Earnings down 2% Q-o-Q; good quarter for Dubai banks

Aggregate earnings for UAE banks were better-than-expected. Earnings declined 2% Q-o-Q (flat Y-o-Y) versus our expectation of a 5% Q-o-Q decline. Key positive earnings surprises were UNB and RAKB on account of lower-than-expected provisioning. Dubai banks had a good quarter, underpinned by strong loan growth, widening spreads, good cost discipline and lower provisioning, while Abu Dhabi banks were weighed down by slower loan growth and growing credit quality concerns in retail.
 
Play UAE banks through ENBD & DIB

We prefer ENBD as it is positioned to benefit from higher US rates, it is a key beneficiary of Dubai’s relatively favorable macro, and we are comfortable with the bank’s provisioning outlook. ENBD has earmarked AED1bn in investment in digital banking over the next 3-4 years, which we believe will widen its competitive advantage over smaller banks. We also like DIB as the bank offers strong ROE prospects (2017e: 20%), scope for wider spreads, and is a play on Dubai’s macro.
 
Reposition into Abu Dhabi banks in 4Q17?

We believe it is too early to reposition in Abu Dhabi banks. Our asset quality concerns around Abu Dhabi banks will not fully dissipate unless we see sequential improvement in provisioning in the retail segment. The end of the school term in June and the normal NPL ageing process of 90 days could mean that the impact of layoffs may not be realised in full until 4Q17.  
 

Key highlights

 
-  Spreads – signs of upwards re-pricing of assets: Aggregate spreads widened on the back of higher asset yields. Asset yields rose 11bps Q-o-Q as loans re-priced on higher interest rates. We believe spreads should widen further in 2H17, however competitive pressure could act as a constraint.
-  Loan growth – Dubai banks outperform: As expected loan growth for Dubai based banks was strong relative to Abu Dhabi banks. We believe Dubai banks were aided by investment spending in the Emirate. Growth was sluggish for Abu Dhabi banks owing to weak credit appetite, selective lending, and post-merger integration.
-  Provisioning declines; expect headwinds in retail in 2H17: Provisioning improved sequentially, led by ENBD (provision releases from legacy NPLs) and UNB (draw-down of general provision reserve). Abu Dhabi banks saw some deterioration in credit quality due to the retail segment (mainly expatriates), as a result of layoffs linked to the slowdown in the economy.

Shabbir Malik
 
Rajae Aadel