EUR 93.96 For Business Accounts Only

UAE banks 4Q20 results review | Muted balance sheet growth, amid expansion in NPL books, broad recovery in profitability

Margin pressure largely absorbed. NIMs are confirmed to have bottomed out (+5bps q-o-q in 4Q20 vs. -18bps in 3Q20 and -27bps in 2Q20), translating into sequential NII growth (+2.9% vs. -6.6% in 3Q20 and -7.6% in 2Q20), as funding cost savings continued to trickle down, while the pressure from asset repricing eased. Operating income rose consecutively for the first time since 4Q19. Opex grew sequentially (+4.1%), on seasonality, but continued to be lower y-o-y (-14.0%), owing to cost rationalisation efforts, while the trends for provisioning were mixed. Aggregate earnings for UAE banks under coverage recorded AED5.74bn in 4Q20 (-40.3% y-o-y and -3.7% q-o-q) and AED24.6bn in FY20 (-33.1% y-o-y).

Muted business activity in 4Q20. This was evident in the banks’ reported sluggish balance sheet (aggregate assets: -1.6% q-o-q, gross loans: -0.2%, deposits: -3.7%) and fee income performances (-14.1% q-o-q). ENBD delivered the only q-o-q loan addition in 4Q20 (+0.4%), driven by the bank’s Turkish and retail portfolios. Both, ADCB and FAB, delivered loan shrinkages (of 0.9% and 0.5%, respectively), while DIB’s loan book was flat. Similarly, the banks’ deposit performance was mixed.  Banks’ CASA contributions continued to improve, a trend that started in 1Q20 (averages: 46.2% in Dec-20, 42.8% in Sep-20, 40.6% in Jun-20, 37.6% in Mar-20, and 24.8% in Dec-19), on limited incentive for time deposits, given lower interest rates.

FY20: Big provisioning year for all banks; FY21e: likely less so. CoR spiked for all names, with the exception of FAB, thanks to: i) recoveries in a number of legacy accounts, and ii) the absence of exposure to troubled NMC Health Group. Average CoR rose by c62bps y-o-y to c157bps in FY20, and by c67bps y-o-y and c34bps q-o-q to c171bps in 4Q20. Aggregate NPL book jumped 7.8% q-o-q, with room for further expansion, post the expiry of the CBUAE’s relief programmes in Jun-21. This will not necessarily be accompanied by rises in CoR levels in FY21e, given the high contribution of precautionary provisions and management overlays in FY20. Dividend distributions for FY20 were generous, with payout ratios increasing to an average of c51.5% in FY20, vs. c45.8% in FY19. DPS announcements either met (DIB) or exceeded (FAB, ADCB, and ENBD) our expectations.

Raise TPs, on discount rate cuts; Maintain ratings. Raises to our TPs are at an average of c13% across our UAE banks coverage, with 50-100bps reductions in cost of equity the main driver for these revisions. Our picks are unchanged: i) DIB: capacity to grow in government, high-yielding areas, and a potential MSCI flow story, and ii) ENBD: attractive valuation, strong capitalisation, and asset quality metrics. We see the least/no upsides for both ADCB and FAB. A breakthrough to NMC Health’s restructuring process represents an upside risk to ADCB. We also acknowledge a likely positive stock reaction for FAB, in case of a revised free float consideration by MSCI, following the bank’s recent disclosure on shareholder structure.