High-quality beat, with strong trends in core earnings metrics; reiterate buy
ENBD reported net profit of AED2.0bn for 2Q17, +8% Q-o-Q and +6% Y-o-Y; a good set of results, with core earnings drivers - loan growth, spreads and provisioning - showing a positive trend. Earnings came ahead of our expectation of AED1.84bn (consensus AED1.86bn) due to stronger net interest income and lower provisioning. It is encouraging to see the spreads widen 17bps Q-o-Q to 2.37% in 2Q17, mainly on the back of higher asset yields, after the spreads bottomed out in 1Q17. Mgmt. expects spreads to improve in the subsequent quarters, due to the recent rise in US rates. We see ENBD as the key beneficiary of Dubai’s relatively favourable macro, and we are comfortable with the bank’s provisioning outlook. The bank has earmarked AED1bn investment in digital banking over 3-4 years, which we believe would widen its competitive advantage over smaller banks. ENBD’s valuations are undemanding (2017e P/B of 1.1x) and it offers an attractive ROE of 18%.We reiterate our Buy rating on the stock.

Provisioning declines, aided by recoveries; reserve buffer continues to be robust
Provisioning surprised positively as it declined 11% Q-o-Q, with cost of risk improving to 68bps from 78bps, aided by recoveries on ENBD’s legacy NPL book. Lower provisioning in the conventional bank and higher recoveries, offset an increase in provisioning in the Islamic segment. NPL ratio declined 20bps Q-o-Q to 6.1%, and NPL coverage was broadly stable at a comfortable 124%. ENBD’s general provision reserve (GP) stood at 3.2%, well above Central Bank’s requirement of 1.5%. The bank’s large GP reserve buffer should help it cope well with IFRS9 regulations.
 
Decent loan growth, led by corporate; deposit growth weak as term deposits let go
Loan growth is still strong at 3% Q-o-Q and 6% Y-o-Y and was underpinned by the corporate segment. Lending to government, though still rising, is growing at a slower pace. In 2Q17, lending to Dubai gov’t rose 1.7% Q-o-Q compared to 2.2% Q-o-Q in 1Q17. Mgmt. is eyeing mid-single digit loan growth in 2017. Deposit growth was weak, at 0.2% Q-o-Q and 7.5% Y-o-Y, as the bank let go of term deposits. CASA deposits rose 1% Q-o-Q, and CASA mix continues to be above sector average, at 56%.