• Earnings and FV cut on macro concerns We cut FGB’s 2016-17 estimates by c6% as we trim loan growth and raise provisioning estimates (figure 1). Management eyes stable to low-single digit earnings growth in 2016 versus c6.0% in 2015. We are more cautious and expect earnings to decline c8.0% in 2016 in light of growing sector-wide risks to credit quality. Despite our earnings cut, we believe it offers an attractive ROE of c19.0% with a solid underlying ROA of 2.4%. Its superior capitalisation and pre-provision profitability should support an above-sector-average pay-out of c75% in 2016e, in our view. We cut our FV to AED13.9 from AED15.3, as we raise our cost of equity by 50bps (macro risks due to slump in oil price). We reiterate our Buy rating on the stock.
• 4Q2015 results were a mixed bag FGB’s net profit rose 21% Q-o-Q and beat estimates, mainly due to mark-to-market gains on real estate. FGB’s cash dividend at AED1.0/share (pay-out 75%) best our forecast of AED0.9. Provisioning was the key weak area - cost of risk rose to 120bps from 80bps in 3Q2015 - as FGB downgraded a cAED1 billion international exposure to NPL.
• Selective loan growth, tighter spreads to weigh on revenue We expect FGB’s revenue to shrink 2.0% in 2016, as spreads contract 17 bps Y-o-Y to 2.83% and loan growth moderates to 4.0% from 7.0% in 2015. Loan growth should decelerate as FGB looks to grow its RWA prudently through selective loan underwriting. Spreads should contract owing to a slow-down in loan origination and a continued increase in cost of funding.
• Strong credit quality track record to be put to test We are comfortable with FGB’s ability to contain credit risk in light of its strong track record. That said, we believe the credit cycle is turning and expect NPLs to increase and recoveries to fade in 2016. We forecast FGB’s NPL ratio to increase to 3.3% from 2.8% in 2015, and expect its cost of risk to rise to 110 bps from 94 bps in 2015.

Shabbir Malik
Murad Ansari