• Reiterate Buy on attractive valuations ADCB’s 1Q2016 net profit declined 18% Y-o-Y to AED1,020 million, and missed our estimate of AED1,130 million, driven by higher-than-expected provisioning. This was a challenging quarter for ADCB, but despite the headwinds to credit quality the bank posted an annualised ROE of 17%. We cut our 2016 earnings 11%, in light of these results, primarily to reflect higher provisioning and tighter spreads. Trading at 2016e P/E of 8.1x and P/BV of 1.3x, we believe ADCB’s valuations are attractive in context of its profitability (2016e ROE of 16%). We cut our FV to AED7.3 from AED8.0, but reiterate our Buy rating on ADCB. A near-term risk is expected passive outflow of USD6 million (1.1x 3MADVT) at end of May, due to MSCI Index rebalancing. • Credit quality metrics weaken; provisioning guidance raised The bank’s NPL ratio rose to 3.4% in 1Q2016 from 3.0% in 4Q2015 as non-performing loans grew 15% Q-o-Q. Management attributes the increase to weakness in self-employed, SME, consumer and mid-tier corporate segments. ADCB’s cost of risk climbed to 90bps from 25bps in 4Q2015. Provisioning in the corporate banking segment rose to AED232 million from a recovery of AED36 million in 1Q2015 and recovery of AED43 million in 4Q2015. Management has raised 2016 cost of risk guidance to 80bps from 55-60bps. We build in a cost of risk of 90bps up from 70bps for 2016. • Revenue growth sequentially was reassuring ADCB’s revenue rose 5% Q-o-Q as its spreads widened to 2.79% from 2.69% as of 4Q2015, on account of improved asset yield. Loan growth was decent at 2% Q-o-Q and 11% Y-o-Y. We expect spreads to come under pressure in 2016 relative to 2015, owing to a further increase in the cost of funds (competition for deposits and higher EIBOR) and a dilution in loan yield due to NPL formation and reduced interest suspense reversals. We expect revenue to remain broadly flat in 2016 as spreads contract 25bps and loan growth decelerates to 5% Y-o-Y (soft macro and reduced risk appetite).
Shabbir Malik Murad Ansari
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