My Corporate Finance Project

CORPORATE FINANCE PROJECT

Abu Dhabi Islamic Bank

National Bank of Abu Dhabi

By

Danial Wahaj Khan

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Page Number

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6

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Corporate Governance Analysis

Stockholder Analysis

Risk and Return

Measuring Investment Returns

Capital Structure Choices

Optimal Capital Structure

Mechanics of Moving to the Optimal

Dividend Policy

A Framework for Analyzing Dividends

Valuation

References and Bibliography

CORPORATE GOVERNANCE ANALYSIS:

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The Chief Executive Officer:

Abu Dhabi Islamic Bank:

Mr.Tirad Mahmud is the CEO of Abu Dhabi Islamic Bank. He has been working as the CEO since March 2008.

ADIB is a publicly traded company with major shareholding of UAE citizens and Emirates

International Investment Company. The company was founded in 1998 and it has major shareholding of Abu Dhabi Royal Family. Tirad was appointed directly as the CEO by Chairman and Board of Directors. Prior to joining ADIB, Tirad served as the General Manager of Samba

Financial Group from 2004-2007 and CEO at the Citibank Romania where he worked for 22 years.

ADIB doesn’t disclose the remuneration and share options information regarding the CEO.

(Business Week, n.d)

National Bank of Abu Dhabi:

Michael H. Tomalin is the CEO of National Bank of Abu Dhabi. He has been serving as the

Group CEO of NBAD since 1999.

NBAD was founded in 1968 and its major shareholding is held by Abu Dhabi Investment

Council (Government entity).NBAD is not a family based business. Micheal joined the company in 1999 as the Group CEO.Micheal was trained as an investment manager at N.M Rothschild in

London then he joined Barclays as CEO in 1992.

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No information regarding the remuneration and share options of the CEO (in particular) is disclosed.

(Business Week, n.d)

The Board of Directors:


Name of the director

HE Jawaan Awaidha Suhail Al

Khaili

Position

Chairman

Years served as a director

4 Years

Khaled Abdulla Neamat Khouri Vice Chairman

Abdulla Bin Aqueeda Al Muhairi Director

5 Years

Juma Khamis Mugheer Al Khaili Director

Dr Sami Ali Al Amri Director

Khamis Mohamed Buharoon

Ragheed Najeeb Shanti

Director

Director

(Abu Dhabi Islamic Bank, 2011)

2 Years

8 Years

3 Years

5 Years

5 Years

Majority of the board members of ADIB are independent and non-executive directors who are serving in different organizations.

Khaled Khouri is a director at ADIA.

Khamis Buharoon is a board member of Abu Dhabi National Hotels Company, Emirates Institute for Banking and Financial Studies and its Human Resources Committee, Arqaam Company and

Board Member of the General Council for Islamic Banks and Financial Institutions.

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Juma is a Member of the Boards of ADIC and AGTHIA Group in the UAE. He is also Board

Member at the General Holding Corporation, Arab International Bank and the Joint Arab

Investment Corporation in Egypt. He is an active member of the Administration, Investment and

Scholarship Committees at ADIA.

Dr. Sami is President of Quantum Consulting.

Jawaan Awaidha Suhail Al Khaili holds 43,941,108 shares interest in the company but this is not a significant holding as it represents 1% holding.

(Business Week)


Name of the director Position

H. E. Nasser Ahmed Khalifa Alsowaidi Chairman

H. E. Dr. Jauan Salem Al Dhaheri

H.E. Mohammed Omar Abdulla

Mr. Khalifa Sultan Al Suwaidi

Mr. Hashim Fawaz Al Kudsi

Mr. David Beau

H.E. Sultan Bin Rashed Al Dhaheri

Sheikh Ahmed Mohammed Sultan Al

Dhaheri

Sheikh Mohammed Saif Mohammed

Al Nahyan

Deputy Chairman

Director

Director

Director

Director

Director

Director

Director

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Mr. Matar Hamdan Al Ameri

Mr. Michael H. Tomalin

(National Bank of Abu Dhabi, 2011 )

Director

CEO

Nasser Ahmed Khalifa Alsowaidi also serves as Chairman of the Department of Economic

Development, the Abu Dhabi Securities Exchange, Abu Dhabi Ports Company and National

Bank of Abu Dhabi. He is the chairman of both the Union Railway Company and ZonesCorp.

H.E. Alsowaidi is the Chairman of the Department of Planning and Economy.

Mohamed Omar Abdulla serves as a Director National Drilling Company.

Bin Rashed Al Dhaheri serves as Board Member of Abu Dhabi National Insurance Company.

Mr. Hashim Fawwaz Al Kudsi serves as a Director Al Wathba Company for Central Services and AD Invest. Mr. Al Kudsi serves as an Executive Director of Abu Dhabi Investment Council

(ADIC).ADIC is a major shareholder of National Bank of Abu Dhabi.

Mr. David Beau serves as Chief Investment Officer at Abu Dhabi Investment Council. He serves as an Executive Committee Member at Abu Dhabi Investment Company.He is also connected to a major shareholding entity of the bank, ADIC.

Mr. Matar Hamdan Al Ameri serves as a Director of National Drilling Company. He serves as a

Board Member of Abu Dhabi National Tanker Company, ADNOC Marketing International,

Singapore, Excel London (subsidiary of ADNEC) and Al Ain Sports Club. He serves as a

Member of ADNOC Group. He serves as Chairman of ADCO Audit Committee, ADNOC

Distribution Audit Committee, Advisory Committee at ESNAAD, Finance Committee at

GASCO and Finance Committee at Al Hosn Gas Company. He serves as a Member of Audit

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Committee at Adu Dhabi National Exhibition Company. He serves as Chairman of FINCO of

Petroleum Institute.

(Business Week)

Share Voting Structure:


ADIB doesn’t have multiple classes of shares with different voting rights. Shareholders can exercise their power at AGM where one share is equal to one vote.


NBAD doesn’t have different classes of shares. One share is equal to one vote at AGM.

Financial Market Concerns:


ADIB is currently listed in Abu Dhabi Stock Exchange. There are currently 5 analysts following the company.

Analyst

Murad Ansari

Radwa El Swaify

Khalid Al Sahli

Jaap Meijer

Nisreen Assi

Institution

EFG Hermes

Beltone Financial

Global Investment House

Arqaam Capital

Arqaam Capital

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(Abu Dhabi Islamic Bank Official )


Khaled Akl

Jaap Meijer

Analyst

Vishal Gupta

Sara Boutros

Munir Shahin

Kato Mukuru

Institution

ADCB Wealth Management Group

Al Futtaim HC Securities

Bank Muscat

Beltone Financial

BoA Merrill Lynch

Citi Investment Research

Rahul Shah Deutsche Bank

Murad Ansari / Shabbir Malik EFG Hermes

Naveed Ahmed

Waleed Mohsin

Aybek Islamov

Naresh Bilandani

Daniel Cowan

May El Haggar

Raja Ghoussoub

Chiradeep Ghosh

Saket Chowdhury

Global Investment House

Goldman Sachs International

HSBC Bank Middle East Limited

JP Morgan

Morgan Stanley & Co.

Naeem Holding

NBK Capital

SICO, Bahrain

TAIB Research

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Sanyalak Manibhandu

(National Bank of Abu Dhabi Official)

Societal Constraints:

Abu Dhabi Financial Services

(NBAD)


ADIB is a well known Islamic bank around the globe. It was the first Islamic bank in Abu Dhabi and second in UAE.ADIB enjoys a good reputation among society which is evident from the continuous growing customer base. The bank knows its responsibility as a corporate citizen and took a number of CSR initiatives to prove it. ADIB provides a number of employment opportunities to the locals through college placement and internship programs. The bank has started programs to provide free education of Islamic finance to fresh graduates of UAE. The bank continues to promote the high standards of Islamic banking and ethical practices at all levels of the business.

There are a number of awards that ADIB received in recent years:



Best Islamic Bank in the UAE for 2011 by Global Finance Magazine



Best Islamic Bank by Business Banking and Finance Magazine Globally



Best Overall Bank in the UAE in customer service for 2011 by Ethos Consultancy



Human Resource Development Award for 2011 organized by Emirates Institute of

Banking &Financial Studies



Best Islamic syndicated facility Majid Al Futtaim Properties AED1.14bn facility by

EMEA award



Rated amongst the best 10 companies in the UAE by Forbes Magazine (Middle East)

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National Bank of Abu Dhabi is the number one bank in the UAE with more than 120 branches all over the country. The bank has been ranked as one of the 50 safest banks in the world by

Global Finance magazine. The positive reputation of the bank is evident by the continuous growing business of the bank. The bank has CSR policy in place to make it a better place to work for and to make Abu Dhabi more sustainable in the future by providing economic stability. The bank has received a number of awards in previous years, some of them are mentioned below:



Best CSR Programme in Middle East 2010 by EMEA Finance.



Human Resources Development Award in Banking Sector by Emirates Institute of

Banking & Financial Studies.



Safest Bank in the Middle East by Global Finance.



Best Bank in the UAE by Euromoney.



Best Asset Manager in the UAE by Global Investor/isf – Euromoney.



Best Pre-paid Card - NBAD Ratibi Card by Smart Card Awards.


STOCK HOLDER ANALYSIS:


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ADIB has AED2365m issued share capital. The major shareholder of the bank is Abu Dhabi

Royal Family who owns 41% the company through wholly owned holding company Emirates

International Investment Company LLC. Members of the Abu Dhabi Royal Family further holds

9% as individual interest in the bank. The Government of Abu Dhabi owns 8% shares through its investment company Abu Dhabi Investment Council. Over 47000 of UAE citizens (general public) own 38% shareholding in the bank. Other shareholders include National Bank of Abu

Dhabi and UAE General Pension and Social Security Authority.

