) daily turnover

Dh20.19m (US$5.46m)
RIC: DISB.DU, DIB UH Priced Dh1.87 at close 12 Aug 2010. Source: Bloomberg

Analyst
Raj Madha
United Arab Emirates +971 55 224 8032 [email protected]

Overall, some disappointment likely We see little indication of the quality or sustainability of the various variances, but overall we do not believe this was a particularly strong set of results compared to our forecasts. Nevertheless, the implications for our forecasts are likely to be minor.

Dubai International Financial Centre, The Gate Village, Building 10, Level 1, P.O. Box 31145, Dubai, United Arab Emirates www.rasmala.com

Important disclosures can be found in the Disclosures Appendix. Distributed outside MENA by The Royal Bank of Scotland N.V. and its affiliates under a strategic alliance with Rasmala Investment Bank Ltd.

Table 1 : 2Q10 results summary

Dhm Balance sheet Loans & Islamic financing Financial instruments Total assets Customer deposits & Islamic funding Capital market liabilities Total liabilities Net liquid assets Shareholders' equity Income statement Net interest & Islamic returns Core non-interest Non-core non-interest Total non-interest income Total banking income Total operating expenses Provisioning Profit before tax Tax, minorities & appropriations Attributable income Headline net income Comprehensive income
Source: Company data, Rasmala forecasts

2Q09A 50,727 13,159 87,865 71,536 2,450 78,971 13,237 8,894

1Q10A 51,016 11,071 84,971 64,672 6,135 76,258 12,561 8,713

2Q10A 50,032 10,053 83,804 64,808 6,110 74,944 13,694 8,860

2Q10F 50,953 12,202 84,180 63,691 6,135 75,195 10,471 8,984

Chg yoy -1% -24% -5% -9% 149% -5% 0%

Chg qoq -2% -9% -1% 0% 0% -2% 2%

Vs est -2% -18% 0% 2% 0% 0% -1%

570 222 54 276 845 (319) (135) 459 (9) 450 450 504

510 198 23 220 731 (331) (174) 202 (2) 200 200 275

551 205 5 210 761 (309) (146) 304 (2) 301 301 145

565 214 13 226 792 (335) (198) 269 (2) 267 267 267

-3% -8% -91% -24% -10% -3% 8% -34% -75% -33% -33% -71%

8% 4% -79% -5% 4% -7% -16% 51% 35% 51% 51% -47%

-2% -4% -62% -7% -4% -8% -26% 13% 1% 13% 13% -46%

Dubai Islamic Bank | Investment View | 16 August 2010

Income statement
Dhm Net interest income Non-interest income Total income Operating costs Goodwill (amort/impaired) Other costs Pre-prov operating profit Provisions charges Post-prov op prof Associates (pre-tax) Other pre-tax items Reported PTP Taxation Minority interests Preference dividends Other post-tax items Reported net profit Tot normalised items Normalised PTP Normalised net profit
Source: Company data, Rasmala forecasts

FY08A 2146 869.2 3015 -1368 n/a -36.9 1610 -288.5 1322 401.0 0.00 1723 -132.4 0.00 0.00 139.9 1730 0.00 1723 1730

FY09A 2339 858.1 3197 -1343 n/a 0.00 1854 -741.0 1113 17.3 0.00 1130 -146.3 -4.79 0.00 228.2 1207 83.9 1130 1124

FY10F 2231 956.2 3187 -1352 n/a 0.00 1835 -822.8 1012 5.61 0.00 1018 -122.6 -1.00 0.00 127.9 1022 0.00 1018 1022

FY11F 2332 1098 3430 -1446 n/a 0.00 1984 -806.8 1177 43.9 0.00 1221 -147.1 -1.20 0.00 152.7 1225 0.00 1221 1225

FY12F 2387 1229 3616 -1525 n/a 0.00 2091 -567.9 1524 89.6 0.00 1613 -194.3 -1.58 0.00 200.3 1617 0.00 1613 1617
year to Dec

Balance sheet
Dhm Net loans to customers Other int earn assets Goodwill Oth non-int earn assets Total assets Total customer deposits Oth int-bearing liabs Non int-bearing liab Total liabilities Share capital Reserves Total equity (excl min) Minority interests Total liab & sh equity Risk weighted assets Est non-perf loans Specific provisions General provisions
Source: Company data, Rasmala forecasts

