EUR 93.97 For Business Accounts Only

UAE banks 1Q21 results review | Loan repayments wipe-out additions; NIMs slide; CoR normalises, despite rise in NPL ratios

Strongest earning quarter since 4Q19. Aggregate earnings for UAE banks under our coverage recorded AED7.76bn in 1Q21 (+16.5% y-o-y and +17.8% q-o-q). This came despite the reported weakness in aggregate NII (-16.7% y-o-y and -6.1% q-o-q) and, consequently, operating income (-9.6% y-o-y and +1.7% q-o-q). The support came from the improvement in: i) non-interest income (+9.3% y-o-y and +22.1% q-o-q), boosted by mark-to-market gains for most names, ii) opex (-12.7% y-o-y and -2.4% q-o-q), as cost rationalisation efforts continue to bear fruit, and iii) provisions (-44.6% y-o-y and -22.1% q-o-q). The pressure on NIMs resumed (-16bps q-o-q, on average, contrary to 2H20 trends), arguably due to lower interest in suspense (on lower recoveries q-o-q) and/or lower FV unwinds, more than asset repricing.

Improved business activity yet to translate into loan growth. All four banks under our coverage reported sequential loan shrinkages in 1Q21, averaging -1.4% q-o-q, with DIB outperforming its peers with flattish performance (-0.1%) and FAB reporting the largest drop (-2.1%). All four banks attributed the drops to significant loan repayments, highlighting strong pipelines of credit set to materialise in 2H21. Deposit performance was mixed, with aggregate deposits up 1.2% q-o-q. CASA contributions continued to improve, a trend that began in 1Q20, reaching c49.4% in Mar-21, up from c46.2% in Dec-20 and c37.6% in Mar-20, as banks capitalise on the lower interest rate environment, concentrating efforts on CASA collection.

Better outlook for remainder of 2021. Expected FY21 trends include: i) mid-single-digit loan growth, ii) stable-to-slightly lower NIMs vs. 1Q21 levels, iii) stable-to-improving CTI, as pressure on operating income eases and opex savings continue to kick in, and iv) lower CoR levels, despite the likely upward pressure on NPL ratios. We note that banks’ aggregate NPL balances were roughly flat q-o-q (+1.0%), while NPL ratio inched up to an average of c6.3% (+24bps q-o-q), with the average coverage ratio edging down to c83.4% (-90bps), on average. UAE banks continue to be well capitalised, with CAR averaging 17.4% and CET-1 13.8%, as of Mar-21.    

Fine-tune assumptions, TPs; Maintain ratings. DIB has the ability to outgrow its peers, in our view, given its high growth capacity within the government/services segments. We also like ENBD’s current valuation (FY21 P/BV: 1.07x) and favour its strong banking metrics. As for ADCB, the bank continues to build a decent record of cost synergies, while trading on attractive levels (FY21 P/BV: 0.95x). A breakthrough to NMC’s restructuring process could potentially act as a trigger to ADCB. FAB would also benefit in the case of a revised free float consideration by MSCI, following the bank’s recent disclosure regarding details of its shareholder structure; so would DIB if the anticipated lift of FoL materialises. Changes to the TP were limited to +0.7% for DIB, -5.8% to ENBD, and +2.8% for FAB, with no change to ADCB’s.