ADIB is only listed in Abu Dhabi Stock Exchange without any international stock listing and its shareholding is entirely UAE based.



NBAD has AED2870m issued and fully paid up capital. The major shareholding is UAE based which is around 97.5% of total shareholding. Abu Dhabi Investment Council, a government entity of Abu Dhabi holds significant shareholding of 70%.

UAE nationals own 27% shareholding while foreigners own only 2.5% in the bank. The bank is only listed in Abu Dhabi Stock Exchange.


RISK AND RETURN ANALYSIS:


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Estimating Historical Risk Parameters:

Businesses usually face two kinds of risk. One is a systematic risk that affects every business operating in a particular jurisdiction though the effect maybe higher or lower for different industries; second is a non systematic risk or a company/industry specific risk. Shareholders can eliminate non systematic risk by diversifying their portfolio but they can’t eliminate systematic risk.

Systematic risk can be an increase/decrease in interest rates, legislative changes affecting all businesses, political instability, changes in tax laws, country specific risk and deteriorating law & order situation.

Beta is the measure of systematic risk which can’t be eliminated by diversification. Beta can be calculated by using regression analysis.

We have calculated the beta of ADIB using regression analysis and graph is shown to demonstrate the volatility of returns. The returns of ADIB have been compared against ADX

(Abu Dhabi Stock Exchange) Index returns.

-4,00% -3,00% -2,00%

1,50%

1,00%

0,50%

0,00%

-1,00%

-0,50%

0,00%

-1,00%

-1,50%

-2,00%

-2,50%

-3,00%

ADX Returns

1,00% 2,00%

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(Asmainfo)

Regression model gave these results:

Intercept

-.0007

Slope(Beta)

.152

R Square

.013

The intercept (alpha) represents the return in excess of the risk borne by investors if its value is positive and if its value is negative it represents the lesser returns for the risk borne. Intercept of

ADIB is quite low here so it doesn’t affect the returns too much.

The slope is the beta of ADIB stocks which is .152. Beta can be interpreted as the change in return of ADIB stocks due to change in Index return. The value of beta is quite low for ADIB thus ADIB stock return is not very much dependent upon market returns.

R Square is the coefficient of determination. It tells us the level of stock return dependency on the market return. In other words it measures the level of systematic risk. The systematic risk is quite lower for the ADIB stocks due to lower R Square value. Company specific risk or non systematic risk can be found by 1-r square, which is .987 or 98.7%. This means that most of the beta risk is defined by business and financial factors of the business not the market.

The above beta is actually levered beta which means it has two components in it; one is the risk due to financial leverage and second is the risk due to business factors. Beta asset (unlevered beta) can be calculated as follows: 𝛽(𝑎𝑠𝑠𝑒𝑡) = 𝛽(𝑒𝑞𝑢𝑖𝑡𝑦)

𝐸

𝐸 + 𝐷(1 − 𝑇)

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Where β (equity) is levered beta calculated using regression analysis, E and D are weights of

Equity and Debt respectively and T is the effective tax rate.

Since UAE doesn’t have any tax for corporate entities we can calculate it more simply.

Market value of ADIB share is 3.16AED/share and no. of shares is 2365m so total market capitalization is 7500m AED. Total value of long term debt is 4591m AED. Beta (equity) has already been calculated as .152 using regression analysis.


Using all the required data we have calculated Beta Asset (Unlevered beta) which is .094. By subtracting asset beta from equity beta we can have the beta figure that represents the risk due to financial leverage; this can be found as .152-.094=.058.This means .058 of beta is due to financial leverage and .094 is due to operational risk.

Estimating default risk and Cost of Debt:

Default risk is the risk that company may fail to make the payments of interest or principal. The default risk is of vital importance to loan providers. They charge more premium on high risk fixed income securities. The credit/default risk is usually estimated through the ratings by institutions such as Moody’s and Fitch.

Credit rating of ADIB:

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Rating Agency

Moody's Investor Services

Fitch Ratings

Long Term

A2

A+

Short Term

P1

F1

Outlook

Stable

Stable

The long term bond rating is A2 by Moody’s which means it is an upper medium rated security with low credit risk and thus lies in investment category not speculative. The bond lies in upper medium rated according to Fitch ratings also. The long term bond rating is overall good and there is low credit risk involved in ADIB bonds.


The short term bond rating lies in high grade category according to Moody’s but according to

Fitch rating it is in upper medium category. Overall ratings for short term bonds are good and it has low risk involved.

ADIB has 3 types of long and medium term debts; amount due to financial institutions, sukook and tier 2 Wakala Capital that is issued to the federal government. The cost of debt is estimated on Sukook and Wakala capital since no information was given regarding the interest rates on the amount due to financial institutions cost of debt is 3%.

Cost of Capital:

The cost of capital is the cost that a company is expected to pay to the providers of capital. The cost of capital is usually higher for risky companies as investors and lenders expect higher returns for the higher level of risk. Companies usually use weighted average cost of capital

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(WACC) to appraise the investment projects. The weighted average cost of capital can be calculated as:

𝐾𝑐 =

𝐸

𝐸 + 𝐷

× 𝐾𝑒 +

𝐷

𝐷 + 𝐸

× 𝐾𝑑(1 − 𝑇)

Where E and D are weights of market value of equity and debt, T is the effective tax rate, Ke is cost of equity and Kd is cost of debt. The values of equity and debt have already been calculated in beta calculation.

E=7500m AED

D=4591m AED

In order to calculate the cost of capital of ADIB we must first calculate the cost of equity. Cost of equity can be calculated using capital asset pricing model (CAPM). The formula of return on equity according to CAPM is:

𝐾𝑒 = 𝑅𝑓 + (𝑅𝑚 − 𝑅𝑓)𝛽𝑒

Where Rf is risk free rate of return, Rm is market return and 𝛽𝑒 is beta equity (levered beta) of firm. Rm-Rf is called risk premium.

Risk free rate is 2% in UAE and risk premium is 6.75%.Using these rates and levered beta we calculated the cost of equity 3.03%.

(Newyork University,n.d;UAE Deposits,n.d)

Now using all the required data we have calculated WACC 3.02%.


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Estimating Historical Risk Parameters:

Businesses usually face two kinds of risk. One is a systematic risk that affects every business operating in a particular jurisdiction though the effect maybe higher or lower for different industries; second is a non systematic risk or a company/industry specific risk. Shareholders can eliminate non systematic risk by diversifying their portfolio but they can’t eliminate systematic risk.

Systematic risk can be an increase/decrease in interest rates, legislative changes affecting all businesses, political instability, changes in tax laws, country specific risk and deteriorating law & order situation.

Beta is the measure of systematic risk which can’t be eliminated by diversification. Beta can be calculated by using regression analysis.

We have calculated the beta of NBAD using regression analysis and graph is shown to demonstrate the volatility of returns. The returns of NBAD have been compared against ADX

(Abu Dhabi Stock Exchange) Index returns.

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1,50%

1,00%

0,50%

0,00%

-3,00% -2,00% -1,00% 0,00% 1,00% 2,00% 3,00% 4,00% 5,00%

-0,50%

-1,00%

-1,50%

-2,00%

-2,50%

-3,00%

ADX Returns

Regression model gave these results:

Intercept

.0022

Slope(Beta)

.510

R Square

.089

The intercept (alpha) represents the return in excess of the risk borne by investors if its value is positive and if its value is negative it represents the lesser returns for the risk borne. Intercept of

NBAD is a positive figure which represents the higher return against the level of risk borne.

The slope is the beta of NBAD stocks which is .510. Beta can be interpreted as the change in return of NBAD stocks due to change in Index return. The value of beta is less than 1 which means the value of NBAD stocks is not perfectly correlated with the index returns. In simple words it means if ADX index increases/decreases by 10% then NBAD stocks will only increase/decrease by 5%. The level of systematic risk of NBAD is lower than the market.

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R Square is the coefficient of determination. It tells us the level of stock return dependency on the market return. In other words it measures the level of systematic risk. The systematic risk is quite lower for the NBAD stocks due to lower R Square value. Company specific risk or non systematic risk can be found by 1-r square, which is .911 or 91.1%. This means that most of the beta risk is defined by business and financial factors of the business not the market.

The above beta is actually levered beta which means it has two components in it; one is the risk due to financial leverage and second is the risk due to business factors. Beta asset (unlevered beta) can be calculated as follows: 𝛽(𝑎𝑠𝑠𝑒𝑡) = 𝛽(𝑒𝑞𝑢𝑖𝑡𝑦)

𝐸

𝐸 + 𝐷(1 − 𝑇)

Where β (equity) is levered beta calculated using regression analysis, E and D are weights of

Equity and Debt respectively and T is the effective tax rate.

Since UAE doesn’t have any tax for corporate entities we can calculate it more simply. The tax was only paid on oversees income which is negligible.

Market value of NBAD share is 10.95AED/share and no. of shares is 2867m so total market capitalization is 31400m AED. Total value of long term debt is 22516m AED. Beta (equity) has already been calculated as .510 using regression analysis.


Using all the required data we have calculated Beta Asset (Unlevered beta) which is .297. By subtracting asset beta from equity beta we can have the beta figure that represents the risk due to

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financial leverage; this can be found as .510-.297=.213. This means .213 of beta is due to financial leverage and .297 of beta is due to operational risk.

Estimating default risk and Cost of Debt:

Default risk is the risk that company may fail to make the payments of interest or principal. The default risk is of vital importance to loan providers. They charge more premium on high risk fixed income securities. The credit/default risk is usually estimated through the ratings by institutions such as Moody’s and Fitch.

