Net profit down 29% Q-o-Q, misses estimate. UNB reported a net profit of AED288mn for 4Q17, down 29% Q-o-Q and up 15% Y-o-Y. Earnings missed our estimate of AED388mn and consensus of AED335mn. For the full-year 2017, it reported a profit of AED1.6bn, up 5% Y-o-Y. UNB proposed a DPS of AED0.20 for 2017, same as last year. This translates into a yield of 5%.
 
Our view of the results: Results were weak. Earnings missed our estimate mainly due to higher-than-expected provisioning and loss on revaluation of the bank’s investment properties. UNB’s cost of risk rose to 166bps from 126bps in 3Q17 (EFGe: 138bps). The bank’s credit quality metrics had deteriorated in 3Q17 and this trend continued, albeit at a slower pace, in 4Q17. The NPL ratio rose 30bps Q-o-Q in 3Q17 and 10bps Q-o-Q in 4Q16 to 4.3%. That said, UNB’s NPL coverage which had dropped to 93% in 3Q17, recovered to 97% in 4Q17. Loan growth (-0.5% Q-o-Q) remained weak likely due to austerity in Abu Dhabi and the bank keeping its credit underwriting standards tight. The bank actively mobilized deposits in the quarter (deposits rose 6% Q-o-Q), which led to an increase in liquidity (LDR decreased to 90% from 96% in 3Q17). The relatively strong growth in deposits appears to be impacted cost of funds and weighed on spreads. UNB’s spreads were down 13bps Q-o-Q to 2.24%. 
 
IFRS 9 impact & Basel III capital adequacy: UNB estimates that the transition to IFRS 9 would reduce its shareholders’ equity by 3.7%. UNB further stated that the amount in transitionary, and the final estimate could change. This is in-line with estimate provided by ENBD, and higher than the estimate provided by FAB (2.8-3.2%). We think UNB is well positioned to absorb this impact.
 
Key highlights: i) Loan book contracts (-0.5% Q-o-Q & -3.5% Y-o-Y); ii) Strong deposit growth (+6% Q-o-Q and +1.5% Y-o-Y); iii) Spreads came under pressure (-13bps Q-o-Q to 2.24%); iv) High provisioning (cost of risk 166bps); and v) Slight deterioration in credit quality metrics (NPL ratio +10bps Q-o-Q to 4.3%)
 
Union National Bank: AED3.99 as of 5 Feb. 2018, Rating: Neutral, TP: AED4.50/share, MCap: USD2,991mn, UNB UH/UNB.AD