Gulf News - Emirates NBD stock reels from overexposure to Turkish lira freefall

Vijay Valecha, Special to Gulf News Mar 22, 2021

The DFM closed lower 1.23 per cent, while ADX gained 0.18 per cent for the day (March 22). The Dubai index was pulled lower by the 3.44 per cent decline of its heavyweight component, Emirates NBD, which itself was due to the slump in the Turkish currency lira.

On Monday, the lira crashed 10 per cent against the dollar after President Recep Erdogan unexpectedly ousted the head of the country's central bank over the weekend. The currency is trading near 7.92 a dollar and clearly suffering from Turkish politics' whims and fancies. Monetary prudence has taken a backseat while political populism has prevailed.

Unfortunately for central bankers, politicians worldwide are unwilling to swallow the bitter pill to solve their countries economic problems. The reform-oriented Turkish central bank governor Naci Agbal recently hiked interest rates by 200 basis points to 19 per cent to combat inflation and forex outflows. His measures had helped restore investor confidence - and now all the hard work seems undone.

Overly exposed

The Dh70 billion market capitalised Emirates NBD derives almost 31 per cent of the revenue from its Turkish subsidiary, DenizBank. Of total revenue of Dh23.21 billion, DenizBank contributed Dh7.25 billion. It was the second-largest contributor after retail banking and wealth management, which generated revenues of Dh7.76 billion in the last financial year.

Indeed, both these divisions were pretty close. In terms of profits, DenizBank contributed almost one-fifth of the aggregate. One significant bull thesis for Emirates NBD was the appreciation of Turkish currency, which would have boosted the contribution of the DenizBank in dirhams.

The plunge in the Turkish lira weakens the argument. It seems the geographical diversification strategy of Emirates NBD has backfired for now. And in the near term, Emirates NBD shares are likely to trade weak.

Chunky dividend

In other major news, the board of United Food Company approved dividends totalling Dh19.66 mineteen, which represents 65 per cent of the share capital, at 65 fils per share. For shareholders, this is almost a 13.2 per cent dividend yield.

During 2020, the company reported an eight per cent rise in revenue to Dh429 million and a 20 per cent jump in net profit to Dh38.8 million. This company seems a good bet for income investors. After all, how much can go wrong with a food company.