• Well positioned to face changing competitive landscape; Buy ADCB posted 2Q16 net profit of AED1,125mn (EPS: AED0.22), +10% Q-o-Q and -12% Y-o-Y, beating our estimate of AED949mn. The beat was driven by strong FX income (volume growth in retail and corporate) and derivative income (increased volatility in SAR, GBP and EUR) coupled with lower-than-expected operating expenses (cost control and seasonality). While the merger of FGB and NBAD will create a new mega bank, ADCB’s strong market position (loan market share 11%) and domestic focus (94% of gross loans in UAE) would help it remain competitive. We raise our 2016 earnings estimates by 5% after incorporating 2Q16 results. ADCB trades at a 2016e P/B of 1.4x and offers a 2016e ROE of 17%. We raise our FV to AED7.6 from AED7.3 and reiterate our Buy rating on the stock.
• Higher cost of funds dent spreads Spreads came under pressure – -15bps Q-o-Q to 2.64% – owing to higher cost of funds. Competitive pressure in the retail (ex SME) and corporate segments have limited ADCB’s ability to pass on the higher cost of funds to borrowers. Management does not expect an improvement in spreads in 2H16, unless there is a one-off reversal of suspended interest.
• Corporate driven loan growth; stable liquidity Loan growth of 2.5% Q-o-Q (13% Y-o-Y) was strong, and was driven by energy (113% Q-o-Q), transport (26%) and manufacturing (9%) sectors. ADCB expects loan growth to slow down in 2H16 as guidance was kept unchanged at 5-6%. Liquidity was stable Q-o-Q with LDR at 104%. Retail segment drives provisioning NPL ratio eased to 2.7% from 3.4% in 1Q16 due to write offs while the NPL coverage improved further to 133% from 112% in 1Q16. Provisioning was relatively stable Q-o-Q (cost of risk 90bps). Consumer segment is under relative stress and management expects this trend to continue in 2H16.

Shabbir Malik
Murad Ansari