• Earnings recovery driven by non-core drivers UAE Banks’ aggregate earnings growth improved to 9.0% Y-o-Y in 4Q2015 (our estimate 10.0%) from 6.4% Y-o-Y in 3Q2015, helped by stronger non-interest income (FGB: real estate income, ENBD: one-off gain). Even though going into earnings season we had some concern regarding the central bank potentially reigning-in dividends (see our report), banks generally met or exceeded our dividend expectations (see figure 4). FGB and ENBD’s earnings beat estimates while ADCB was in-line. Credit quality deterioration was a common theme across banks results this quarter. Other banks missed our and consensus estimates on account of higher provisioning. We urge caution in 2016, particularly as we expect a second wave of provisioning from the retail segment following a surge in delinquency in SMEs. We prefer FGB, ADCB, NBAD, and ENBD.
• Core earnings drivers depict a weakening trend Higher cost of funds, wider liquidity buffers weighed on spreads, which declined to 2.77% in 4Q2015 from 2.84% in 3Q2015. While certain banks coped well with the pressure, RAK Bank (-50bps), UNB (-40bps) and CBD (-22bps) reported a sharp drop in their spreads. Loan growth was relatively stable at c10% Y-o-Y, however credit appetite is softening and banks are tightening credit underwriting. The central bank’s latest survey indicates that banks continued to tighten credit standards for the corporate and SME segments during 4Q. Fee income fell 3% Y-o-Y compared to 6% growth in 3Q mainly due to slower loan origination. DIB’s management reckons the drop in fees (-12.8%) is temporary. NBAD’s fees weakened (-13%) on lower brokerage and absence of one-off gains. Provisioning rose for the first time since 2013 as cost of risk climbed to c100bps from 77bps in 3Q2015. With the exception of ENBD (tailwind of recoveries from legacy NPLs), provisioning rose across the board as banks de-risked their SME books and took precautionary provisions.
• Strong deposit collection helps ease liquidity pressure Liquidity pressure eased in 4Q2015 as banks focused on mobilising deposits and ran-down their trade finance (shorter tenor) loans. For our coverage, the LDR improved to 94% from 97% from 3Q2015. Deposits grew c8.0% Y-o-Y in 4Q2015 compared to c3.0% in 3Q2015, with ADCB (13.9%), ENBD (11.2%) and ADIB (13.9%) posting strong growth rates. The increased liquidity headroom should provide banks space to let go of expensive deposits and help ease cost of funds. NBAD and Islamic banks are relatively better positioned in terms of liquidity as of 4Q2015.

Shabbir Malik
Murad Ansari