• Capitalisation is relatively stretched; reiterate Neutral ADIB reported 2Q net profit of AED507mn (EPS: AED0.11), +5% Q-o-Q and 1% Y-o-Y, which was above our estimate of AED477mn. Revenue growth of 8% Y-o-Y, the highest of the banks that have reported so far, was driven by wider spreads and strong investment income. The bank’s funding profile continues to be robust – LDR of 82% - enabling it to keep funding cost pressure at bay. That said, we believe ADIB’s capitalisation – CET1 ratio of 8.6% – is relatively stretched and that it will need to take further remedial action (ADIB issued rights of AED504mn in 2015) to ensure its growth prospects and dividends are not hit. Moreover, its associate ADIB Egypt could add volatility to earnings owing to risk of EGP devaluation vs the USD. We tweak our estimates (see fig 2) and raise our FV to AED4.3 from AED4.2. We reiterate our Neutral rating on the stock.
• Strong liquidity protects spreads; loan growth recovers Despite systemic liquidity pressure, ADIB’s spreads (ex-Tier 1 note expense) have been resilient aided by a liquid, CASA rich and retail-oriented deposit base. 2Q16 spreads were 3.44%, stable Q-o-Q and up 6bps Y-o-Y. As of 1Q16, retail accounted for 59% of total deposits and non-remunerative current accounts represented 32% of deposits. Loan growth recovered to 2% Q-o-Q (7% Y-o-Y) from -0.1% Q-o-Q in 1Q16 owing to a mix of growth in the consumer and corporate segments. Deposits grew by 1% Q-o-Q (9% Y-o-Y) driven by the consumer segment.
• Credit quality is stable though risks linger in retail segment Credit quality metrics have so far been reassuring. The NPL ratio eased to 3.2% from 3.4% in 1Q16, and NPL coverage improved to 116% from 113% in 1Q16. Cost of risk at 114bps was in line with our expectation. We believe the outlook for credit quality remains challenging. Past due loans were up 14% Q-o-Q. Moreover retail loans (c60% of loan book) are at risk due to lay-offs in various sectors across the UAE.

Shabbir Malik
Mohamad Al Hajj
Murad Ansari