• Earnings up 8.2% Y-o-Y, in line with estimate ENBD reported a net profit of AED1,808 million (EPS: AED0.30) for 1Q16, +8.2% Y-o-Y and -15.3% Q-o-Q. Earnings were in line with our AED1,872 million estimate (missed consensus of AED1,918 million). Overall results were mixed as stronger-than-expected investment income compensated for pressure on spreads and higher-than-expected provisioning. ENBD trades at a 2016e P/E of 6.8x and P/B of 1.2x. The bank’s provisioning should ease off in 2016 supported by writebacks. We view ENBD as the best positioned among UAE banks to benefit from higher US rates and the lifting of Iranian sanctions. We reiterate our Buy rating on the stock.
• Higher deposit cost weigh on spread; decent fee income growth Spreads contracted sharply to 2.50% from 2.72% in 4Q15 owing to a temporary increase in cost of funds (+15bps Q-o-Q to 1.25%). ENBD mobilised term deposits in 4Q15 (+22% Q-o-Q) to build a liquidity buffer, and the cost of these deposits impacted 1Q16’s cost of funds. We expect cost of funds to improve in 2Q16, as the bank let go of expensive deposits in 1Q16. That said, liquidity tightened marginally – LDR rose to 96% from 94% in 4Q15 – as loan growth outpaced deposit growth. The bank’s CASA deposit growth was impressive, driving CASA mix to improve to 59% from 56% in 4Q15. Fee income growth was decent (2.5% Q-o-Q, and 2.0% Y-o-Y) supported by growth in credit card volumes.
• Provisioning higher-than-expected; NPL formation subdued While NPL formation was subdued Q-o-Q, ENBD raised its NPL coverage as the UAE’s credit cycle turns. The bank’s cost of risk rose to 105bps from 73bps in 4Q15 (our estimate 99bps), which helped raise NPL coverage to 114% from 112% in 4Q15. We expect lower provisioning to be the key driver of bank’s earnings owing to i) release of loan loss reserves; and ii) management incentivising the recoveries effort. The bank’s NPL ratio eased to 6.9% from 7.1% in 4Q2015, but is still above-sector average and offers scope for improvement, in our view.

Shabbir Malik
Murad Ansari