Vision 2035 Will Advance Banking With Gen AI And Fintech Alliances

Key Takeaways

• ADIB's Vision 2035 strategy focuses on leveraging technology and innovation to drive growth and profitability improvements.
  
• Customer base expansion and improved cost-to-income ratio highlight potential for sustained revenue growth and better margins.
  
• New credit provisioning standards and reliance on competitive market share could pressure net margins, asset growth, and earnings stability amidst execution risks from emerging technologies.

Catalysts

Provides banking, financing, and investing services in the United Arab Emirates and internationally.

• ADIB is implementing a Vision 2035 strategy that includes using Gen AI technology, fintech, and venture partnerships to enhance the bank's transformation. This could drive future growth in revenue as the bank becomes more innovative and tech-driven.
  
• The bank is on track to significantly reduce its non-performing asset (NPA) ratio by settling legacy exposures, targeting a sub-4% NPA ratio by year-end. This could improve net margins by reducing provisions for bad debts and boosting profitability.
  
• ADIB shows strong growth in nonfunded income, which has increased by 41% year-on-year, driven by its card portfolio expansion and fee income from wealth management. This diversification can help sustain revenue growth even if funded income faces pressure.
  
• The growth in ADIB's customer base, with 150,000 new clients in a year, can lead to higher revenue through increased banking transactions and cross-selling opportunities as the bank expands its products and services to these new customers.
  
• The reduction in cost-to-income ratio to 29.1% from around 48% in recent years, through digital initiatives and efficiencies, indicates potential improvement in net margins if this trend continues while maintaining revenue growth.

Abu Dhabi Islamic Bank PJSC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Abu Dhabi Islamic Bank PJSC's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 54.8% today to 51.2% in 3 years time.
• Analysts expect earnings to reach AED 6.2 billion (and earnings per share of AED 1.56) by about December 2027, up from AED 5.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as AED 5.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.8x on those 2027 earnings, up from 9.1x today. This future PE is greater than the current PE for the AE Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 2.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.89%, as per the Simply Wall St company report.

Abu Dhabi Islamic Bank PJSC Future Earnings Per Share Growth

Risks

• The introduction of new credit provisioning standards by the Central Bank could potentially impact the bank's cost of risk and provisioning, potentially affecting future earnings and net margins.
  
• The compression in net profit margin due to higher growth in costlier deposits compared to asset yields could pressure future profitability, impacting net margins.
  
• The dependency on competitive profit rates for corporate deposits and the potential repricing of a significant portion of time deposits might lead to a decline in net interest margins, affecting earnings stability.
  
• The reliance on market share gains in a competitive market and potential repayment of government loans could pressure asset growth and future revenue streams.
  
• The integration of emerging technologies and partnerships as part of the Vision 2035 strategy entails execution risks and sizable investment, which could influence net margins and overall financial performance.

Valuation

• The analysts have a consensus price target of AED 15.21 for Abu Dhabi Islamic Bank PJSC based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of AED 17.6, and the most bearish reporting a price target of just AED 11.4.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be AED 12.1 billion, earnings will come to AED 6.2 billion, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 19.9%.
• Given the current share price of AED 13.6, the analyst's price target of AED 15.21 is 10.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.