• Downgrade to Neutral; FV unchanged at AED9.10 We downgrade NBAD to Neutral as its share price has risen 21% in the past eight weeks outperforming our UAE banks coverage, which rose 11% during this period. We see limited upside as i) valuation - 2016e P/E of 9.0x and P/BV of 1.2x - fairly captures NBAD’s defensive qualities; and ii) 1Q16 results are unlikely to provide any positive catalysts. We expect 1Q16 earnings to fall 10% Y-o-Y (+23% Q-o-Q) as higher provisioning should offset mild revenue growth. Revenue is likely to be supported by wider spreads (better cost of deposits) and improved fee income (retail loan growth and brokerage income). NBAD is adequately buffered – LDR: 88%, tier 1: 15.7% - and offers a superior credit risk management track record, which should limit downside risk as the credit cycle turns, in our view. The key upside risks to our estimates are lower-than-expected provisioning and higher oil price.
• Retail segment to drive loan growth, funding pressure to ease We expect overall loan growth to rise 7.5% Y-o-Y (1.4% Q-o-Q) in 1Q16 versus 6.0% Y-o-Y (-2.5% Q-o-Q) in 4Q15, led by strong retail growth. NBAD is eyeing 3.0-4.0x sector growth in this segment as part of its strategy to strengthen its positioning in higher-yielding segments in the UAE. Central Bank’s February statistics indicate that pressure on government deposits has dissipated and sector deposits have been stable since 4Q15. We expect NBAD’s deposits (market share 16.5%) to remain stable relative to 4Q15.
• Clean-up provisioning in the SME segment likely We expect cost of risk to be at 59bps in 1Q16 compared to 33bps in 1Q15, as the bank de-risks its SME loan book. A continued focus on low risk credit (GREs and high quality corporates) should enable the bank to keep overall provisioning pressure under control, in our view. Management is guiding towards cost of risk of under 55bps in 2016 compared to 45bps in 2015. NBAD is eyeing recoveries in 1H2016, which could drive a positive earnings surprise.

Shabbir Malik
Murad Ansari