Credit rating of NBAD:

Rating Agency Long Term

Moody's Investor Services

Fitch Ratings

S&P

RAM

RI


Aa3

AA-

A+

AAA

A+

Short Term

P1

F1+

A1

P1

A+

Outlook

Stable

Stable

Stable

Stable

Stable

The long term bond rating is Aa3 by Moody’s which means it is a higher grade rated security with very low credit risk and thus lies in investment category not speculative. The bond lies in higher grade rated according to Fitch ratings also. The long term bond rating is overall good and there is very low credit risk involved in NBAD bonds.

The short term bond rating lies in prime category according to Moody’s and Fitch rating. Overall ratings for short term bonds are good and it has very low risk involved.

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NBAD broadly has 3 types of debts. These are medium term notes, subordinated notes and medium term borrowings. There are more than 20 types of loans further with in the category with different maturities and interest rates. Some of the loans are mentioned without interest rates so in order to simplify the calculation of cost of debt we have calculated the average according to the weightage. The calculated cost of debt is 4.32%.

Cost of Capital:

The cost of capital is the cost that a company is expected to pay to the providers of capital. The cost of capital is usually higher for risky companies as investors and lenders expect higher returns for the higher level of risk. Companies usually use weighted average cost of capital

(WACC) to appraise the investment projects. The weighted average cost of capital can be calculated as:

𝐾𝑐 =

𝐸

𝐸 + 𝐷

× 𝐾𝑒 +

𝐷

𝐷 + 𝐸

× 𝐾𝑑(1 − 𝑇)

Where E and D are weights of market value of equity and debt, T is the effective tax rate, Ke is cost of equity and Kd is cost of debt. The values of equity and debt have already been calculated in beta calculation.

E=31400m AED

D=22516m AED

In order to calculate the cost of capital of NBAD we must first calculate the cost of equity. Cost of equity can be calculated using capital asset pricing model (CAPM). The formula of return on equity according to CAPM is:

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𝐾𝑒 = 𝑅𝑓 + (𝑅𝑚 − 𝑅𝑓)𝛽𝑒

Where Rf is risk free rate of return, Rm is market return and 𝛽𝑒 is beta equity (levered beta) of firm. Rm-Rf is called risk premium.

Risk free rate is 2% in UAE and risk premium is 6.75%.Using these rates and levered beta (.510) we calculated the return on equity 5.44%.

(Newyork University,n.d;UAE Deposits,n.d)

Now using all the required data we have calculated WACC 4.97%.

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MEASURING INVESTMENT RETURNS:


Accounting Returns:

Return on equity is the measure of return generated on shareholders’ common equity. The return on equity is an important investor ratio that is widely used to assess the performance of a company. Return on equity can be calculated as

Return on Equity (ROE) = Net Income/Shareholders’ equity

Return on equity of ADIB for 2011 is 13.48%.Based upon this result ADIB is picking profitable projects.

Return on capital is the measure of return generated on overall capital of a company. Overall capital includes book value of shareholders’ equity and book value of debt. Return on capital is calculated as:

Return on Capital = Net Income/Total Capital

Return on capital of ADIB for 2011 is 11.85%. By comparing this to the WACC (3%) we can conclude that ADIB performed well.

Return on equity for previous year (2010) was 12.62% and comparing this figure to current year figure we can see a slight favorable change in performance. In 2009 ROE was drastically low at

1.5% which was abnormal return due to overall economic crisis in Middle East. Return on capital shows a stable trend with very low growth as it was 11.6% in 2010. Except for 2009 the

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trend is a growing trend as the bank is expanding its operations and putting profitable strategies in place.

(Securties.com)

The use of above accounting ratios as a measure of return is not a very good approach. These ratios use accounting returns (profits) which are highly subjective and arbitrary. Before reaching to an accounting profit a number of non-cash expenses are deducted such as depreciation and amortization which are just accounting estimates not real (cash) expenses. The accounting returns base on judgments of accountant as accounting standards provide different ways to account for the financial information. Accounting profits can be manipulated by business managers to improve these ratios such as cutting Research and Development expenditure to improve ratios in short term but it puts the long-term stability of a firm at stake.

These ratios use book values of equity and debt which is not a fair approach. These ratios also don’t include the investing decisions that do not alter the capital side of balance sheet such as operating leases rather than finance leases. These ratios do not show good figures in short term if a company is investing more because the value of these ratios fall as capital or equity value increase.

To make it fairer, accounting returns should be replaced with cash flows that actually are the returns and expenditure in ‘cash’ and discounting them using relevant discount rate (WACC). All the expenditure related to invested capital should be included in the calculation and book value of capital should be replaced with more updated values.

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Economic Value Added:

Economic value added is the measure of increase/decrease in shareholders’ wealth that is in excess or less than the cost of capital. Economic value added uses ‘economic profit’ rather than accounting profit thus it’s a more fair measure of company’s performance as compared to other measures that use accounting profits.

𝐸𝑉𝐴(𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑉𝑎𝑙𝑢𝑒 𝐴𝑑𝑑𝑒𝑑) = 𝑁𝑂𝑃𝐴𝑇 − (𝑊𝐴𝐶𝐶 × 𝐶𝑎𝑝𝑖𝑡𝑎𝑙)

NOPAT here is the economic profit earned by a firm. Ideally there are some 160 adjustments that should be made to reach this NOPAT but due to lack on information available and no tax world (UAE has no corporate tax) we are using EBIT. Capital is the total book value of capital employed; capital employed is the long term debt and shareholders’ equity in balance sheet.

EVA for ADIB is calculated as follows:

𝐸𝑉𝐴 = 2042𝑚 − (3.02% × 13159𝑚)

EVA=1645m AED

EVA of ADIB is a positive figure which means 1645m AED economic value has been added to the investors’ value in 2011. This amount is in excess of the cost of capital of the bank.

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Accounting Returns:

Return on equity is the measure of return generated on shareholders’ common equity. The return on equity is an important investor ratio that is widely used to assess the performance of a company. Return on equity can be calculated as

Return on Equity (ROE) = Net Income/Shareholders’ equity

Return on equity of NBAD for 2011 is 14.05%.Based upon this result NBAD is picking profitable projects.

Trends on return on equity can be seen as:

Return on Equity

25

20

15

10

5

0

2008

2009

2010

2011

Return on equity was highest in 2008 with 21% and it fell significantly in 2009 to 15% and remained stable in 2010 but slightly fell by 1% in 2011. The trend can be regarded as stable since

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2009 however major decrease in return from 2008 to 2009 was primarily due to the overall economic crisis in Middle East.

(Asmainfo)

The use of above accounting ratios as a measure of return is not a very good approach. These ratios use accounting returns (profits) which are highly subjective and arbitrary. Before reaching to an accounting profit a number of non-cash expenses are deducted such as depreciation and amortization which are just accounting estimates not real (cash) expenses. The accounting returns base on judgments of accountant as accounting standards provide different ways to account for the financial information. Accounting profits can be manipulated by business managers to improve these ratios such as cutting Research and Development expenditure to improve ratios in short term but it puts the long-term stability of a firm at stake.

These ratios use book values of equity and debt which is not a fair approach. These ratios also don’t include the investing decisions that do not alter the capital side of balance sheet such as operating leases rather than finance leases. These ratios do not show good figures in short term if a company is investing more because the value of these ratios fall as capital or equity value increase.

To make it fairer, accounting returns should be replaced with cash flows that actually are the returns and expenditure in ‘cash’ and discounting them using relevant discount rate (WACC). All the expenditure related to invested capital should be included in the calculation and book value of capital should be replaced with more updated values.

28

Economic Value Added:

Economic value added is the measure of increase/decrease in shareholders’ wealth that is in excess or less than the cost of capital. Economic value added uses ‘economic profit’ rather than accounting profit thus it’s a more fair measure of company’s performance as compared to other measures that use accounting profits.

𝐸𝑉𝐴(𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑉𝑎𝑙𝑢𝑒 𝐴𝑑𝑑𝑒𝑑) = 𝑁𝑂𝑃𝐴𝑇 − (𝑊𝐴𝐶𝐶 × 𝐶𝑎𝑝𝑖𝑡𝑎𝑙)

NOPAT here is the economic profit earned by a firm. Ideally there are some 160 adjustments that should be made to reach this NOPAT but due to lack on information available and no tax world (UAE has no corporate tax) we are using EBIT. Capital is the total book value of capital employed; capital employed is the long term debt and shareholders’ equity in balance sheet.

EVA for NBAD is calculated as follows:

𝐸𝑉𝐴 = 5317𝑚 − (4.97% × 48905𝑚)

EVA=2886m AED

EVA of NBAD is a positive figure which means 2886m AED economic value has been added to the investors’ value in 2011. This amount is in excess of the cost of capital of the bank.

29

CAPITAL STRUCTURE CHOICES:


Capital structure of a company consists of debt finance and equity finance. Companies can choose to have different levels of debt in their capital structure however debt finance and equity finance both have their advantages and disadvantages. To assess the level of debt finance in capital structure firms have to consider few important aspects.

Capital structure of a firm or gearing level can be assessed by Debt/Capital ratio which shows the value of debt as a percentage of total capital (debt plus equity) of a firm. D/C ratio of ADIB is

35%. A decision whether to add further debt is dependent upon the cost and benefits of debt to the bank.

Debt finance has a cost which is finance cost that is paid to the lenders of debt. The tax advantage of this is a fact that this is a tax deductible expense unlike the dividend payments by a company that is non-tax deductible. Debt finance is also considered a cheaper finance to corporate finance managers. In case of ADIB this is irrelevant because UAE is a no tax zone and it doesn’t charge any tax to local corporate entities. Consequently ADIB has no ‘tax advantage’ in using debt finance.

Free cash flows analysis is also very much important before increasing debt of a firm. Free cash flows are cash flows available for distribution among securities holder. Free cash flows can be calculated as:

𝐹𝑟𝑒𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠 = 𝐸𝐵𝐼𝑇(1 − 𝑇) − 𝑁𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

Net Capital expenditure is equal to capital expenditure less depreciation and amortization.

