EUR 97.38 For Business Accounts Only

UAE banks 3Q20 results review | Capital, liquidity ratios, fee income improve; NPL ratios inch up; Loans: mixed; Downgrade FAB to N

Sequential improvement in 3Q20 business activity. This was evident in the progressive rise in fee income posted by most names (c.+13.3%, on average q-o-q), with banks citing improved consumer spending trends, credit card usage, and trade finance activity as drivers for growth. NIMs continued to fall q-o-q (-c14bps, on average), albeit at a slower pace, as the bulk of asset repricing took place in 1H20. 3Q20 saw sequential reductions in provisions, save for ENBD, as the bank continued to ramp up provision coverage in Turkey. Total earnings for our four UAE banks under coverage came in at AED6.43bn in 3Q20, down 40.3% y-o-y and 3.7% q-o-q and at AED18.9bn in 9M20, down 37.2% y-o-y. 

Mixed balance sheet trends; NPL ratio up for most. Both ADCB and FAB delivered loan growth for the quarter (+1.6% and +1.2%, respectively), with the growth for FAB driven by the government and GRE segment, as well as the corporate segment, adding 7.3% and 1.3% respectively, q-o-q. ENBD’s loan book was roughly flat (+0.2%), while DIB delivered negative loan growth of 1.3%. Deposit performance was mixed, with FAB delivering sequential growth of +16.0%, DIB: +3.9%, ENBD: -0.6%, and ADCB -2.7%. FAB’s management indicated that the bulk of the quarterly additions reversed, so did the corresponding drop in CASA contribution (-2pps q-o-q to c36% in Sep-20). The banks’ aggregate NPL books added c2.8% q-o-q, slower than the 1Q20 (+6.9%) and 2Q20 (+8.8%) additions, with the average NPL ratio of our coverage adding c20bps q-o-q to c5.5%. Capitalisation ratios improved for all four banks q-o-q in 3Q20, with CAR averaging 17.5% (+c30bps q-o-q).

Eye room for further improvement q-o-q in 4Q20e. Pressure on NIMs is expected to further ease, with asset repricing mostly behind us. We do not foresee heavy provisions in 4Q20e, as adjustments to the banks’ ECL models to reflect COVID-19 challenges were made in 1H20, particularly following CBUAE’s decision to extend the AED50bn zero cost facility for an additional six months, through Jun-21, which would likely further mute the actual deterioration of banks’ asset quality metrics. Regarding dividends, banks gave no specific guidance on 2020 dividends to date; however, there is a consensus that there will no restrictions from the CBUAE on dividends, so long as the minimum capitalisation regulatory requirements are met.

Fine-tune forecasts post 3Q20 results; Downgrade FAB to Neutral following stock price gains. Changes to our TPs are minor, namely: -4.8% to DIB’s , +1.3% to ENBD’s, +3.6% to ADCB’s, and -1.5% to FAB’s. At the current valuations, we prefer DIB (capacity to grow in government, high-yielding areas, potential flow story) and ENBD (attractive valuation, strong capitalisation, asset quality metrics) with their TPs implying upsides of c40.8% and c55.5%, respectively. We downgrade FAB to Neutral following the stock price gain of c12% recorded since our