4Q18 net profit up 5% Q-o-Q and 13% Y-o-Y, slightly above EFGe. DIB reported a net profit of AED1.30bn for 4Q18, +5% Q-o-Q and +13% Y-o-Y. Earnings came 6% above our estimate of AED1.22bn. Stronger-than-expected non-interest income offset weaker spread and higher credit provisions and drove the slight earnings beat relative to our estimate.
 
FY18 earnings up 14% Y-o-Y: FY2018 net income stood at AED4.92bn, an increase of 14% Y-o-Y. Dividend was shy of our estimate: The Board has proposed a DPS of AED0.35 for 2018, slightly up from AED0.34 in 2017 but below our estimate of AED0.40. The proposed dividend implies a dividend yield of 6.7%. DIB is becoming more prudent in terms of capital management. Their capital management in the past has been unconventional, which has meant that they have regularly issued new capital to support their above sector average loan growth and dividend payout. Looking at their loan growth guidance for 2019, we believe they have made the right decision to conserve capital.
 
2019 guidance:
Loan growth: 10-15% (vs. 12% in 2018); Net interest margin: 3.00-3.15%  (vs. 3.12% in 2018)
NPL ratio: 3.0% (vs. 3.4% in 2018); NPL coverage: 120% (vs. 112% in 2018)
Cost-to-income ratio: c30% (vs. 28% in 2018)
ROA: 2.20-2.25% (vs. 2.32% in 2018) ; ROE: 17-18% (vs. 18% in 2018)
 
Our view of the results: Results were a mixed bag. Loan growth strengthened sequentially to 1.5% Q-o-Q in 3Q18, vs. 0.5% in 3Q18. However, spreads shrunk 10bps Q-o-Q as higher funding costs outpaced stronger asset yields. Revenue growth of 6% Q-o-Q was fueled by strong non-interest income, while net interest income was broadly stable Q-o-Q. Non-interest income solid sequential growth of 27% was mainly driven by income from properties but also decent fee income growth (+10% Q-o-Q). It is worth noting that income from properties tends to be the highest in 4Q. After a strong deposit growth of 6% Q-o-Q in 3Q18, DIB shed some deposits in 4Q18 (-3% Q-o-Q) which drove an increase in its loan-to-deposit ratio to 93%, vs. 89% in 3Q18. Cost discipline continues with operating expenses broadly unchanged sequentially, driving 153bps Q-o-Q decline in the cost-to-income ratio. Credit provisioning charge was higher than expected with cost of risk at 91bps in 4Q18, vs. 47bps in 3Q18 and EFGe of 71bps. DIB’s NPA ratio rose by 10bps Q-o-Q to 3.4%, while the bank’s NPA coverage declined to 112% from 121% in 3Q18. The bank remains well capitalized with a 12.4% CET 1 ratio and a total CAR of 17.5%.
 
Main positives: Good cost control with OPEX flat Q-o-Q and down 4% Y-o-Y; Strong income from properties (+17% Y-o-Y). Main negatives: Spreads shrunk 10bps Q-o-Q and 15bps Y-o-Y to 2.66%; Higher-than-expected credit provisioning costs (cost of risk 91bps vs. EFGe of 71bps); Decline in deposits of 3% Q-o-Q. 
 
Dubai Islamic Bank (DU): AED5.26 as of 29 Jan. 2019, Rating: Buy, TP: AED6.40/share, MCap: USD9,444mn, DIB UH/DISB.DU
Shabbir Malik, Rajae Aadel