4Q18 net profit up 18% Q-o-Q and 27% Y-o-Y, beats our estimates. ADCB reported 4Q18 net profit of AED1.36bn, an increase of 18% Q-o-Q and 27% Y-o-Y. Earnings exceeded our forecast of AED1.12bn (+21%) on lower provisioning. FY18 earnings up 13% Y-o-Y: FY2018 net income stood at AED4.84bn, an increase of 13% Y-o-Y. 
 
Proposed DPS broadly in-line with EFGe: The Board has proposed a DPS of AED0.46 for 2018, up from AED0.42 in 2017 and broadly in line with our estimate of AED0.45. The proposed dividend implies a payout ratio of 69%, up from 53% last year and our estimate of 53%. The proposed DPS implies a dividend yield of 5% at current share price.
 
Our view of the results: Overall a good set of results. Provisioning costs were the key positive surprise this quarter with cost of risk at 34bps in 4Q18, down from 81bps in 3Q18 and EFGe of 89bps. Credit quality metrics marginally improved sequentially with NPL ratio down 9bps Q-o-Q to 2.88% owing to the downgrade of some corporate accounts. NPL coverage continues to trend down to 130% in 4Q18, from 133% in 3Q18 and 146% in 2Q18. Revenue momentum was weak, down 2% Q-o-Q on 10% Q-o-Q contraction in non-interest income. Weaker trading and investment income sequentially weighed on non-interest income, despite a pick-up in fee income Q-o-Q. Net interest income was flat Q-o-Q although spreads contracted Q-o-Q, with funding costs increase exceeding asset yield expansion Q-o-Q. Operating costs fell 7% Q-o-Q and led to an improvement in the cost-to-income ratio to 33% in 4Q18, vs. 35% in 3Q18. Loan growth remains subdued, at 0.7% Q-o-Q in 4Q18, vs. -0.3% in 3Q18, mainly due to retail loan contraction. However, deposit growth rebounded to 4% Q-o-Q, from a decline of 1% Q-o-Q in 3Q18, but was biased towards term deposits. Thus CASA mix deteriorated 169bps Q-o-Q to 39%.  
 
Key highlights:
Spreads compression of 6bps Q-o-Q as higher funding costs more than offset stronger asset yields 
Broadly flat loan book Q-o-Q
Lower-than-expected provisioning charge with cost of risk at 34bps in 4Q18, vs. 81bps in 3Q18 and EFGe of 89bps
Good cost discipline with operating expenses down 7% Q-o-Q and 8% Y-o-Y
Strong deposit growth of 4% Q-o-Q with CASA mix down 169bps Q-o-Q to 39% (Shabbir Malik, Rajae Aadel, Company)
 
AD Comm. Bank: AED8.92 as of 28 Jan. 2019, Rating: Buy, TP: AED9.00/share, MCap: USD12,646mn, ADCB UH/ADCB.AD

Union Natl. Bank : AED5.29 as of 28 Jan. 2019, Rating: Neutral, TP: AED5.20/share, MCap: USD3,966mn, UNB UH/UNB.AD