4Q18 net profit up 4% Y-o-Y, down 3% Q-o-Q, broadly in-line: FAB has reported 4Q18 net income of AED2.93bn, an increase of 4% Y-o-Y, but a decline of 3% Q-o-Q. Earnings came in broadly in line with our estimate of AED3.06bn (-4%) and consensus of AED3.07bn (as collected by FAB IR from sell-side analysts). 
 
FY18 earnings up 10% Y-o-Y: FY2018 net income stood at AED12.0bn, an increase of 10% Y-o-Y.
 
Dividend below our estimate: The Board has proposed a DPS of AED0.74 for 2018, up from AED0.70 in 2017. The recommended DPS came in below our estimate of AED0.78 but in-line with consensus of AED0.75 (as collected by FAB IR from sell-side analysts). The proposed dividend implies a dividend yield of 5.1%.
 
FOL increase from 25% to 40% on the table: The Board has recommended the increase of foreign ownership limit from 25% to 40%, subject to shareholders’ approval on 25 February 2019 and regulatory green nod. 
 
2019 guidance: 
Loan growth: high-single digit (vs. 7% Y-o-Y in 2018); Revenue growth: mid-single digit (broadly flat in 2018)
Net profit growth: mid-single digit (vs. 10% in 2018); Cost of risk: 55-65bps (vs. 48bps in 2018) 
Cost-to-income ratio: 25-26% (vs. 26% in 2018); ROTE: 16-17% (vs. 16% in 2018); CET 1: >13% (vs. 14% in 2018)
 
Our view of the results: Key operating metrics were fairly subdued sequentially. Spreads shrunk 11bps Q-o-Q as higher funding costs outpaced stronger asset yields. Loan book was flat Q-o-Q, vs. +3% Q-o-Q in 3Q18, as contraction in private corporate and consumer lending Q-o-Q offset a pick-up in public sector loans. Weaker spreads and subdued volumes drove flat net interest income sequentially. FX income was very high in 4Q18 (+50% Q-o-Q) but was offset by weak fee income (-1.4% Q-o-Q) and investment income (-59% Q-o-Q). Provisioning costs surprised positively, supported by stable credit quality metrics with NPL ratio flat Q-o-Q at 3.1%. Cost of risk was broadly unchanged Q-o-Q at 47bps, below our forecast of 54bps. Operating costs rose 3% Q-o-Q, following good cost control in 9M18 due to the realization of cost synergies. Mgmt. attributed the uptick in OPEX in 4Q18 to salary increases. Deposit growth weakened to 2% Q-o-Q, vs. 6% Q-o-Q in 3Q18 mainly on a decline in retail deposits Q-o-Q. CASA mix was broadly unchanged sequentially at 34.0% in 4Q18.
 
Main positives: Lower-than-expected provisioning costs with cost of risk broadly stable Q-o-Q at 47bps vs. EFGe of 54bps; Strong FX income 6% Q-o-Q (+20% Y-o-Y)
 
Main negatives: Spreads compression of 11bps Q-o-Q and 34 bps Y-o-Y as higher funding costs outpaced stronger asset yields; Flat loan book Q-o-Q; Subdued revenue growth with flat net interest income Q-o-Q and 3% decline in non-interest income. 

Shabbir Malik, Rajae Aadel
 
First Abu Dhabi Bank (AD): AED14.58 as of 30 Jan. 2019, Rating: Neutral, TP: AED14.50/share, MCap: USD43,295mn, FAB UH/FAB.AD