30

The figure of free cash flows of ADIB for 2011 is 1832m AED. The level of free cash flows is high enough to pay off further interest however ADIB is an Islamic bank which has to pay profit to the Sukuk holders and also high level of dividends to investors.

The volatility of operating profit should also be considered before giving final words on cash flows. The operating profit graph of ADIB is given below:

Operating Profit

2 000,00

1 800,00

1 600,00

1 400,00

1 200,00

1 000,00

800,00

600,00

400,00

200,00

0,00

2007 2008 2009 2010 2011


The trend in operating profit is a positive trend which means ADIB can afford having more debt in its capital structure but managers should consider risk profile of shareholders because the bank is already geared and introducing more debts will make the bank more risky.

The increasing level of operating profits tells us that bank invested in profitable opportunities in past and will continue to do so. According to pecking order theory the cheapest source of finance

31

is the retained earnings and bank is retaining its earnings for future growth rather than relying on further debt finance.

Retention of profits to finance future projects, giving higher level of dividends and timely information in the form of investors’ presentation on website mean the managers of ADIB are actually in line and performing in the interest of shareholders. ADIB board of directors also has a number of independent and non executive directors who scrutinize the bank’s performance in the best interest of shareholders.

Debt holders can find relevant information regarding shareholders on ADIB’s website and recent developments. The bond rating of ADIB is high and they have low credit risk so there is a less risk involved for debt holders.

Cash

12000

10000

8000

6000

4000

2000

0

2008 2009 2010 2011

32

The level of cash maintained in previous years may be a sign of concern for lenders due to high level of volatility in the level however they are enough to service the debt. For example in 2011 the profit paid to sukuk holders (debt holders) was 886mAED and cash level was 11273m AED.

(Asmainfo)

The bank sets its targets for futures which are apparently feasible because it does include the level of competition, overall economic environment including recent financial crisis and market needs. Bank is planning to grow its operation in retail banking, diversifying the sources & structure of its revenue and entering new markets.



Capital structure of a company consists of debt finance and equity finance. Companies can choose to have different levels of debt in their capital structure however debt finance and equity finance both have their advantages and disadvantages. To assess the level of debt finance in capital structure firms have to consider few important aspects.

Capital structure of a firm or gearing level can be assessed by Debt/Capital ratio which shows the value of debt as a percentage of total capital (debt plus equity) of a firm. D/C ratio of NBAD is

46%. A decision whether to add further debt is dependent upon the cost and benefits of debt to the bank.

Debt finance has a cost which is finance cost that is paid to the lenders of debt. The tax advantage of this is a fact that this is a tax deductible expense unlike the dividend payments by a company that is non-tax deductible. Debt finance is also considered a cheaper finance to

33

corporate finance managers. In case of NBAD this is irrelevant because UAE is a no tax zone and it doesn’t charge any tax to local corporate entities. Consequently NBAD has no ‘tax advantage’ in using debt finance.

Free cash flows analysis is also very much important before increasing debt of a firm. Free cash flows are cash flows available for distribution among securities holder. There are different methods of calculating free cash flows. Free cash flows can be calculated as:

𝐹𝑟𝑒𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠 = 𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

The figure of free cash flows of NBAD for 2011 is 3852m AED. The level of free cash flows is high enough to pay off further interest however NBAD pays high level of dividends and already has higher gearing levels so it will not be profitable to introduce more debts.

The volatility of operating income should also be considered before giving final words on cash flows. The operating income graph of NBAD is given below:

Operating Income

8 000,00

7 000,00

6 000,00

5 000,00

4 000,00

3 000,00

2 000,00

1 000,00

0,00

2007 2008 2009

34

2010 2011

(Gulfbase)

The trend in operating income is a positive trend which means NBAD can afford having more debt in its capital structure but managers should consider risk profile of shareholders because the bank is already geared and introducing more debts will make the bank more risky.

The increasing level of operating income tells us that bank invested in profitable opportunities in past and will continue to do so. According to pecking order theory the cheapest source of finance is the retained earnings and bank is retaining its earnings for future growth rather than relying on further debt finance.

Retention of profits to finance future projects, giving higher level of dividends and timely information in the form of investors’ presentation on website mean the managers of NBAD are actually in line and performing in the interest of shareholders. NBAD board of directors also has a number of independent and non executive directors who scrutinize the bank’s performance in the best interest of shareholders.

Debt holders can find relevant information regarding shareholders on NBAD’s website, through analyst’s covering the bank and recent developments. The bond rating of NBAD is very high and they have lowest credit risk so there is very less risk involved for debt holders.

We can further look to the level of cash balances maintained in previous years. The high level of cash balances is a good sign from debt holders’ perspective and it may also means that a firm is not using all resources on risky and bad projects.

35

Cash

40000

35000

30000

25000

20000

15000

10000

5000

0

2008 2009 2010 2011

The level of cash maintained in previous years was higher as compared to a significant decrease in 2011. The decreased level of cash may put doubts on the credit risk of the bank in future and thus the ratings however as long as the bank is using these resources in profitable opportunities they will earn better returns.

(Asmainfo)

The bank has set a number of targets for the future which includes entering into new markets such as India, Iraq and Brazil to increase the geographical diversification, investing in SME segments and achieving 16bn Net Profit in 10 years time at the growth rate of 16%. The targets are exaggerated and don’t have too much flexibility since UAE Banking sector has growth of

3.8% and bank believes that it would be able to grow at the rate of 16%.


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OPTIMAL CAPITAL STRUCTURE:


The optimal structure is ideally the structure where firm’s value is highest. As we know that market value of a firm is the present value of its future cash flows, discounted using WACC.

Mathematically the value of a firm will be highest once we find the lowest WACC.

The level of capital structure where WACC is lowest can be effectively called the optimal capital structure of a firm. Debt is regarded as a cheaper source of finance than equity due to two reasons; one is tax advantage of debt and second is the lower cost due to low risk. If we introduce more debt into a capital structure it will reduce the WACC as equity holders always require more returns than debt holders. By this introduction of debt, the WACC will fall but

WACC is actually the weighted average of cost of debt and cost of equity so when we introduce more debt it will increase the gearing levels and thus the risk for shareholders. Shareholders will require more returns consequently and at very high levels of gearing risk for debt holders will also increase and they also will also require high returns. Lowest WACC can be achieved somewhere between the highest and lowest levels of gearing.

In our case the bank is based in no tax world so no advantage can be made of debt. The beta of company is also lower which resulted in lower cost of equity; in fact cost of equity is still very close to the cost of debt and if we incorporate more debt it will rise. Cost of debt also rises as gearing level increases; this is because of increased credit risk and firm’s ability to pay interest on time. Current cost of capital of the bank is 3.02% and it will increase if more debt is introduced. The WACC will be lower at lowest possible gearing level however since it’s a

37

financial entity(bank) we can’t eliminate long-term debt altogether but can conclude that it should keep the gearing level as low as possible.

If we incorporate more debt at this point in this company ideally the share price will fall as the company becomes more risky to risk-averse investors however some investors believe that incorporation of debt in capital structure is a cheaper source of finance which can earn better return at lower cost so they might invest more money. Abu Dhabi Stock Exchange is not a very efficient market so we can expect that share price will not show significant change in short term if the incorporates more debt.

ADIB’s current rating according to moody’s is A2 and A+ according to fitch’s. For under leveraged firms the ratings go downside pattern if optimal capital structure is reached through more debt incorporation however ADIB’s position is in contrast with that since it’s over leveraged if we reach the lowest gearing levels it would reach better rating. Ratings are also dependent upon the volatility of operating income. The operating income of ADIB shows a positive trend as it’s a growing bank.

The relative analysis can be made with other banks operating in the same jurisdiction and listed in Abu Dhabi Stock Exchange.

38

Gearing

Abu Dhabi Commercial Bank

Sharjah Islamic Bank

National Bank of Abu Dhabi

Abu Dhabi Islamic Bank

0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00%

(Asmainfo)

ADIB’s gearing ratio is lower relative to these banks except for Sharjah Islamic Bank. The high gearing ratio is not profitable for these banks because of the no tax advantage as we mentioned previously.


The optimal structure is ideally the structure where firm’s value is highest. As we know that market value of a firm is the present value of its future cash flows, discounted using WACC.

Mathematically the value of a firm will be highest once we find the lowest WACC.

The level of capital structure where WACC is lowest can be effectively called the optimal capital structure of a firm. Debt is regarded as a cheaper source of finance than equity due to two reasons; one is tax advantage of debt and second is the lower cost due to low risk. If we introduce more debt into a capital structure it will reduce the WACC as equity holders always

39

require more returns than debt holders. By this introduction of debt, the WACC will fall but

WACC is actually the weighted average of cost of debt and cost of equity so when we introduce more debt it will increase the gearing levels and thus the risk for shareholders. Shareholders will require more returns consequently and at very high levels of gearing risk for debt holders will also increase and they also will also require high returns. Lowest WACC can be achieved somewhere between the highest and lowest levels of gearing.

In our case the bank is based in no tax world so no advantage can be made of debt. The beta of company is also lower than the market which resulted in lower cost of equity; in fact cost of equity is still very close to the cost of debt and if we incorporate more debt it will rise. Cost of debt also rises as gearing level increases; this is because of increased credit risk and firm’s ability to pay interest on time. Current cost of capital of the bank is 4.97% and it will increase if more debt is introduced. The WACC will be lower at lowest possible gearing level however since it’s a financial entity(bank) we can’t eliminate long-term debt altogether but can conclude that it should keep the gearing level as low as possible.

