C o m p a n y R e p o r t F e b r u a r y 1 2 0 1 7 Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com +971-4-5071744 Janany Vamadeva Arqaam Capital Research Offshore s.a.l National Bank of Abu Dhabi No surprises with stress in some pockets of retail/commercial to persist in FY 17e We maintain our estimates and expect net profit growth of 5% in FY17e on a standalone basis after posting almost in-line full year earnings. Meanwhile, over the year earnings growth limited due to higher loan loss charges in its retail (personal instalment loans) and commercial (lower end of SME such as trade and subcontractors). Increased payout to 47% from 38% in FY 15A, proposing DPS of AED 0.45, + 24% y/y, leading to a yield of 4.4%. Government has increased its deposits, as fiscal deficits are dissipating, to 43% of total deposits and contributed 117% to the growth seen in 2016 (offsetting the decline in retail). Meets its guidance given out for FY 16 with low single-digit revenue/earnings growth, CoR of 57bps, NPL ratio of 2.7% and coverage of 115%. NBAD expects CoR to remain at similar levels in FY 17e as well (on a standalone basis) due to continued pressure on some pockets of commercial loans, especially civil construction, with CoR still being the sector lowest given its low risk loan mix. We remain bullish on the new NBAD and find valuations compelling at 9.8x FY 17e earnings on a pro forma basis, with strong synergies of AED 1bn (17% of combined cost base), sector s lowest CoF (92bps) and lowest CoR at 57bps (72bps on a blended basis) Loan growth affected by continued run-off of trade book and currency devaluation (weighed on deposit growth as well). Loan book contracted due to trade book and currency devaluation. Excluding trade loans, over the year loan growth would have amounted to +1%. Deposit growth was at a faster clip, despite the currency impact, driven by government. Consequently, LtD ratio has improved significantly to 82.1% from 91.1% in FY 15A, beating its FY target of <95%. Corporate book declined -5.3% y/y due to run-off of trade book, while government loan remained almost unchanged. Increase in retail of +2.7% could not offset the negative impact from trade book and currency devaluation. Loan growth would have been +2% higher excluding the devaluation effect. Loan contracted during the last quarter, reversing the trend seen in Q2 and Q3 and more in line with Q1 as retail and government also declined during Q4. BUY Banks / UAE Price Performance 153 140 127 114 101 88 NBAD UH Jan/16 Apr/16 Jul/16 Oct/16 AED 12.5 Bloomberg code NBAD UH Market index Abu Dhabi Price target (local) 12.5 Upside (%) 26.0 Market data 2/1/2017 Last closing price 9.9 52 Week range 7.5-10.8 Market cap (AED m) 51,472 Market cap (USD m) 14,014 Average Daily Traded Value (AED m) 8.0 Average Daily Traded Value (USD m) 2.2 Free float (%) 31% Year-end (local m) 2015 2016 2017e 2018e Revenues 10,556 10,808 22,334 24,511 Pre-provisioning profit 6,473 6,795 16,088 18,084 EPS 0.97 0.96 1.05 1.19 P/E (x) (mkt price) 10.2 10.3 9.5 8.3 BVPS 7.0 7.6 8.8 9.5 Tangible BVPS 7.0 7.6 7.3 8.0 P/B (x) (mkt price) 1.4 1.3 1.1 1.0 P/TBVPS (x) (mkt price) 1.4 1.3 1.3 1.2 DPS 0.36 0.45 0.42 0.47 Div. yield (%) 3.7 4.6 4.2 4.8 EPPS 0.32 0.30 0.32 0.33 RoAA (%) 1.3 1.2 1.6 1.6 RoRWA (%) 1.8 1.8 2.2 2.3 RoATE (%) 14.3 13.2 14.9 15.4 RoEcC (%) 17.5 17.3 17.6 17.4 RAROC (%) 13.7 14.3 16.6 16.5 Net LtD ratio (%) 88.1 79.1 95.5 94.3 Risk Weighted Assets (bn) 275.3 271.3 513.7 556.5 Core Equity T1 ratio (%) 13.5 14.5 14.2 14.3 Tier 1 capital ratio (%) 15.7 16.9 16.2 16.3 Total capital ratio (%) 16.7 18.1 16.9 17.0 NPL ratio (%) 2.8 2.7 3.4 3.8 Coverage ratio (%) 105.0 115.0 97.2 92.4 Number of shares 5,201 5,201 10,844 10,844 Abu Dhabi Copyright 2016, Arqaam Capital Limited. All Rights Reserved. See Important Notice.
