• Earnings dip 22% Q-o-Q; cash dividend surprises positively NBAD reported net profit of AED1,036 million for 4Q2015, -22% Q-o-Q and -25% Y-o-Y, and below our estimate of AED1,258 million (consensus estimate of AED1,245 million) due to higher-than-expected provisioning and investment losses. The bank proposed a cash dividend of AED0.40/share (c40% pay-out), in-line with 2014 level, but slightly above our AED0.38 forecast. Management expects low single digit earnings growth in 2016 (2015: -6.2%), which we believe is encouraging guidance given the challenging macro backdrop. We tweak our 2016-17e earnings (increase by c1.0%) as we factor in slightly wider spreads. We cut our FV to AED9.10 from AED9.70 as we raise our cost of equity by 50bps. Trading at a 2015 P/BV of 1.2x NBAD’s valuation is undemanding, in our view, and we maintain our Buy rating on the stock.
• Provisions front loaded to prevent spike in 2016 Provisioning was higher-than-expected – cost of risk rose to 81bps from 31bps in 3Q2015 – as the NPL ratio rose to 2.76% from 2.60% in 3Q2015. Management attributed the increase in provisioning to the challenging operating environment, stress in the SME book, and prudent provisioning. It expects to contain cost of risk under 55bps in 2016, up from 44bps in 2015, by continued focus on low-risk credit. Its NPL coverage of 105% in 4Q15, and general provision reserve at 1.7% remain robust, in our view.
• Spreads resilient as liquidity pressures contained Spreads were relatively stable as NBAD reined-in loan growth by running off trade loans to cope with tightening liquidity. Its spreads eased slightly to 1.84% from 1.87% in 3Q15. Liquidity improved as LDR eased to 88.1% from 90.2%. While government deposits fell 16% Q-o-Q, overall deposits were only 1% down Q-o-Q as it replaced government deposits with private sector corporate deposits. Government deposits as a source of funding for NBAD fell significantly - 11% of total deposits in 2015 vs 29% in 2014.

Shabbir Malik
Murad Ansari