• Valuations limit upside potential; maintain Neutral NBAD’s earnings rose 23% Q-o-Q (-11% Y-o-Y) in 1Q16 to AED1,271mn and came in line with our estimate, as lower provisioning compensated for weaker investment income. Credit quality remains NBAD’s strong suite, as the NPL ratio was stable Q-o-Q at 2.8% and NPL coverage improved to 110% from 105%. NBAD’s cost of risk (CoR) eased to 56bps from 81bps in 4Q15. A high-quality loan book, a satisfactory provisions buffer and likely upgrade of a certain non-performing loans in 2Q16, should enable NBAD keep CoR under 55bps in 2016. We tweak our estimates for 2016-17 and reduce our FV to AED9.0 from AED9.1. NBAD trades at 2016e P/B of 1.2x, which, in our view, adequately captures its profitability (2016e ROE of c14%). We reiterate our Neutral rating on the stock.
• Focus on high-yielding assets as liquidity concern subsides Loan book contracted 3% Q-o-Q in 1Q16, as management let the trade finance book mature and deployed this liquidity in relatively higher-yielding investment book, up 27% Y-o-Y, and retail loans, up 3% Q-o-Q. The bank remains well-positioned in terms of liquidity, in our view. LDR at 86%, as of 1Q16, is well below the sector average of 94%. Deposits were stable Q-o-Q, and the pressure of withdrawal of government deposits has dissipated as these deposits were up 6% Q-o-Q.
• Resilient spreads, solid growth in fee and FX income NBAD’s spreads were stable Q-o-Q at 1.84% in 1Q16 vs. our UAE coverage’s spreads, which declined 12bps Q-o-Q to 2.65% in 1Q16. We believe the bank’s relatively strong liquidity position helped offset the funding cost pressures that some UAE banks encountered. Management’s transformational strategy is showing results. Fee income growth at 6% Q-o-Q was impressive vis-à-vis our coverage’s 3% Q-o-Q. Strong growth in retail loans, cross-sell of FX and treasury products to commercial clients and a focus on debt capital markets and advisory services for corporates are underpinning growth in fees and FX income.

Shabbir Malik
Murad Ansari