Abacus Profitability NIM 4% 3% 2% 1% 0% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Credit Quality 100% 98% 96% 94% 92% 90% 88% Capital Ratios 20% 15% 10% 5% 0% Growth 15% 10% 5% 0% -5% 2.35% 2.50% 1.83% 0.34% 0.44% 1.85% Arqaam Capital Fundamental Data 3.13% 3.25% 3.38% 3.43% 0.73% 2.21% 2.31% 0.74% 2.17% 0.76% 2.18% 0.79% FY 15A FY 16A FY 17e FY 18e FY 19e FY 20e PPP/RWA Cost of risk/rwa RORWA 2.05% 1.93% 2.58% 2.63% 2.71% 2.72% FY 15A FY 16A FY 17e FY 18e FY 19e FY 20e Net interest margin FY 17e FY 18e FY 19e FY 20e 0.14 NPL Cov ratio (%) NPL as % of tot loans 16.7% 18.1% 16.9% 17.0% 16.8% 16.6% 0.15 0.14 0.14 0.14 0.14 4.2% 4.0% 3.8% 3.6% 3.4% 3.2% 3.0% FY 15A FY 16A FY 17e FY 18e FY 19e FY 20e Core Tier 1 (Base III) CAR 6% -4% 8% -3% 9% 11% 8% 8% 8% 9% 11% 8% FY 15A FY 16A FY 17e FY 18e FY 19e FY 20e Loan growth Deposit growth National Bank of Abu Dhabi Performance analysis Net Interest Margin (%) 2.05 1.93 2.58 2.63 2.71 2.72 Asset yield (%) 2.62 2.69 3.67 3.77 3.89 3.90 Cost of Funds (%) 0.69 0.92 1.18 1.22 1.26 1.26 Risk Adjusted Margins (%) 1.79 1.62 1.99 2.03 2.10 2.08 Cost / Income (%) 38.7 37.1 28.0 26.2 24.8 24.1 Net Interest Income / total income (%) 69.2 67.6 73.1 73.6 74.2 74.2 Fees & Commissions / operating income (%) 20.0 20.2 19.8 19.5 19.0 19.1 Trading gains / operating income (%) 2.4 3.0 1.1 1.1 1.1 1.1 RoATE (%) 14.3 13.2 14.9 15.4 14.4 14.6 Pre-prov. RoATE (%) 16.4 15.6 19.0 19.5 18.8 19.2 RoAA (%) 1.3 1.2 1.6 1.6 1.5 1.6 Revenue / RWA (%) 3.83 3.98 4.35 4.40 4.50 4.51 Costs / RWA (%) 1.48 1.48 1.22 1.15 1.12 1.09 PPP / RWA (%) 2.35 2.50 3.13 3.25 3.38 3.43 Cost of Risk / RWA (%) 0.34 0.44 0.73 0.74 0.76 0.79 RoRWA (%) 1.83 1.85 2.21 2.31 2.17 2.18 RoRWA (%) (adj. for gross-up of associates) 1.83 1.85 2.18 2.28 2.14 2.16 Asset Quality Provisions charge / avg. gross loans (%) 0.5 0.6 0.9 0.9 0.9 1.0 Past due not impaired / gross loans (%) 0.9 1.4 1.0 1.0 1.0 1.0 NPL / gross loans (%) 2.8 2.7 3.4 3.8 4.0 4.0 NPL coverage ratio (%) 105.0 115.0 97.2 92.4 92.8 98.0 Provisions / avg. gross loans (%) 2.9 3.1 3.3 3.5 3.7 3.9 Provisions charge / operating income (%) 14.6 17.5 23.3 22.9 22.4 23.1 Funding and Liquidity Net Loans / Deposits (%) 88.1 79.1 95.5 94.3 91.3 91.1 Cash and interbank / assets (%) 11.8 15.7 5.6 6.1 7.7 7.4 Deposits / liabilities (%) 63.2 66.5 65.3 66.0 67.9 67.8 Capital and leverage ratios Core Tier 1 ratio (Basel III) (%) 13.5 14.5 14.2 14.3 14.1 14.0 Tier 1 ratio (%) 15.7 16.9 16.2 16.3 16.2 16.0 Total capital ratio (%) 16.7 18.1 16.9 17.0 16.8 16.6 Tangible equity / assets (%) 9.0 9.4 12.8 12.8 12.6 12.4 RWA / assets (%) 67.7 64.5 68.0 68.2 68.4 68.6 Growth Revenues (%) 1.4 2.4 9.0 9.7 10.7 8.6 Cost (%) 10.5 (1.7) 1.7 2.9 4.8 5.2 Pre-Provision Operating Profit Growth (%) (3.7) 5.0 12.1 12.4 12.8 9.7 Provisions (%) 8.6 26.3 26.0 10.5 10.4 12.7 Net Profit (%) (6.7) (0.4) 6.5 13.5 1.6 9.1 Assets (%) 8.1 3.5 79.5 8.0 8.0 8.0 Loans (%) 6.0 (2.6) 8.8 7.8 7.8 7.8 Deposits (%) (3.9) 8.4 11.1 9.1 11.4 8.0 Risk Weighted Assets (%) 10.0 (1.4) 4.1 8.3 8.3 8.3 National Bank of Abu Dhabi Copyright 2016, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 2
