Earnings up 5% Q-o-Q, beat estimates; reiterate Buy
DIB reported 2Q17 net profit of AED1,057mn, up 5% Q-o-Q and 14% Y-o-Y, coming in ahead of our forecast of AED979mn and consensus of AED985mn. Earnings beat was driven by stronger non-interest income, lower cost of risk and good cost discipline. Spreads stabilised, and mgmt. is expecting them to improve in 2H17, as loans re-price to higher US rates (70% of DIB’s loan book is floating). Fee income was weak; however, it was offset by strong other income. We believe DIB’s CET 1 ratio of 11%, though relatively low, is adequate to sustain loan growth of 15% and dividend of AED0.45/share (yield 8%) in 2017. DIB offers strong ROE prospects (2017e: 20%), scope for wider spreads and a play on Dubai’s favourable macro. We reiterate our Buy rating on DIB.
 
Strong balance sheet growth; pressure on spreads receding
Loan growth was fairly strong at 3% Q-o-Q, but decelerated sequentially from 6% Q-o-Q in 1Q17. DIB is on track to meet the high end of its 10-15% loan growth guidance for 2017. Deposit growth of 3% Q-o-Q was in line with loan growth; hence, LDR was broadly unchanged Q-o-Q at 89% in 2Q17. Deposit growth was biased towards current deposits, driving an uptick in CASA’s share of deposits to 37% in 2Q17, from 36% in 1Q17. It was encouraging to see that pressure on net interest spread softened Q-o-Q, with spreads broadly stable compared to 1Q17. 
 
Sustained recoveries keep cost of risk under control 
Provisioning costs surprised positively, with cost of risk falling to 56bps in 2Q17, from 51bps in 1Q17 (vs. our forecast of 61bps). Provisioning was supported by a decline in gross provisioning, coupled with sustained recoveries, which continue to keep cost of risk in check. Provisioning in the retail segment picked up 21% Q-o-Q, but were offset by recoveries related to the corporate and investment banking segment. Credit quality metrics were broadly stable, with NPL ratio broadly unchanged at 3.6%. NPL coverage picked up slight to 120% in 2Q17, from 118% in 1Q17.