• First Y-o-Y drop in earnings since 2Q12 UAE banks’ aggregate earnings declined 7% Y-o-Y in 1Q16 (broadly in-line with our estimate of -6%) from 3% growth in 4Q15, on flattish revenue and higher provisioning. While the results largely confirm our view of growing headwinds to credit quality, the sharp pressure on spreads took us by surprise. FGB, ADIB, and UNB posted beats underpinned by lower provisioning, while NBAD, RAKB and ENBD were in-line. Key misses were ADCB (provisioning) and DIB (spreads). Credit quality and liquidity are likely to remain the key concerns dominating UAE bank’s landscape in 2016. We believe banks that are well equipped to navigate through these challenges are likely to outperform. We continue to like ENBD as it offers scope for provisioning release on its legacy NPL book, has a high CASA deposit mix, and is leveraged to the lifting of sanctions on Iran.
• Lingering liquidity pressures dent spreads; fee income remains soft Spreads disappointed even though liquidity constraints have eased off since 3Q15 (LDR was 94% compared to 98% as of 3Q15). Spreads contracted 12bps Q-o-Q to 2.65% mainly due to higher cost of funds as banks sought longer-dated funding and continued to compete for deposits. Asset yield re-priced at a relatively slow pace owing to competitive pressures and fading reversals of suspended interest. ADCB, NBAD and ADIB were bright spots in an otherwise weak quarter for spreads. Fee income was muted (-1% Y-o-Y) owing to sluggish macro, however the underlying trends were mixed. DIB (20%) and NBAD (10%) saw impressive growth whereas FGB (-22%) and UNB (-16%) reported a drop in fees.
• Loan growth: the action is in Dubai Aggregate loan growth moderated to 9% from 10% in 4Q15. Dubai-based DIB (+26% Y-o-Y) and ENBD (12%) led the growth within our coverage. NBAD (-0.3% Y-o-Y) felt more comfortable with its liquidity and redeployed it from short-dated trade finance loans into investments (+12%). Meanwhile UNB (2%) and FGB (7%) acted cautiously and reined in loan growth due to macro risks. UAE’s credit sentiment survey highlights that credit appetite for personal and business loans improved in 1Q16 versus 4Q15. However, banks appear less willing to extend credit to corporates and SMEs in light of growing credit risks.
• Credit quality fears being realised Aggregate cost of risk rose to 101bps from 95bps in 1Q15. The key negative surprise was ADCB, where the cost of risk rose to 90bps from 65bps in 1Q15, and exceeded guidance of 55-60bps. NBAD kept credit risk under control (54bps) and intends to keep cost of risk under 55bps in 2016. While NPLs in SME are plateauing, we believe a soft job market may hit expat jobs disproportionately and hurt the retail segment’s credit quality.

Shabbir Malik
Murad Ansari