Abacus Company overview Arqaam Capital Fundamental Data NBAD, merged entity of current FGB-NBAD in Q1 17e, will be the largest bank in the MENA in terms of assets and 2 nd largest in market capitalization just after QNB, whilst the market leader in the UAE with loan market share of 26%. NBAD (post merger) will have a robust international presence (19 countries) and maximize value by combination of the best consumer and wholesale platform, while enhance cost efficiency. https://www.bankfortheuae.com/en/disclaimer/?redi rect=kbef%2fzyhr2xck2fbopzmjw%3d%3d Loan Breakdown by Sector 26% 7% 45% 22% Deposit Breakdown by Country Govt. Corporate Retail FI National Bank of Abu Dhabi Income statement (AED m) Interest income 9,351 10,166 23,171 25,807 28,860 31,345 Interest expense 2,044 2,862 6,853 7,774 8,730 9,497 Net Interest Income 7,307 7,305 16,318 18,034 20,131 21,848 Fee income 2,106 2,178 4,423 4,777 5,159 5,623 Net investment income 254 328 249 269 291 314 Other operating income 888 997 1,344 1,431 1,547 1,672 Total operating income 10,556 10,808 22,334 24,511 27,127 29,457 Total operating expenses 4,083 4,013 6,246 6,427 6,735 7,088 Pre-provision operating profit 6,473 6,795 16,088 18,084 20,392 22,369 Net provisions 943 1,191 3,751 4,143 4,574 5,157 Other provisions / impairment - - - - - - Operating profit 5,530 5,605 12,337 13,940 15,818 17,212 Associates - - 20 22 24 26 Pre-tax profit 5,530 5,605 12,357 13,962 15,841 17,238 Taxation 298 309 618 698 2,376 2,586 Net profit 5,232 5,296 11,739 13,264 13,465 14,652 Minorities - - - - - - Others 201 283 405 405 405 405 Attributable net profit 5,031 5,013 11,335 12,859 13,060 14,247 Diluted EPS 0.97 0.96 1.05 1.19 1.20 1.31 DPS 0.36 0.45 0.42 0.47 0.60 0.66 BVPS 6.99 7.62 8.80 9.52 10.12 10.78 Tangible BVPS 6.99 7.62 7.33 8.04 8.64 9.30 Ma na ge me nt Chairman Vice Chairman CEO 23% 77% UAE International on Bin Zayed Al Nahyan (FGB) asser Ahmed Alsowaidi (NBAD) Abdulhamid M. Saeed (FGB) Major Shareholders % ADIC 33.2 Mubadala 3.7 Consensus Total Coverage % Buy % Hold % Sell 15 7% 60% 33% Balance sheet (AED m) Gross loans and advances 212,039 206,941 425,180 459,259 496,066 535,819 Less: loan loss provisions 6,125 6,409 14,057 16,129 18,416 20,995 Net loans and advances 205,914 200,532 411,123 443,130 477,650 514,824 Cash and central bank 76,382 98,665 121,612 134,821 149,115 164,413 Due from banks 10,892 8,523 45,353 48,982 52,900 57,132 Investment, net 76,276 79,013 89,498 95,929 102,874 110,374 Fixed assets, net 2,646 2,849 3,766 3,479 3,189 3,122 Other assets 34,455 31,132 84,030 89,472 95,350 101,698 Total assets 406,564 420,714 755,382 815,813 881,078 951,564 Customer deposits 233,815 253,382 430,564 469,755 523,356 565,225 Due to banks 70,053 58,186 155,182 164,238 164,874 181,842 Debt 29,077 36,026 58,788 63,236 67,711 72,212 Other liabilities 37,155 33,368 15,000 15,000 15,000 15,000 Total liabilities 370,100 380,963 659,534 712,229 770,941 834,279 Total equity 36,464 39,751 96,354 104,131 110,728 117,923 Risk Weighted Assets (bn) 275 271 514 556 603 653 Average Interest-Earning Assets 356,493 377,940 631,833 685,053 