If we incorporate more debt at this point in this company ideally the share price will fall as the company becomes more risky to risk-averse investors however some investors believe that incorporation of debt in capital structure is a cheaper source of finance which can earn better return at lower cost so they might invest more money. Abu Dhabi Stock Exchange is not a very efficient market so we can expect that share price will not show significant change in short term if the incorporates more debt.

NBAD current rating according to Moody’s and Fitch are very high. For under leveraged firms the ratings go downside pattern if optimal capital structure is reached through more debt

40

incorporation however NBAD’s position is in contrast with that since it’s over leveraged if we reach the lowest gearing levels it would reach better rating. Ratings are also dependent upon the volatility of operating income. The operating income of NBAD shows a positive trend as it’s a growing bank.

The relative analysis can be made with other banks operating in the same jurisdiction and listed in Abu Dhabi Stock Exchange.

Gearing


Sharjah Islamic Bank



0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00%

(Asmainfo)

NBAD’s gearing ratio is higher relative to these banks except for Abu Dhabi Commercial Bank.

The high gearing ratio is not profitable for these banks because of the no tax advantage as we mentioned previously.

41

MECHANICS OF MOVING TO THE OPTIMAL:


Immediacy Question:

ADIB isn’t under-levered as far as the optimal capital structure according to cost of capital is concern however according to prevailing gearing levels of banks in the similar sector it’s under levered. Being under levered doesn’t mean a firm is a potential takeover target. We must analyze firm from different perspectives to conclude whether it’s really a potential takeover target from a hostile firm.

ADIB is a leading bank of UAE and has been ranked as the fourth largest Islamic bank of the world which means it’s not a small entity and not vulnerable due to its size. ADIB is under the significant control of Royal Family of Abu Dhabi who owns 41% of the bank. Other holdings include 8% by the government and 38% by UAE based individuals. Royal family has their representatives on board which means any hostile takeover is not an easy option, the family also has strong financial position and they enjoy holding major shareholding in UAE based companies.


The returns of ADIB are quite impressive as we calculated and interpreted the accounting returns previously. The level of dividend paid remained quite good in previous years. The wealth of shareholders is represented by market capitalization. The market capitalization was also increased which can be seen as follows:

42

Market Capitalization

2011

2010

2009

0 1000 2000 3000 4000 5000 6000 7000 8000

(Asmainfo)

Due to the powerful ownership structure and satisfaction of shareholders in terms of increased market capitalization and dividend level the bank is not a potential target for hostile takeover.

Alter Financing Mix Or Taking Projects:

ADIB has 6 operating business segments as of 2011. The performance of these business segments can be seen as:

43

Operating Profits

1400

1200

1000

800

600

400

200

0

-200

Retail

Banking

Wholesale

Banking

Private

Banking

Capital

Markets

Real Estate Other

Operations

2010

2011


The retail banking of ADIB is a major component of bank’s operating profit. During the year

2011 the Central Bank put more strict guidelines in place which were welcomed by ADIB and resulted in more responsible credit and service culture in UAE. Since it’s a vital component of

ADIB’s profits the bank increased the number of ATM and braches to 460 & 69 respectively.

The bank also initiated gold and diamond banking for affluent customers. The division also had geographical expansion as it opened branches in Saudi Arabia and UK. UK is a major market and ADIB is the first retail bank to open in UK. The performance of retail banking remained good in previous years and knowing the recent investments in new markets we have strong reasons to conclude that this segment will continue to grow at better pace in future.

Wholesale banking segment focuses on Corporate Banking, Public Sector Banking, Financial

Institutional Clients, Investment Banking, Transaction Services and Corporate Finance. In 2011 the bank managed to increase the operating profit despite of too much competition in the market.

44

ADIB reached the status of approved major oil supplier due to increase of transaction services focus in this area. The Corporate Finance and Investment Banking departments launched a dedicated project finance/capital-raising advisory unit which is expected to reach full proficiency in 2012. The Sukuk (debt finance) is a popular product of this segment which will grow at better pace in future due to increased use of Islamic products by corporate entities. Due to all the growth factors mentioned and results achieved in past we can conclude that the bank will achieve great growth in this segment.

Private Banking is an emerging segment of the bank. The bank separated the operation of Private

Banking by establishing a dedicated private bank. Major marketing events are planned in 2012 which will approach corporate families in UAE.

The Real Estate business is a loss making segment which remained loss making in 2011 too. The overall Real Estate industry is in turbulent times and it will continue to incur losses in 2012 and in future. This is a bad investment sector and further investment in this sector means nonprofitable decisions. Fortunately the weightage of this segment is quite low on overall returns.

Overall the bank has produced great returns on investment in past which is evident by the returns calculated previously. By performing analysis on each segment we can conclude that overall the bank has many profitable opportunities which will produce excess returns in future with greater pace.

The majority of shares belong to the Royal Family of Abu Dhabi and they don’t want to realize their investment in future as they look more interested in dividends rather than selling their shares back to the bank. The shareholders proffered dividend in past and this is evident by high

45

level of dividend payments. The individuals also want dividend payments as there is no share buyback transaction in bank’s financials.


Financing Type:

Macro economic factors such as interest rates, currency movements, inflation and overall economy affect every business. The degree of affection can be higher or lower for different business. Financial entities such as banks’ income and costs are highly dependent upon such macroeconomic changes. Changes in these factors change the interest rates and returns demanded by investors. Consequently it changes the WACC and capital structure of a firm.

ADIB is an Islamic bank which doesn’t pay Riba (interest) apparently but Sukuk is a debt finance instrument and return is also dependent upon prevailing interest rates. The bank essentially pay interest/profit on fixed income securities and receive it from customer financing so the effect of change in interest rate would ideally be nil but it’s necessary to look the cost/income ratio of a bank and if it’s higher it means bank is highly exposed to interest rate risk.

Cost/income ratio of ADIB can be seen as follows:

46

Cost/Income Ratio

41,00%

40,00%

39,00%

38,00%

37,00%

36,00%

35,00%

34,00%

39,30%

39,00%

36,50%

39,50%

39,90%

2007 2008 2009 2010 2011


Cost/Income is quite stable except for 2009. Cost/Income ratio of 39% is considered quite lower and good for banks.

The major operating income of the bank is derived from Murabaha, Mudaraba, Ijara and other

Islamic financing from customers. This income further has categories of goods, vehicle, share and commodities. If inflation is increased the purchasing power of customer will change and also prices of commodities. The bank may not be able to alter the agreements already made and may face losses if such changes happen. Foreign exchange risk is also there for the bank however since bank doesn’t have too much geographical diversification the impact would be lower of any such changes.


47

UAE doesn’t have high inflation currently although it used to have high inflationary pressure but that pressure relaxed in 2009 and now it’s standing at 3%.

(Export Finance and Insurance Corporation)

Considering all the macroeconomic factors and level of volatility due to changes in macroeconomic factors we can finally discuss the financing type that the firm should use. Ideally firms should use internally generated earnings to finance their future projects as these earnings do not have any cost of capital. Debt and equity holders both want return on their investments but we must know that interest on debt should be paid whether company makes profit or not in a specific period. Equity holders’ return in contrast is not mandatory to be paid and firm can defer dividend payment in turbulent times. Analyzing the volatility of earnings and their dependency upon macroeconomic factors we can conclude that firm should use internally generated earnings to finance the projects or issue more shares in future as it also doesn’t have tax advantage of debt.


Immediacy Question:

NBAD isn’t under-levered according to the optimal capital structure according to cost of capital and the prevailing gearing level. Being under levered doesn’t mean a firm is a potential takeover target. We must analyze firm from different perspectives to conclude whether it’s really a potential takeover target from a hostile firm.

NBAD is a leading commercial bank of UAE and has been ranked as the largest bank of Abu

Dhabi which means it’s not a small entity and not vulnerable to takeover due to its size. NBAD

48

is under the significant control of the Government of Abu Dhabi who owns 70% of the bank.

Other holdings include 27% by UAE based individuals. Government has its representatives on board of director that means any hostile takeover is not an easy option.

The returns of NBAD are quite impressive as we calculated and interpreted the accounting returns previously. The level of dividend paid remained quite good in previous years. The wealth of shareholders is represented by market capitalization. Market capitalization can be seen as follows:

Market Capitalization

2011

2010

2009

2008

2007

0 5000 10000 15000 20000 25000 30000 35000 40000 45000

(Asmainfo)

The market capitalization remained volatile during previous five years which is due to similar change in the ADX market. It could have been a risk of hostile takeover but in the case of NBAD it is still not a risky point because the Government owns the majority shares and we all know that

Governments don’t invest to realize their investment.

49

Alter Financing Mix Or Taking Projects:

NDAB has 7 operating business segments as of 2011. The performance of these business segments can be seen as:

Operating Income

3000

2500

2000

1500

1000

500

0

2010

2011


The Domestic Banking is responsible for three major customer segments: Consumer Banking,

Business Banking group and Elite Banking. In 2011 new regulations by central bank caused few challenges though but bank managed to grow the income. Initiatives were taken to enhance customer services, seven new branches and 128 new ATMs were added to the segment, 25% growth in elite banking and a number of new products were launched in this segment. In business banking group NBAD focused on SME and launched 6 tailor made products for businesses to capture SME market. Due to strong historical results and recent growth

50

opportunities in this segment we believe that the bank will continue to grow in this area with better pace in future.

The International Banking segment manages the overseas banking network and credit derivative book. It primarily comprises of both Arab world banking (in Bahrain, Egypt, Oman, Kuwait,

Jordan, Sudan and Libya) and international banking (in France, Malaysia, Hong Kong , the

United Kingdom and the United States of America). The bank has recently expanded the operations in this segment by opening new units in 11 countries. The business in Arab world didn’t grow up well due to recent political and social unrest in this part. The bank has recently started business in Chinese and Malaysian markets. The segment enjoyed great growth in past and the recent opportunities in new markets have great potential of growth nevertheless the Arab turmoil may continue to be there so we conclude that bank may grow in this segment but not with extra ordinary pace.

