EFG Hermes has initiated coverage on the National Bank of Ras Al-Khaimah (RAK Bank), supplying the fair value of AED 11.5 with the recommendation ‘Buy’.

With a loan market share of two percent, RAK Bank is a small-sized bank; however, focus on retail lending with around 70% of lending to expatriates, drives strong profitability, the financial group revealed, adding that the UAE-based bank has switched its strategic focus to retail in 2001, becoming one of the first banks to target UAE’s mass market retail segment. RAK Bank’s spread at 8.61% for 2014e is the highest in the UAE, whose sector average stands at 2.58%, with retail accounting for 93% of the loan book and certain products generating a yield of c20%.

There is “substantial headroom for loan growth”, EFG noted, adding that with a CAR of c30.0% as of Q3-14 including net profit from the first nine months of the 2014, RAK Bank is well capitalised and has abundant room to leverage up and support its the balance sheet. “The robust capital positioning is a result of a historically conservative dividend payout policy and strong internal capital generation. We expect the bank’s loan book to grow at a CAGR of c11% over 2014-16e (sector: c8%), driven by commercial and SME segments,” EFG added.

It is worth highlighting that RAK Bank fully provisions for unsecured retail NPLs after 90 days, ahead of the regulatory requirement of 180 days. Moreover, cost of risk is considered as high relative to the sector, reflecting the Bank’s retail-oriented business model. Moreover, the high provisioning costs can be comfortably absorbed as the bank’s pre-provision ROA is robust.