• Core revenue metrics show improvement UNB reported 1Q16 net profit of AED470mn, +5% Q-o-Q and -17% Y-o-Y, which beat our estimate of AED410mn (consensus AED386mn) mainly due to better-than-expected non-interest income and lower provisioning. Loan growth rose to 2.5% Q-o-Q from -0.1% Q-o-Q in 1Q16 due to strong trend in consumer (5% Q-o-Q). Spreads widened Q-o-Q (+5bps to 2.35%) and fee income rose 25% Q-o-Q. 2H16 revenue outlook is challenging. Competitive pressure will make loan re-pricing difficult, while slower economic growth and liquidity constraints (LDR: 96%) should cap loan growth.
• Share price rally driven by merger speculation; don’t expect it in ST UNB’s shares have risen 23% since the FGB/NBAD merger announcement on speculation that UNB is a potential acquisition target (for ADCB). While we don’t rule this out, we don’t expect this to happen in the short term.
• Raise estimates and FV on better credit quality outlook We raise our 2016-18 earnings by 10% on lower provisioning and more measured cost escalation (fig 2). We like the improved restructuring terms on Al Jaber’s debt (UNB is one of four Abu Dhabi banks that hold cUSD0.8bn of the group’s debt) and UNB’s disciplined cost growth in 2Q16 (-2% Y-o-Y). That said, we expect UNB’s ROE to remain below the cost of equity in the near term owing to provisioning pressure in SME and pressure on spreads. We raise our FV to AED5.0 from AED3.8. We reiterate our Neutral rating.
• Provisioning surprise on reversal in corporate segment UNB kept provisioning pressure under control aided by reserve releases in the corporate segment. The bank’s cost of risk rose to 63bps from 47bps in 1Q16, however it was below our estimate of 84bps. Credit quality metrics improved marginally with the NPL ratio easing 10bps Q-o-Q to 3.6% and NPL coverage remained stable at 102%. The retail segment continues to account for the bulk of the bank’s provisioning. Within retail, the SME segment remains the key stress area. The provisioning trend of the corporate bank suggests that there is no sign of stress yet in this segment.

Shabbir Malik
Murad Ansari