The Financial Markets segment is the Group’s key access point to the global markets; it also ensures the liquidity for the entire bank. The managers focused on Japanese markets and issued notes of 130m US dollar. The sales in this segment were increased and a number of new agreements have been made with Islamic investors and corporate entities in commodities hedging. The segment continued to grow however derivatives expose firms to greater risks and the bank will grow in this area as historical patterns and recent developments suggest however the level of risk should be reconsidered.

Corporate and Investment Banking segment provides corporate and investment clients with strategic advice and bespoke solutions. The segment comprises six units: Corporate Banking,

Investment Banking, Wholesale Banking, Abu Dhabi National Leasing, Abu Dhabi National

51

Properties and Special asset advisory. Corporate banking managers focused on the Government and public sector entities while investment banking got a couple of great M&A and advisory tasks. The properties business faced the adverse effects of major downturn in real estate business in UAE however the unit has a growth perspective because it recently got associated with UK based property company Knight Frank. Overall the segment is quite critical for the bank as it makes nearly half of the bank’s profit. Due to the average level growth and good historical returns we conclude that bank will continue to invest in this segment and grow at ordinary rates since the segment is highly competitive.

Overall the bank has produced great returns on investment in past which is evident by the returns calculated previously in investment returns section. By performing analysis on major segments we can conclude that overall the bank has many profitable opportunities which will produce excess returns in future with greater pace.

The majority of shares belong to the Government of Abu Dhabi and they don’t want to realize their investment in future as they own the bank as a bank for state activities and may want dividend to run meet the state expenditures. The shareholders preferred dividend in past and this is evident by high level of dividend payments. The individuals also want dividend payments as there is no share buyback transaction in bank’s financials.


Financing Type:

Macro economic factors such as interest rates, currency movements, inflation and overall economy affect every business. The degree of affection can be higher or lower for different business. Financial entities such as banks’ income and costs are highly dependent upon such

52

macroeconomic changes. Banks also have a number of derivatives and floating rate products which are highly sensitive to such changes. Changes in these factors change the interest rates and returns demanded by investors. Consequently it changes the WACC and capital structure of a firm.

NBAD has a diversified business portfolio which has a number of assets, liabilities, costs and income sensitive to the interest rates fluctuations, currency changes and overall economy. Due to presence in different geographical sectors the bank has exposed itself to the increased level of currency risk plus there is also credit risk involved with different kind of loans, debt securities, commitments, OTC derivatives and other off balance sheet. Total gross credit exposure by different instruments is 689bn AED which can be segregated as:

Credit Risk

13%

23%

57%

4%

3%

Loans

Debt Securities

Commitments

OTC Derivatives

Other Off Balance Sheet

The highest level of credit risk faced from the OTC Derivatives. The bank faces high level of credit risk due to all these instruments.

53

The bank further faces currency risk due to geographical diversification which can be seen as follows:

77%

1%

Currency Risk

0%

7%

3%

5%

7%

0%

0% 0%

GCC(exc UAE)

Arab League(exc GCC)

Asia

Africa

North America

South America

Caribbean

Europe

Australia

Others

The major currency risk arises from the European side and due to the recent Euro zone debt crisis this is a major concern. The bank has high currency risk involved.

Cost/income ratio of NBAD can be seen as follows:

54

Cost/Income Ratio

33,00%

32,00%

31,00%

30,00%

29,00%

28,00%

27,00%

26,00%

28,80%

28,20%

29,70%

30,50%

32,50%

2007 2008 2009 2010 2011


Cost/Income is volatile with increasing trend which is unfavorable and it means bank’s cost is rising in comparison to its income.

The bank’s major operating income is from interest. Other operating income is from Islamic finance contracts and bank fees. Foreign exchange gains and losses also alter the pattern of income. Some of the bank’s investments carry floating interest and others carry fixed interest. In either case the income is highly sensitive to the level of interest rates changes however a bank’s costs also move with interest rates though not in similar proportion.


UAE doesn’t have high inflation currently although it used to have high inflationary pressure but that pressure relaxed in 2009 and now it’s standing at 3%.

(Export Finance and Insurance Corporation)

55

Considering all the macroeconomic factors and level of volatility due to changes in macro economic factors we can finally discuss the financing type that the firm should use. Ideally firms should use internally generated earnings to finance their future projects as these earnings do not have any cost of capital. Debt and equity holders both want return on their investments but we must know that interest on debt should be paid whether company makes profit or not in a specific period. Equity holders’ return in contrast is not mandatory to be paid and firm can defer dividend payment in turbulent times. Analyzing the volatility of earnings and their dependency upon macroeconomic factors and current gearing levels we can conclude that firm should use internally generated earnings to finance the projects or issue more shares in future as it also doesn’t have tax advantage of debt.

DIVIDEND POLICY:


Historical Dividend Policy:

ADIB paid 24.4% (as a percentage to the face value) dividend per share in 2011. This makes total payment of 578m AED. The bank didn’t buy back any shares in the previous 2 years. The levels of historic dividend payments, as a percentage to face value of shares, are shown below:

56

Cash Dividend

25,00%

20,00%

15,00%

10,00%

5,00%

0,00%

2007 2008 2009 2010 2011


The level of cash dividend remained unstable as in 2007 and 2009. The reason was low level of earnings in these years however bank paid 20% bonus to shareholders in 2007 and 2009.

Firm Characteristics:

Dividend policy decides the level of dividends that should be paid to investors of a firm. There are different theories that do exist and a famous one of them is Modigliani and Miller theory. The theory suggests that in a perfect capital market the shareholders are indifferent whether their wealth is increased due to dividends or share price increment and as long as the firm invests in positive NPV projects it increases the wealth of shareholders. The theory actually has assumption of ‘perfect’ capital market which is not possible practically. Shareholders in practical are not indifferent of capital gains and dividend due to a number of reasons. The main reasons include the level of taxation on capital gains and dividend income; dividend is taxed at lower rates as

57

compared to the capital gains. The need of current income by shareholders is also important; they want that to meet their expenses and lastly liquidity requirements of shareholders.

Another aspect of dividend policy is dividend signaling. The shareholders do not have access to the insider information and thus they can only analyze the true value of a firm by market information and more importantly firm’s actions and results. Dividend is practically regarded as a signal to the market that the firm has enough cash to pay its investors and they are not forecasting any major financial distress in future that restrict them to pay dividends. Historically it has been seen that share price increases after excess dividends announcement and falls with the decrease in the level of dividends. Too much dividend payment may be seen as a negative signal and investors might think that firm doesn’t have future growth potential as they are not keeping funds to finance their growth. The internally generated funds are best way to finance any future investments due to the fact that they do not have any cost of finance but due to above mentioned reasons dividends can’t be too low so a trade off is actually needed.

In case of ADIB the information is available to investors widely through its website under investor relations section however Abu Dhabi Stock Exchange, in which the company is listed, is actually not a big exchange and thus analysts do not cover it usually so investors might lack the analysts’ opinion on this stock. Due to this reason the bank must use dividend as a signal (good signal) to investors.

The major shareholding of ADIB is in the hands of Royal Family of Abu Dhabi and individual investors of UAE. Both of them do not seem to be interested in realizing their investments rather want ongoing income in terms of dividend which is evident by historical dividend payments and no share buybacks.

58

Financial flexibility of a firm can be defined as the ability and choices to get additional finance.

The flexibility in finance is broadly important to every firm and especially financial firms like banks but a firm can’t enjoy such flexibility if its earnings are volatile plus it has higher debt/capital ratio. Due to stable pattern of earnings generated by ADIB it can forecast its financing needs and keep necessary reserves; ADIB is not very much dependent upon flexibility when fluctuations in market occur however due to its business nature it’s essential to have such flexibility. ADIB is actually flexible to the rapid changes as it can use more debt due to low debt/capital ratio as compared to the market.

Covenants by lenders usually put restrictions on firms to pay dividends to investors as the lenders do not want all cash to be drained paying dividends. This is usually the case with high level of gearings and bad credit ratings. ADIB doesn’t have any such covenants.

The level of dividend paid (DPS) by other banks in the market and ADIB can be seen as follows:

59

Union National Bank



EPS

DPS


0 0,2 0,4 0,6 0,8 1 1,2 1,4

(Asmainfo)

The DPS of ADIB is more than other banks with similar EPS however little lower than NBAD but this is due to higher EPS achieved by NBAD. The shareholders enjoyed good dividends despite low EPS as compared to other banks in the market. Nevertheless the dividend payments were not stable though in 2010 and 2011 the bank maintained payout ratio of 50% but in 2009 the bank paid bonus of 20%. Bonus share is a good alternative to dividend payments when firm does not have too much cash available especially with low earnings in a particular period.

Bonus-shares do not add any value to shareholders wealth rather just increase the number of shares held by each shareholder. Bonus shares essentially pay off investors if the company pays off similar or higher dividends ‘per share’ as they enjoy more dividends in total.

60


Historical Dividend Policy:

NBAD paid 30% (as a percentage to the face value) cash dividend and 35% bonus per share in

2011. This makes total payment of 861m AED (only cash dividend). The bank didn’t buy back any shares in the previous 2 years. The levels of historic dividend payments, as a percentage to face value of shares, are shown below:

Cash Dividend

40,00%

35,00%

30,00%

25,00%

20,00%

15,00%

10,00%

5,00%

0,00%

2007 2008 2009 2010 2011

(Asmainfo)

In addition to that the bank paid bonus share in percentage of face value as follows:

2007

20%

2008

10%

2009

10%

2010

20%

2011

35%

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The level of cash dividend per share declined which can be easily seen in the cash dividend column chart however one thing is worth noting that the level of bonus shares given in previous years actually increased the number of shares. The overall payment of dividends increased in

2010 and 2011 as compared to 2007 but DPS remained lower due to higher number of shares.

