• Rights issue to boost lending capacity; reiterate Neutral DIB plans to raise capital via a AED3.2 bn rights issue, the subscription for which starts on June 7. We expect DIB’s CET1 ratio to rise c230bps post rights (as of 1Q16 CET1 was 9.3%). We believe the rights issue would enable DIB to maintain above-sector-average loan growth (recapitalised balance sheet to enhance lending capacity) and its pay-out at c60% and comply with more demanding capital requirements. That said, we are concerned by the weakness in spreads and retail credit quality in 1Q16. We expect DIB’s ROE to ease to 21% in 2016 from 27% in 2015 owing to the capital increase, pressure on spreads and higher provisioning. We believe DIB’s valuations (2016e P/B of 1.6x) are fair in light of its medium-term ROE. We adjust our estimates for the rights issue, and raise our FV to AED5.8 from AED5.6. We reiterate our Neutral rating on the stock.
• Systemic liquidity constraints weigh on spreads DIB’s spreads were hurt in 1Q16 (down 46bps Y-o-Y) as it actively mobilised deposits (17% Y-o-Y) in a relatively tight liquidity environment. Moreover, the deposit growth was biased towards relatively expensive term deposits (mix of term deposits rose to 61% from 50% as of 1Q15). We do not expect spreads to improve in the short term as constraints to systemic liquidity continue to linger. In addition, DIB’s loan growth is likely to be driven by the low yielding corporate segment, which should dilute asset yields. We expect net interest spread to fall to 2.59% from 3.08% in 2015.
• Provisioning concerns on frailty of retail segment DIB’s credit provisioning in 1Q16 was elevated (cost of risk 100bps) driven by a 3x Y-o-Y increase in retail provisioning. The bank was however able to keep overall provision charges under control (-13% Y-o-Y) owing to provision releases from non-core assets (17% of DIB’s total assets). While we expect another reversal in 2Q16 as exposure to Limitless is likely to be upgraded, we expect provisioning to rise as reversals start fading. We forecast DIB’s 2016 cost of risk at 84bps versus 53bps in 2015.

Shabbir Malik
Murad Ansari