• Credit quality metrics continue to improve ENBD reported 2Q16 net profit of AED1.91bn (EPS: AED0.32), up 6% Q-o-Q and 16% Y-o-Y. Earnings were slightly above our AED1.85bn estimate (consensus AED1.81bn) as lower provisioning offset the effect of weaker-than-expected net interest income. Provisioning declined sequentially (cost of risk eased to 85bps from 105bps in 1Q15) as the NPL ratio eased 30bps Q-o-Q to 6.6%. We believe the improvement in provisioning was in part driven by a provision release on Limitless. We believe ENBD’s outlook for provisioning in 2H16 is relatively favourable as its overall NPL coverage is satisfactory at 119% and its GP reserve stood at 3.2%, which is well above the central bank’s minimum of 1.5%.
• Spreads tighten, however loan growth was quite strong ENBD’s spreads tightened further this quarter as cost of funds crept upwards and asset yield weakened. The bank’s CASA mix deteriorated slightly (57% from 59% in 1Q16) while spreads tightened on retail and Islamic loans due to competitive pressure and slow systemic loan growth. Management cut it NIM guidance for 2016 to 2.55-2.65% from 2.70-2.85% citing funding cost pressure and the delayed US rate hike. Loan growth, however continues to be quite decent at 2.5% Q-o-Q and 11.7% Y-o-Y. Growth sequentially was driven by the Islamic (6%) and retail (3%) segments.
• Valuations are undemanding; reiterate Buy We tweak our estimates (see fig 2) to incorporate the 2Q16 results. ENBD’s valuations continue to be undemanding – 2016e P/E of 7.2x and P/B of 1.3x – in light of its strong profitability profile (2016e ROE: 19%). We believe the bank is best positioned in the UAE to benefit from higher US rates considering its rich CASA oriented deposit base. Moreover, scope for further improvement in its NPL ratio and its excess provision reserve is likely to mitigate provisioning pressure. We reiterate our Buy rating on ENBD, as our unchanged FV of AED10 implies 18% upside potential.

Shabbir Malik
Murad Ansari