• Discount to Abu Dhabi banks around historical level; Stay Neutral UNB reported 3Q16 profit of AED407mn (EPS: AED0.13), down 13% Q-o-Q and 15% Y-o-Y, but in line with our forecast (AED420mn) and consensus (AED419mn) as strong revenue, driven by recurring and non-recurring factors, was offset by higher-than-expected provisioning. Spreads widened for the second consecutive quarter, as management shed liquidity (LDR rose to 98% from 96% in 2Q16), grew investments (4% Q-o-Q) and focused on booking high yielding loans. We expect UNB’s ROE to remain below normalised levels in 2016-17 at c10% primarily due to headwinds to credit quality. While its valuation is undemanding (2016e P/B of 0.7x), UNB’s discount to Abu Dhabi banks is in-line with historical avg. (fig 4). We cut our estimates and FV to AED4.5 from AED5.0. We reiterate our Neutral rating on UNB.
• Corporate segment drives provisioning uplift Provisioning was elevated in 3Q16 - cost of risk nearly doubled Q-o-Q to 113bps – as write backs in corporate segment faded. UNB recorded a charge of AED92mn in 3Q16 versus a write-back of AED60mn in 1H16 in the corporate segment. Provisioning in the consumer segment has moderated, but UNB indicates that the SME segment (c2% of loans) continues to be an overhang. UNB’s general provision reserve is low (1.45% of credit risk weighted assets) and its NPL ratio deteriorated sequentially, which suggests that provisioning is likely to increase further in 4Q16.
• Loan growth outpaces deposits; latest bond issue should ease CoF Loan growth was solid at 5% Q-o-Q and 7% Y-o-Y as the bank regains its credit risk appetite. Growth was driven by consumer (5% Q-o-Q) and energy (18%) sectors. Deposit growth in contrast remains sluggish at 2% Q-o-Q. The bank successfully closed a USD600mn 5-year bond at attractive spreads which should i) replace the cUSD600mn EMTN maturing in November; and ii) reduce cost of funding (CoF) – 2.75% versus 3.875% for the maturing notes.

Shabbir Malik
Murad Ansari