• Spreads come under pressure; earnings in line with expectation RAKB reported net profit of AED249 million (EPS: AED0.15) for 1Q16, down 21% Q-o-Q and 31% Y-o-Y. Earnings were broadly in line with our estimate of AED259 million and slightly below consensus of AED269 million. Stronger investment and other income compensated for pressure on spreads, which weakened 47bps Q-o-Q to 7.49%, owing to softer asset yield on higher corporate loans mix. RAKB’s high exposure to SME and retail segments in a decreasing credit cycle is a concern. That said, we believe it has good defensive buffers (solid CAR of 24.3% and a high break-even cost of risk of 900bps) to absorb the high provisioning. We have a Neutral rating on the stock.
• Asset quality trends still underwhelming Provisioning continues to be the key overhang on profitability. The bank’s annualised cost of risk rose to 556bps in 1Q16 from 493bps in the previous quarter (294bps in 1Q15), as the small-sized business segment (RAK Finance) accounting for 20% of loans, continues to face headwinds. The plan by UAE banks to halt prosecution of bounced cheques would benefit RAKB marginally, in our view, as the plan does not yet cover the personal banking and the small ticket business loans. We expect RAKB’s provisioning to remain elevated in 2016. RAKB’s NPL ratio rose to 3.6% from 3.2% in 4Q15, as non-performing loans grew 14% Q-o-Q in 1Q16. The bank’s NPL coverage improved to 83% from 81% in the previous quarter.
• Loan book continues to be corporate-ised In light of credit quality risks in the SME and retail segments, management curbed its credit risk appetite. RAKB’s loan growth slowed to 7% Y-o-Y (0.4% Q-o-Q) from 10% Y-o-Y in 4Q15. Management continues to focus on the corporate segment (+27% Q-o-Q), while pulling back from higher risk retail and SME segments (-2% Q-o-Q). The bank’s liquidity positioning remains satisfactory as LDR eased to 98% from 100% in 1Q15.

Shabbir Malik
Murad Ansari