• Core team remains intact; reiterate Buy Last week Reuters reported that three senior executives had left FGB. We believe the departure of these executives (including heads of corporate and treasury) should not be disruptive for FGB as the core management team (CEO, CFO and head of risk) remains intact. FGB aims to deliver flat to low-single-digit earnings growth in 2016, underpinned by growth in corporate and retail segments, enhanced cross-selling between segments and upward re-pricing of the corporate loan book. We are more cautious and expect earnings to decline 5% in 2016 vs. our earlier expectation of an 8% decline (lower provisioning and costs). We raise our FV to AED14.8 from AED13.9 and reiterate our Buy rating on the stock.
• 1Q16 results: Lower provisioning and cost control drive beat FGB’s 1Q16 net profit declined 6% Y-o-Y to AED1,332mn; however, it beat our AED1,264mn estimate, owing to lower provisioning and operating costs. The NPL ratio eased to 2.6% from 2.8% in 4Q15, while NPL coverage improved to 110% from 103% in 4Q15. Cost of risk (CoR) at 97bps was lower than our estimate of 112bps and down compared to 122bps in 4Q15. The bank’s spreads contracted 16bps Q-o-Q as cost of funds continue to trend upwards. Cost control was, however, good, as operating costs were down 5.6% Y-o-Y on lower staff expenses.
• Credit quality trends encouraging; pressure on spreads to persist We trim FGB’s 2016 CoR to 100bps from 110bps. Management states that retail credit quality has improved since 3Q15 and stabilised in 1Q16. With regard to corporate, there were no restructurings in 1Q16, and management expects the stable trend to continue in 2Q16. We expect spreads to contract 18bps Y-o-Y to 2.82% in 2016, owing to systemic liquidity constraints. FGB is taking steps to prevent spread compression including i) growing CASA deposits (+13% Q-o-Q in 1Q16); ii) expanding its funding from the Euro Commercial Paper programme, which offers stable and low-cost funding; and iii) broadening the geographic mix of its deposits.

Shabbir Malik
Murad Ansari