30-Jul-2017
First Abu Dhabi Bank - 2Q17: Navigating through integration and subdued macro
Rating: Neutral
Target Price: AED11.3
Closing Price: AED10.7
Earnings down 12% Q-o-Q, in-line with estimates
FAB reported 2Q17 net profit of AED2,562mn, -12% Q-o-Q and -5% Y-o-Y, in line with our estimate of AED2,584mn (and consensus of AED2,570mn), as lower provisioning and OPEX compensated for sluggish revenue. The results reflect post-merger transition within the bank and weak economic activity in Abu Dhabi. Operating costs surprised positively, down 8% Q-o-Q (6% Y-o-Y), due to partial realisation of cost synergies. FAB said that it had realised c18% of its targeted cost synergies of AED1bn in 1H17. The bank’s cost synergy realisation target for 2017 is 25%, so it is on track to meet its goal for the year, in our view. The balance sheet volumes were down, and fee income was weak in part due to weak economic activity. We are positive on FAB’s LT prospects as its scale will give it a competitive edge over smaller banks, in our view. That said, we believe the weak macro story in Abu Dhabi and integration risks will prevent any ST re-rating of the stock; thus, we maintain our Neutral rating.
Weak balance sheet volumes; increased liquidity & competition caps spread improvement
Balance sheet trends were weak: loans were down 7% Q-o-Q, while deposits were down 4% Q-o-Q. Mgmt. attributed the loan book contraction to subdued demand and run-down of low-yielding trade loans and high risk SME loans. Mgmt. cut loan growth guidance to slight contraction from mid-single digit. Deposits declined as FAB let go of high-cost deposits, as it is focused on realising funding cost synergies post-merger. Liquidity increased, with LDR easing to 85% from 88% in 1Q17. Spreads were stable Q-o-Q, as any realisation of funding cost synergies was offset by competitive pressure and placement of excess liquidity in low-yielding instruments.
NPL ratio deteriorates due to retail; provisioning within guidance
Credit quality deteriorates, with NPL ratio up to 3.2% from 2.6% in 1Q17, with the uptick driven by lower gross loans and some NPL formation related to the retail segment and a couple of corporate downgrades. NPL coverage declined to 112% from 122% in 1Q17. The bank’s provisioning remains under control, with cost of risk at 70bps (our estimate 77bps), which is in line with guidance (70-75bps). General provisions reserve was adequate, at 1.7% of credit risk weighted assets, above the min. required of 1.5%.
Target Price: AED11.3
Closing Price: AED10.7
FAB reported 2Q17 net profit of AED2,562mn, -12% Q-o-Q and -5% Y-o-Y, in line with our estimate of AED2,584mn (and consensus of AED2,570mn), as lower provisioning and OPEX compensated for sluggish revenue. The results reflect post-merger transition within the bank and weak economic activity in Abu Dhabi. Operating costs surprised positively, down 8% Q-o-Q (6% Y-o-Y), due to partial realisation of cost synergies. FAB said that it had realised c18% of its targeted cost synergies of AED1bn in 1H17. The bank’s cost synergy realisation target for 2017 is 25%, so it is on track to meet its goal for the year, in our view. The balance sheet volumes were down, and fee income was weak in part due to weak economic activity. We are positive on FAB’s LT prospects as its scale will give it a competitive edge over smaller banks, in our view. That said, we believe the weak macro story in Abu Dhabi and integration risks will prevent any ST re-rating of the stock; thus, we maintain our Neutral rating.
Weak balance sheet volumes; increased liquidity & competition caps spread improvement
Balance sheet trends were weak: loans were down 7% Q-o-Q, while deposits were down 4% Q-o-Q. Mgmt. attributed the loan book contraction to subdued demand and run-down of low-yielding trade loans and high risk SME loans. Mgmt. cut loan growth guidance to slight contraction from mid-single digit. Deposits declined as FAB let go of high-cost deposits, as it is focused on realising funding cost synergies post-merger. Liquidity increased, with LDR easing to 85% from 88% in 1Q17. Spreads were stable Q-o-Q, as any realisation of funding cost synergies was offset by competitive pressure and placement of excess liquidity in low-yielding instruments.
NPL ratio deteriorates due to retail; provisioning within guidance
Credit quality deteriorates, with NPL ratio up to 3.2% from 2.6% in 1Q17, with the uptick driven by lower gross loans and some NPL formation related to the retail segment and a couple of corporate downgrades. NPL coverage declined to 112% from 122% in 1Q17. The bank’s provisioning remains under control, with cost of risk at 70bps (our estimate 77bps), which is in line with guidance (70-75bps). General provisions reserve was adequate, at 1.7% of credit risk weighted assets, above the min. required of 1.5%.
Shabbir Malik
Rajae Aadel