• Earnings down c60% Q-o-Q; cash dividend cut to AED0.20/share UNB’s 4Q2015 results were disappointing with net profit of AED193 million, down 59.9% Q-o-Q and 55.0% Y-o-Y, which was well short of our AED427 million estimate and consensus (AED438 million), due to pressure on spreads and higher-than-expected provisioning. Also, the proposed cash dividend of AED0.20/share (26% payout) was lower than last year’s AED0.25 and below our forecast of AED0.28. YTD, UNB’s stock is down 26%, versus -12% for ADSMI and it now trades at a 2015 P/BV of only 0.6x. However, we believe the stress in the SME segment (c2% of loans) will continue to weigh on profitability in 2016, and we see downside risk to our 2016 spread estimate. We reiterate our Neutral rating on the stock.
• Spreads under pressure, driven by higher cost of funds Net interest income contracted 11.9% Q-o-Q and 4.6% Y-o-Y in 4Q2015, as spreads tightened to 2.54% from 2.94%. The contraction in spreads was due to i) the increased cost of funding (competition for deposits, higher EIBOR); ii) absence of reversal in suspended interest; and iii) wider liquidity buffer (LDR decreased to 91% from 94% in 3Q2015), in our view. Although deposit growth was decent (+2.1% Q-o-Q and +10.9% Y-o-Y), these deposits were sourced from the rate-sensitive corporate sector, and the incremental liquidity was not deployed profitably. Moreover, there was a slight deterioration in CASA mix, which continues to be low at 16.4%.
• Provisioning surprises negatively; credit quality metrics improve Provisioning was higher than expected due to i) sustained stress in the commercial and SME loan portfolio; ii) lower recoveries; and iii) build-up of general provisions to comply with Central Bank’s minimum requirements (UNB’s general provision reserves rose to 1.50% as of 4Q2015 from 1.36% at the end of 3Q2015). UNB’s cost of risk rose to 225bps from 158bps in 4Q2014. The NPL ratio, however, improved to 3.5% in 4Q2015 from 3.8% in 3Q2015, as non-performing loans declined.

Shabbir Malik
Murad Ansari