• Attractive dividend yield should limit downside; reiterate neutral We cut RAKB’s 2016-17 earnings c7%, mainly due to higher provisioning on i) our expectation of a pick-up in delinquencies in the retail segment; and ii) mgmt’s cautious credit quality guidance. SME and retail account for 90% of its loan book, making it one of the most sensitive banks to cycles in these sectors. That said, we believe it has good defensive buffers, and it has priced credit risks appropriately (yield on risky RAK Finance loans is c20%). Moreover, its dividend yield (2016e c8.0%) is attractive and should limit downside. We cut our FV to AED6.1 from AED7.8, as we raise our cost of equity (+50bps to 12.5%) and reiterate our Neutral rating. Our top picks in the UAE banking sector are FGB (BUY) and ENBD (BUY).
• 4Q2015 results: Provisioning pressure dents earnings 4Q2015 earnings dropped 15.2% Q-o-Q and 17.0% Y-o-Y, due mainly to higher-than-expected provisioning. Operating costs surprised positively, falling 15.0% Q-o-Q and 13.0% Y-o-Y, as management cut outsourced staff costs and marketing costs to help cope with the provisioning burden. The bank proposed a cash dividend of AED0.50/share (60% pay-out).
• Credit quality deterioration is our key concern… RAKB’s NPLs increased 48% Y-o-Y, while its past-due loans rose 71% Y-o-Y in 2015. While stress in the commercial segment has eased, owing to the coordinated efforts by banks to rehabilitate troubled loans, the small business segment continues to face challenges, and the loss rate for some retail products – cards, personal loans and autos – has risen. We expect RAKB’s cost of risk to increase to 510bps in 2016 from 390bps in 2015.
• …however the bank is well-positioned to cope with the stress RAKB’s high pre-provision ROA (2016e: RAKB: 6.2%; sector 2.4%) helps mitigate the risk of capital erosion. Moreover, a well-capitalised balance sheet (CAR: RAKB: 24%; sector: 18%) positions the bank well to cope with credit stress and is supportive of a high dividend pay-out, in our view.

Shabbir Malik
Murad Ansari
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