Rating: Neutral
Target Price: AED8.20
Closing Price: AED7.25

2Q17 earnings down 9% Q-o-Q; volatile FX income drives miss
ADCB reported 2Q17 net profit of AED1.0bn, -9% Q-o-Q and -10% Y-o-Y. The bank’s earnings missed our estimate of AED1.06bn (consensus of AED1.1bn) owing to FX loss, which mgmt. attributed to challenging market conditions, and high provisioning. ADCB should recover from 2Q17’s FX loss; however, certain key weak operating trends (high provisioning and limited spread expansion) should limit re-rating in the ST, in our view. We see job cuts and reduced gov’t spending in Abu Dhabi as a headwind for ADCB’s retail business – retail accounted for more than 40% of fees and 24% of loans in 2Q17. We tweak our estimates (raise loan growth and cut opex) and increase our TP to AED8.2 from AED7.9. ADCB trades at a 2017e P/B of 8.9x, offers an ROE of 16.8% and is supported by a healthy div. yield of 6.2%. We reiterate our Neutral rating on the stock.
 
Strong loan growth; satisfactory liquidity
Loan growth was decent at 3% Q-o-Q and 6% Y-o-Y, and above-sector-average, as the bank saw good appetite in Abu Dhabi. The bank is experiencing strong growth in Islamic loans (24% Y-o-Y in 2Q), albeit growing from a small base. Deposits were flattish Q-o-Q (up 9% Y-o-Y) and consequently the LDR rose to 102% from 98% in 1Q17. The bank’s liquidity however is comfortable, with LCR at 110% compared to 80% required by the regulator in 2017.
 
Spreads widened, although the improvement is modest
Spreads rose 4bps Q-o-Q to 2.56% due to a higher yield. While the Fed hike in June should be supportive, mgmt. expects spreads in 2H17 to be flattish to slightly higher relative to 1H17 as re-pricing of loans continues to be a challenge due to competitive pressures. 
 
Provisioning rises on lower reversals; NPL ratio creeps up
Cost of risk rose to 102bps from 94bps in 1Q17 owing to lower provision recoveries. Credit quality metrics deteriorated, with the NPL ratio rising 12bps Q-o-Q to 2.8%. NPL coverage declined to 124% from 133% in 1Q17. Mgmt. expects provisioning in 3Q17 to be similar to 2Q17 level mainly due to concerns around the retail segment.