Firm Characteristics:

Dividend policy decides the level of dividends that should be paid to investors of a firm. There are different theories that do exist and a famous one of them is Modigliani and Miller theory. The theory suggests that in a perfect capital market the shareholders are indifferent whether their wealth is increased due to dividends or share price increment and as long as the firm invests in positive NPV projects it increases the wealth of shareholders. The theory actually has assumption of ‘perfect’ capital market which is not possible practically. Shareholders in practical are not indifferent of capital gains and dividend due to a number of reasons. The main reasons include the level of taxation on capital gains and dividend income; dividend is taxed at lower rates as compared to the capital gains. The need of current income by shareholders is also important; they want that to meet their expenses and lastly liquidity requirements of shareholders.

Another aspect of dividend policy is dividend signaling. The shareholders do not have access to the insider information and thus they can only analyze the true value of a firm by market information and more importantly firm’s actions and results. Dividend is practically regarded as a signal to the market that the firm has enough cash to pay its investors and they are not forecasting any major financial distress in future that restrict them to pay dividends. Historically it has been seen that share price increases after excess dividends announcement and falls with the

62

decrease in the level of dividends. Too much dividend payment may be seen as a negative signal and investors might think that firm doesn’t have future growth potential as they are not keeping funds to finance their growth. The internally generated funds are best way to finance any future investments due to the fact that they do not have any cost of finance but due to above mentioned reasons dividends can’t be too low so a trade off is actually needed.

In case of NBAD the information is available to investors widely through its website under investor relations section and a number of analysts follow the bank but information from these analysts is not widely available. Due to this reason the bank must use dividend as a signal (good signal) to investors so they must know that bank is not foreseeing any major financial distress in the future and can afford to use its retained earnings to pay off the investors.

The major shareholding of NBAD is in the hands of the Government of Abu Dhabi and individual investors of UAE. The Government sees the bank as a major entity that contributes to its economy and will not realize the investment. The individual investors of NBAD also do not look interested in realizing their investment rather in dividend income as we have seen in past patterns of dividends.

Financial flexibility of a firm can be defined as the ability and choices to get additional finance.

The flexibility in finance is broadly important to every firm and especially financial firms like banks but a firm can’t enjoy such flexibility if its earnings are volatile plus it has higher debt/capital ratio. The pattern of earnings of NBAD is quite stable as but it faces high level of risks which include credit risk, market risk and currency risk. NBAD is already more geared than average of the market though its bond ratings are still good. We believe that due to earnings

63

pattern NBAD is able to forecast its financing needs which can further be seen by earnings retentions.

Covenants by lenders usually put restrictions on firms to pay dividends to investors as the lenders do not want all cash to be drained paying dividends. This is usually the case with high level of gearings and bad credit ratings. NBAD doesn’t have any such covenants.

The level of dividend paid (DPS) by other banks in the market and NBAD can be seen as follows:

Union National Bank



EPS

DPS


0 0,2 0,4 0,6 0,8 1 1,2 1,4

(Asmainfo)

The DPS of the bank remained highest as compared to other banks in the market however the level of DPS is quite low as compared to the EPS achieved by the bank. The bank is proposing more investments in other segments of business as we discussed earlier so we believe that bank

64

is actually retaining its earnings for those investment projects as more debt financing can lead to more risk.

FRAMEWORK FOR ANALYZING DIVIDENDS:


Affordable Dividends:

The best practical way to analyze the level of affordable dividends is free cash flow to equity.

Free cash flow to equity actually calculates the level of funds available to equity holders after the deduction of interest payments (lenders’ return) and net borrowings from free cash flow to firm.

As we have calculated the free cash flow to firm so we are starting calculation from that point.

Amount in AED m

Free Cash flows

Less: Interest

Add: Debt Issued

Less: Debt Repaid

Free Cash flow to Equity



2009

607

(978)

2000

-

1629

2010

1699

(1045)

2754

(253)

3408

2011

1832

(886)

2089

(2938)

3035

The total amount of dividend paid, payout ratio and cash balances available are also relevant and this information is given below:

65

Amount in AED m

Cash balance

Total Dividend Paid

Payout Ratio

(Asmainfo)

2009

3331

-

-

2010

988

512

50%

2011

11273

578

50%

Now we have all this information we can analyze the affordable dividend more effectively. The bank didn’t pay anything in 2009 due to poor earnings result and paid out 50% of its earnings in

2010 and 2011. The level of dividend that the bank actually could afford is shown by free cash flow to equity. The level of dividend that was paid by the bank was affordable which can be seen clearly from the above information.

Management Trust:

There is a fiduciary relationship between the owners and managers of a company. The management can’t earn the trust of owners in a day and it takes time before managers could prove themselves by earning good results and adding value to shareholders.

In case of ADIB, the management has historically proven itself by earning good returns on investment though the business was adversely affected by the overall downturn in UAE economy and real estate sector.

The Islamic banking is an emerging sector according to a number of market analysts. We have also analyzed the level of investments bank has recently made or planned to make. The bank has clear growth potential and earning good results due to historical patterns and future outlook both.

66

We have no reason to believe that managers will fail to invest in such (good) projects and increase the wealth of shareholders.

Changing Dividend Policy:

The firm has to alter its dividend policy when it’s paying too low or too high dividends. High dividends are those dividends that a firm cannot afford and yet pay out of reserves or net positive borrowings or do not retain much to finance future projects. Lower dividends are generally those dividends that are quite lower as compared to sector dividends or if a firm’s managers failed to utilize the resources of company effectively and efficiently in past then it is better to pay off the returns rather than retaining and losing them in bad projects.

For ADIB the dividend policy is quite reasonable. The level of dividend paid in past was affordable and a constant payout was maintained. The shareholders also do not prefer buyback over dividends as we have seen no such thing happening in past so it’s better to maintain this level of payout.


Affordable Dividends:

The best practical way to analyze the level of affordable dividends is free cash flow to equity.

Free cash flow to equity actually calculates the level of funds available to equity holders after the deduction of interest payments (lenders’ return) and net borrowings from free cash flow to firm.

As we have calculated the free cash flow to firm so we are starting calculation from that point.

67

Amount in AED m

Free Cash flows

Less: Interest

Add: Debt Issued

2009

1195

(2256)

9144

Less: Debt Repaid

Free Cash flow to Equity


(800)

7283

2010

(14470)

(2129)

5128

(4176)

(15647)

2011

3852

(2157)

538

(591)

1642

(National Bank of Abu Dhabi, 2010)

The total amount of dividend paid, payout ratio and cash balances available are also relevant and this information is given below:

Amount in AED m

Cash balance

Total Dividend Paid

Payout Ratio

(Asmainfo)

2009

37578

217

7%

2010

32593

718

19%

2011

4254

861

23%

Now we have all this information we can analyze the affordable dividend more effectively. The bank also paid bonus shares in percentage of face value as 10% in 2009 30% in 2010 and 30% in

2011. The level of dividend that the bank actually could afford is shown by free cash flow to equity. The level of dividend bank paid was actually not affordable in 2010 however we should understand that there were significant abnormal changes in working capital in 2010 that’s why free cash flows figure look quite adverse.

68

Management Trust:

There is a fiduciary relationship between the owners and managers of a company. The management can’t earn the trust of owners in a day and it takes time before managers could prove themselves by earning good results and adding value to shareholders.

In case of NBAD, the management has historically proven itself by earning good returns on investment though the business was adversely affected by the overall downturn in UAE economy.

The bank has some strong segments in which it leads the financial markets of UAE and it has geographical diversification which ensures the growing earnings opportunities in future as they achieved in past. The historical patterns do not necessarily occur in future but due to low level of inflation and stability of local economy and operational reasons we believe that bank will continue to give the historical returns.

Changing Dividend Policy:

The firm has to alter its dividend policy when it’s paying too low or too high dividends. High dividends are those dividends that a firm cannot afford and yet pay out of reserves or net positive borrowings or do not retain much to finance future projects. Lower dividends are generally those dividends that are quite lower as compared to sector dividends or if a firm’s managers failed to utilize the resources of company effectively and efficiently in past then it is better to pay off the returns rather than retaining and losing them in bad projects.

For NBAD the dividend policy should be reconsidered. The payout ratio of NBAD is not very good as compared to the other banks operating in the market which means NBAD is retaining

69

earnings for future growth since due to relatively high level of gearings NBAD can’t afford to look for more debts in balance sheet. NBAD historically paid bonus percentage on shareholding which doesn’t actually increase the wealth of shareholders rather no. of shares owned. NBAD should reconsider the bonus as it just increase the no. of shares and in future DPS maintenance results in higher total dividends.

VALUATION:


Valuation of a firm is not an exact science and practically it’s regarded as an art not science.

Firms are valued from a number of methods in real world however not all valuation models are appropriate in a given situation for a given firm. P/E ratio is a valuation ratio for a stock which actually estimate the intrinsic value of a stock but there is an assumption that market is ‘actually’ valuing a stock genuinely. The assumption cannot be taken in our situation where our bank is traded in Abu Dhabi Stock Exchange which is not a very technical market and slim chances that it is valuing the stock genuinely. Dividend discount model is another model that can be used to value firm by discounting future dividends on cost of equity but reliability is also low for this model. The most popular model is free cash flow discounting model practically.

The dividends of ADIB are related to the free cash flow and the leverage of the firm is expected to change as the bank is planning to issue more Sukuk (debt) to finance the future activities. Due

70

to this reason we are using free cash flow and we will discount it using cost of capital (WACC).

The inflation is not very much high in the country so we are not using real values.