FY08A 52659 14708 0.00 8904 85031 66427 6086 4453 76966 8065 0.00 8065 0.12 85031 68916 n/a -1245 n/a

FY09A 49925 11848 34.5 8343 84304 64196 7617 4050 75862 8437 0.00 8437 4.91 84304 68778 n/a -1948 n/a

FY10F 51063 12569 34.5 9218 83031 62807 7553 3975 74335 8690 0.00 8690 5.06 83031 70345 n/a -2724 n/a

FY11F 53271 12814 34.5 9056 85740 64990 7602 4191 76783 8951 0.00 8951 5.21 85740 73387 n/a -3524 n/a

FY12F 57857 12563 34.5 9914 91750 70007 7716 4533 82256 9488 0.00 9488 5.52 91750 79705 n/a -4084 n/a
year ended Dec

Capital
Dhm Risk weighted assets Reported net profit Opening risk assets Closing risk assets Change in risk assets Capital required Free capital flow Ordinary dividend paid Share buy back/spec div Equity / preference issue Cash flow from financing Net capital flow Tier 1 capital Tier 1 capital ratio (%)
Source: Company data, Rasmala forecasts

FY08A 68916 1730 51808 68916 17108 1711 19.5 -860.5 0.00 14.8 -845.8 -826.2 8626 12.5

FY09A 68778 1207 68916 68778 -137.9 -13.8 1221 -538.6 -67.6 5.44 -600.8 620.5 8703 12.7

FY10F 70345 1022 68778 70345 1567 188.1 833.8 -539.7 0.00 0.00 -539.7 294.1 8860 12.6

FY11F 73387 1225 70345 73387 3042 365.0 860.4 -636.0 0.00 0.00 -636.0 224.4 9127 12.4

FY12F 79705 1617 73387 79705 6318 758.2 859.3 -704.2 0.00 0.00 -704.2 155.1 9677 12.1
year to Dec

Dubai Islamic Bank | Key Financial Data | 16 August 2010

Recommendation structure
Absolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price and only reflects capital appreciation. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months. Market or sector view: This view is the responsibility of the strategy team and a relative call on the performance of the market/sector relative to the region. Overweight/Underweight implies upside/downside of 10% or more and Neutral implies less than 10% upside/downside. Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value.

Valuation and risks to target price

Dubai Islamic Bank (RIC: DISB.DU, Rec: Hold, CP: Dh1.87, TP: Dh1.97): Upside risks to our GGM-derived valuation and target price include substantial improvement in performance of Dubai-based companies and a stabilisation of property prices in the Emirate. Downside risks, on the other hand, would be continuous deterioration in contribution from associates (primarily Deyaar) and subsidiaries.

Disclaimer
This report is prepared by Rasmala Investment Bank Limited ("RIB"). RIB is regulated by the Dubai Financial Services Authority ("DFSA"). RIB products or services are only made available to customers who RIB is satisfied meet the regulatory criteria to be a " Professional Client", as defined under the Rules and Regulations of the Dubai International Financial Centre ("DIFC"). Our investment recommendations take into account both risk and expected return. We base our long-term fair value estimates on a fundamental analysis of a company's future prospects, after having taken perceived risks into consideration. We have conducted reasonable research to arrive at our investment recommendations and fair value estimates for the company or companies mentioned in this report. Although the information in this report has been obtained from sources that RIB believes to be reliable, we have not independently verified such information thus it may not be accurate or complete. RIB does not represent or warrant, either expressly or impliedly, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by RIB or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connection therewith. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This research report is prepared for general circulation and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any securities referred to in the report. It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs. RIB is not registered with the U.S. Securities and Exchange Commission, or any U.S. state authority, as a broker-dealer or investment advisor. This report has not been approved, disapproved or recommended by the U.S. Securities and Exchange Commission, any state securities commission in the United States, the securities commission of any non-U.S. jurisdiction or any other U.S. or non-U.S. regulatory authority. None of these authorities has passed on or endorsed the merits or the accuracy or adequacy of this report. RIB and its group entities (together and separately, "Rasmala") does and may seek to do business with companies covered in its reports. As a result, users should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Rasmala and its respective employees, directors and officers shall not be responsible or liable for any liabilities, damages, losses, claims, causes of action, or proceedings (including without limitation indirect, consequential, special, incidental, or punitive damages) arising out of or in connection with the use of this report or any errors or omissions in its content. The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

Dubai Islamic Bank | Disclosures Appendix | 16 August 2010