Rating: Sell
Target Price: AED3.90
Closing Price: AED4.35

Earnings up 8% Q-o-Q, miss our estimate on higher provisioning costs

CBD reported 2Q17 net income of AED172mn, an increase of 8% Q-o-Q (-30% Y-o-Y), missing our estimate of AED255mn (-32%). The key driver of the earnings miss was higher-than-expected provisioning due to higher credit costs and an additional AED23mn impairment on other assets. Net interest income growth was fairly solid, up 5.8% Q-o-Q, boosted by strong loan growth, coupled with spread expansion. Spreads widened 11bps Q-o-Q to 2.56%, lifted by higher asset yields, as funding costs were flat Q-o-Q. Non-interest income was strong (+16% Q-o-Q); however, it was driven by other income (likely to be non-recurring), with fees and FX income declining sequentially. Management kept cost under control as opex was flat Q-o-Q.
 
Strong broad-based loan growth; deposit growth biased towards term deposits

Loan growth was strong at 5% Q-o-Q in 2Q17, broadly unchanged compared to 1Q17 and driven by the construction and retail segments. However, deposit growth slowed to 2% Q-o-Q in 2Q17, from 5% in 1Q17, pushing the loan-to-deposit ratio up to 99% in 2Q17 (vs. 96% in 1Q17). Deposit growth was biased towards term deposits, leading to a deterioration in the deposit mix, with CASA share of deposits falling to 42% this quarter, from 50% in 1Q17.
 
Credit quality metrics improved sequentially; provisioning remains elevated

Credit quality improved Q-o-Q, with NPL ratio down to 6.2% in 2Q17, compared to 7.1% in 1Q17. Absolute NPLs declined 10% Q-o-Q this quarter. NPL ratio has been on a downtrend since early 2016. However, NPL coverage deteriorated to 92% in 2Q17, from 101% in 1Q17. Cost of risk rose to 219bps in 2Q17, compared to 210bps in 1Q17 and 148bps in 2Q16. Provisioning was driven by the corporate segment, while retail and SME-related provisioning declined sequentially in 2Q17.

Shabbir Malik

Rajae Aadel