17-Jan-2017
Emirates NBD (ENBD) - 4Q earnings beat on low provisioning
Rating: Buy
Price: AED8.7
Target Price: AED9.8
Earnings top estimates; cash dividend at AED0.40/share
ENBD reported 4Q net profit of AED1.86bn, +12% Q-o-Q and -13% Y-o-Y. Results were a mixed bag. Earnings beat our estimate of AED1.65bn and consensus of AED1.72bn, mainly due to lower-than-expected provisioning. However, spreads came under pressure and FX income was weak mainly due to the devaluation of the EGP. The bank proposed a cash DPS of AED0.40, which was below our forecast of AED0.45, however ENBD’s capitalisation continues to be satisfactory (Tier 1: 18.7%) and liquidity remains adequate (LDR: 93%). ENBD trades at an undemanding 2017e P/E of 7.2x and P/BV of 1.2x. In addition, we see ENBD as a key beneficiary of Dubai and UAE’s relatively supportive macro. We reiterate our Buy rating on the stock.
Provisioning surprise on corporate recoveries and easing stress in Islamic segment
Provisioning surprised positively as the bank continues to enjoy tailwinds from recoveries from the stock of legacy NPLs (AED20bn as of 2016). The bank’s cost of risk eased to 54bps in 4Q16 from 83bps in 3Q16. The bank continues to generate recoveries from the corporate segment. Meanwhile provisioning in the Islamic segment improved Q-o-Q, suggesting that the stress in the micro SME segment is beginning to ease off. While management did not provide guidance for provisioning in 2017, we expect recoveries from legacy NPLs to continue to support earnings in 2017, as NPL coverage remains comfortable at 120%.
Spreads remain under pressure; higher US rates and oil price tailwind for spreads in 2017
ENBD’s spreads continue to weaken – 15 bps Q-o-Q to 2.20% in 4Q16 - weighed down by weak asset yield and higher cost of funds. The bank has not yet managed to pass on the higher cost of funds to customers, owing to competitive pressure from offshore banks. Mgmt. expects NIMs to contract 5-15bps in 2017 owing to sustained liquidity constraints, subdued loan growth and competitive pressure. The key tailwind for ENBD’s spreads in 2017 are i) higher US rates (ENBD is most leveraged to higher US rates owing to its CASA rich deposit base); and ii) higher oil prices which should improve system liquidity, in our view.
Shabbir Malik
Murad Ansari
Price: AED8.7
Target Price: AED9.8
Earnings top estimates; cash dividend at AED0.40/share
ENBD reported 4Q net profit of AED1.86bn, +12% Q-o-Q and -13% Y-o-Y. Results were a mixed bag. Earnings beat our estimate of AED1.65bn and consensus of AED1.72bn, mainly due to lower-than-expected provisioning. However, spreads came under pressure and FX income was weak mainly due to the devaluation of the EGP. The bank proposed a cash DPS of AED0.40, which was below our forecast of AED0.45, however ENBD’s capitalisation continues to be satisfactory (Tier 1: 18.7%) and liquidity remains adequate (LDR: 93%). ENBD trades at an undemanding 2017e P/E of 7.2x and P/BV of 1.2x. In addition, we see ENBD as a key beneficiary of Dubai and UAE’s relatively supportive macro. We reiterate our Buy rating on the stock.
Provisioning surprise on corporate recoveries and easing stress in Islamic segment
Provisioning surprised positively as the bank continues to enjoy tailwinds from recoveries from the stock of legacy NPLs (AED20bn as of 2016). The bank’s cost of risk eased to 54bps in 4Q16 from 83bps in 3Q16. The bank continues to generate recoveries from the corporate segment. Meanwhile provisioning in the Islamic segment improved Q-o-Q, suggesting that the stress in the micro SME segment is beginning to ease off. While management did not provide guidance for provisioning in 2017, we expect recoveries from legacy NPLs to continue to support earnings in 2017, as NPL coverage remains comfortable at 120%.
Spreads remain under pressure; higher US rates and oil price tailwind for spreads in 2017
ENBD’s spreads continue to weaken – 15 bps Q-o-Q to 2.20% in 4Q16 - weighed down by weak asset yield and higher cost of funds. The bank has not yet managed to pass on the higher cost of funds to customers, owing to competitive pressure from offshore banks. Mgmt. expects NIMs to contract 5-15bps in 2017 owing to sustained liquidity constraints, subdued loan growth and competitive pressure. The key tailwind for ENBD’s spreads in 2017 are i) higher US rates (ENBD is most leveraged to higher US rates owing to its CASA rich deposit base); and ii) higher oil prices which should improve system liquidity, in our view.
Shabbir Malik
Murad Ansari