The growth of the earnings remained higher in previous periods for bank. The growth of the cash flows to equity also grew. Analysts’ growth rate is actually not given and we cannot estimate the value of cost of capital(WACC) in future growth periods so we can use long term growth rate due to lack of information available. The long term growth rate is estimated to be 2% and we are using it as the constant growth.

Value of Firm=Value of Equity+ Value of Debt

This can be seen as follow:

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐹𝑖𝑟𝑚 =

𝐹𝐶𝐹𝐹(1 + 𝑔)

𝑊𝐴𝐶𝐶 − 𝑔

=

1832(1 + 2%)

3.02% − 2%

= AED 18142m

This value of the bank is highly due to the growth level that is supposed and due to low cost of capital the value is quite higher than the present value of the bank. The value is highly sensitive to the assumptions that are taken. The cost of capital that is supposed may be changed in future and it has ability to alter the value. The growth rate is highly subjective as practically there are a number of growth rates for example one period growth, two period growth and others can be supposed but here due to lack of information we used a single growth rate model. Any change in

71

the level of growth can alter the value. The free cash flows in the future maybe highly different to the one that is supposed here (the historical cash flow).

Overall the bank has highly qualified human resources in place who have contributed to the value enhancement of the bank in past as can be seen in profitability ratios which are quite higher as compared to other firms in the market. The operating income is showing a positive trend. The Islamic banking market overall is expected to enhance its share in the future so the bank has growth potential with positive cash flows in future. The cost of capital is lower than other market players however reaching to the optimal level of capital structure can further add value to the firm. All business segments are expected to grow at the same or higher pace except for Real Estate business which is a loss making segment however firm is not planning to increase the level of investment. Overall the investment, financing and dividend policy all look quite reasonable however for financing side the bank should try to use its own retained earnings rather than issuing more long term debts for financing purpose (business debt due to the nature of business is not included). If we successfully use this type of financing than the retained earnings used will get better cash flows and increase the equity thus wealth of shareholders. The firm is a listed firm and usually the control premium in traded firms is 30% of the value of equity.


Valuation of a firm is not an exact science and practically it’s regarded as an art not science.

Firms are valued from a number of methods in real world however not all valuation models are appropriate in a given situation for a given firm. P/E ratio is a valuation ratio for a stock which actually estimate the intrinsic value of a stock but there is an assumption that market is ‘actually’ valuing a stock genuinely. The assumption cannot be taken in our situation where our bank is

72

traded in Abu Dhabi Stock Exchange which is not a very technical market and slim chances that it is valuing the stock genuinely. Dividend discount model is another model that can be used to value firm by discounting future dividends on cost of equity but reliability is also low for this model. The most popular model is free cash flow discounting model practically.

The dividends of NBAD are related to the free cash flow and the leverage of the firm is expected to change to finance the future activities. Due to this reason we are using free cash flow and we will discount it using cost of capital (WACC). The inflation is not very much high in the country so we are not using real values.

The growth of the earnings remained higher in previous periods for bank. The growth of the cash flows to equity also grew. Analysts’ growth rate is actually not given and we cannot estimate the value of cost of capital(WACC) in future growth periods so we can use long term growth rate due to lack of information available. The long term growth rate is estimated to be 2% and we are using it as the constant growth.

Value of Firm=Value of Equity+ Value of Debt

This can be seen as follow:

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐹𝑖𝑟𝑚 =

𝐹𝐶𝐹𝐹(1 + 𝑔)

𝑊𝐴𝐶𝐶 − 𝑔

=

3852(1 + 2%)

4.97% − 2%

= AED 132291m

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This value of the bank is highly due to the growth level that is supposed and due to low cost of capital the value is quite higher than the present value of the bank. The value is highly sensitive to the assumptions that are taken. The cost of capital that is supposed may be changed in future and it has ability to alter the value. The growth rate is highly subjective as practically there are a number of growth rates for example one period growth, two period growth and others can be supposed but here due to lack of information we used a single growth rate model. Any change in the level of growth can alter the value. The free cash flows in the future maybe highly different to the one that is supposed here (the historical cash flow).

Overall the bank has good corporate governance in place who has contributed to the value enhancement of the bank in past as can be seen in profitability ratios which are quite higher as compared to other firms in the market. The operating income is showing a positive trend. The bank’s corporate banking market is quite mature so not too much growth is expected from this investments however the bank has plans to introduce itself in new segments and increase investments in those segments. The cost of capital is relatively higher for NBAD as it’s using too much debt in its capital structure and if we move to optimal this WACC can be decreased. All business segments are expected to grow at the same or higher pace. The financing side of the bank needs to be reviewed critically as the bank has high gearing than other players in the market with no tax advantage of debt. Debt should be repaid using government grant, as it is a government bank, and the bank should focus on using its own retained earnings to finance future projects. The dividend policy should also be revised as the investors are only looking for dividends and a constant payout ratio would help them to forecast their income. The bonus should also be reconsidered as it doesn’t add any value to the shareholders’ wealth rather increase number of shares. If we successfully use this type of financing then the retained

74

earnings used will get better cash flows and increase the equity thus wealth of shareholders.The firm is a listed firm and usually the control premium in traded firms is 30% of the value of equity.

75

REFERENCES & BIBLIOGRAPHY:

1.

Abu Dhabi Islamic Bank’s CEO.n.d.Retreived from http://investing.businessweek.com/research/stocks/people/person.asp?personId=4110926

6&ticker=ADIB:UH&previousCapId=9263975&previousTitle=Abu%20Dhabi%20Islam ic%20Bank

2.

National Bank of Abu Dhabi’s CEO.n.d. Retrieved from http://investing.businessweek.com/research/stocks/people/person.asp?personId=2720194

2&ticker=NBAD:UH&previousCapId=10062321&previousTitle=QATAR%20TELECO

M%20(QTEL)%20Q.S.C

3.

National Bank of Abu Dhabi Board of Directors.n.d. Retrieved from http://investing.businessweek.com/research/stocks/people/board.asp?ticker=NBAD:UH

4.

Country Default Spreads and Risk Premiums.2012. Retrieved from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

5.

Long Term Rates. Retrieved from http://uae.deposits.org/

6.

Debt Profile National Bank of Abu Dhabi.2011. Retrieved from http://www.nbad.com/en/InvestorsRelation/Pages/Credit_profile.aspx

7.

Credit Rating National Bank of Abu Dhabi 2011. Retrieved from http://www.nbad.com/en/InvestorsRelation/Pages/Credit_profile.aspx

8.

National Bank of Abu Dhabi Awards. Retrieved from http://www.nbad.com/en/AboutNBAD/awards/Pages/default.aspx

9.

Analyst Coverage National Bank of Abu Dhabi. Retrieved from http://www.nbad.com/en/InvestorsRelation/Pages/Analyst-Coverage.aspx

10.

Dividend Payments National Bank of Abu Dhabi. Retrieved from http://www.nbad.com/en/InvestorsRelation/Pages/shareholder_info.aspx

11.

Credit Rating.Abu Dhabi Islamic Bank. Retrieved from http://www.adib.ae/credit-ratings

12.

Analyst Coverage Abu Dhabi Islamic Bank.Retrieved from http://www.adib.ae/analyst-coverage

13.

Dividend Abu Dhabi Islamic Bank.Retrieved from

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http://www.adib.ae/share-information

14.

Annual Report.2011.National Bank of Abu Dhabi.

15.

Annual Report 2010.National Bank of Abu Dhabi.

16.

Annual Report 2009 Abu Dhabi Islamic Bank.

17.

Annual Report 2011 Abu Dhabi Islamic Bank.

Other Sources Used:

1.

Charts.Asmainfo.Retrieved from www.asmainfo.com

2.

Historical Data.Asmainfo.Retrieved from www.asmainfo.com

3.

Historical Data.Gulfbase.Retrieved from www.gulfbase.com

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My Corporate Finance Project

CORPORATE FINANCE PROJECT

Abu Dhabi Islamic Bank

National Bank of Abu Dhabi

CORPORATE GOVERNANCE ANALYSIS:

STOCK HOLDER ANALYSIS:

RISK AND RETURN ANALYSIS:

MEASURING INVESTMENT RETURNS:

Return on Equity

CAPITAL STRUCTURE CHOICES:

Operating Profit

Cash

Operating Income

Cash

OPTIMAL CAPITAL STRUCTURE:

Gearing

Gearing

MECHANICS OF MOVING TO THE OPTIMAL:

Market Capitalization

Operating Profits

Cost/Income Ratio

Market Capitalization

Operating Income

Credit Risk

Currency Risk

Cost/Income Ratio

DIVIDEND POLICY:

Cash Dividend

Cash Dividend

FRAMEWORK FOR ANALYZING DIVIDENDS:

VALUATION:

REFERENCES & BIBLIOGRAPHY:

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My Corporate Finance Project

CORPORATE FINANCE PROJECT

Abu Dhabi Islamic Bank

National Bank of Abu Dhabi

CORPORATE GOVERNANCE ANALYSIS:

STOCK HOLDER ANALYSIS:

RISK AND RETURN ANALYSIS:

MEASURING INVESTMENT RETURNS:

Return on Equity

CAPITAL STRUCTURE CHOICES:

Operating Profit

Cash

Operating Income

Cash

OPTIMAL CAPITAL STRUCTURE:

Gearing

Gearing

MECHANICS OF MOVING TO THE OPTIMAL:

Market Capitalization

Operating Profits

Cost/Income Ratio

Market Capitalization

Operating Income

Credit Risk

Currency Risk

Cost/Income Ratio

DIVIDEND POLICY:

Cash Dividend

Cash Dividend

FRAMEWORK FOR ANALYZING DIVIDENDS:

VALUATION:

REFERENCES & BIBLIOGRAPHY:

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