• Valuations are demanding; reiterate Sell CBD reported net profit of AED245mn (EPS: AED 0.17) for 2Q16, +2% Q-o-Q and down 22% Y-o-Y. The bank’s earnings fell short of our AED293mn estimate owing to higher-than-expected provisioning. CBD’s cost of risk rose to 148bps (ex-general provisions cost of risk was 100bps) in 2Q16 from 119bps in 1Q16. We cut our estimates for 2016-18 by c16% (see fig 2) to factor in tighter spreads (expensive funding) and higher provisioning (pressure on retail and SME segments). CBD’s valuations – 2016e P/E of 13.9x and P/BV of 1.8x – remain demanding. We cut our FV to AED4.6 from AED5.3, and reiterate our Sell rating.
• Loan growth recovers; liquidity continues to be adequate Loan growth was strong in 2Q16 at 5% Q-o-Q (7% Y-o-Y) underpinned by growth in the corporate segment. This comes after a weak 1Q16, when the loan book contracted 0.7% Q-o-Q. YTD, CBD’s gross loans grew 4.6% versus 3.9% for the sector. Liquidity tightened – LDR rose to 98% from 94% in 1Q16 – as deposit growth was relatively subdued at 0.5% Q-o-Q. The bank is comfortably positioned with respect to regulatory liquidity requirements. CBD’s liquidity coverage ratio (LCR) was at 127% (minimum for 2016: 70%).
• Cost of funds stabilise; fee income strong on loan growth The bank’s spreads were flat Q-o-Q at 2.63%; however they are down 36bps Y-o-Y. CBD’s funding costs, which had been rising due to system wide tightening of liquidity, appear to have stabilised. Fee income rose 13% Q-o-Q likely due to strong loan growth during the quarter.
• Controlled cost growth due to focus on efficiency Cost growth was muted (+1.7% Q-o-Q, -6.5% Y-o-Y). CBD has continued to invest in enhancing its distribution network and digital platform to help grow the personal and business banking segments. However, it offset this by enhancing efficiency in other segments of the bank.

Shabbir Malik
Murad Ansari