742,445 804,295 Average Interest-Bearing Liabilities 297,387 312,383 581,819 638,331 694,034 755,060 Common shareholders 36,464 39,751 79,588 87,304 93,834 100,957 Core Equity Tier 1 (Basel III) 37,208 39,419 72,703 79,809 84,953 91,483 Tier 1 capital 43,098 45,759 83,237 90,953 97,483 104,606 Jaap Meijer, MBA, CFA jaap.meijer@arqaamcapital.com +971-4-5071744 Janany Vamadeva Arqaam Capital Research Offshore s.a.l National Bank of Abu Dhabi Copyright 2016, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 3
Deposit growth would have touched +12% adjusting for the currency impact. Deposit grew +8.4% y/y mainly driven by government (+26.1% y/y) followed by corporate (+3.6%). However, currency devaluation weighed on growth, which would have been 10% when the EGP impact is removed and 12% when adjusted for UK. Even the Q4 growth was mainly driven by government (+10% q/q), which weighed on margins though, as these are usually parked in liquid assets. Unlike 2015, loan and deposit growth were mainly driven by UAE operations with growth negative in international segment, explaining the currency impact. UAE loan growth slowed down to +1.1% from +4.9% in FY 15A, while international lending book contracted -7.1% compared with growth of +6.2% in 2015 (partly due to trade book). Meanwhile, UAE deposits increased +16.2% (government) after declining -22.5% the previous year, while outside UAE declined -4.8% from +25.5% growth in 2015 mainly due to currency impact. Still NBAD derives a sizable share (40%) of deposits from outside UAE. Margin compression of 9bps during the year, but NBAD s ALM position has improved. NIM compressed to 1.92% from 2.01% in FY 15A due to deployment of excess liquidity in CB facilities. Cash has increased to 23% of total assets at the end of last year from 19% in FY 15A. However, the margin compression is limited to 3bps during the last quarter as CoF remained flat. CoF has increased to 0.54% from 0.42% in 2015 driven by higher deposits costs, largely driven by rate hike. Relatively strong growth in deposit resulted in deposit s share increasing to 67% of non-equity funding from 63% in 2015. Favourable asset mix and rate hike helped increase asset yield to 3.59% in FY 16 from 3.56% in 9M 16 and 3.37% in FY 15A. NBAD has reduced its loan assets to 48% of total assets from 51% in FY 15A as it runs off its trade book. NBAD s ALM position has improved during 2016 with 77% of assets now re-priced within a year compared with 75% in 2015. The rate gap position has improved significantly in the 1 year period. NBAD has hedged its longer term funding for rate hike, helping improve the ALM position. The lender estimates net income to increase by AED 434m now for a 50bps rate hike as opposed to AED 341m at the end of 2015, or 56bps in additional NIM and 8.7% boost to earnings (adjusted for coupon payment). Non-interest income helped by investment and forex income. Fee growth was at low singledigit driven by low business volumes, while investment income (driven by lower losses on its portfolio held at FV and derivatives) and forex supported non-funded income. Positive JAWS, meeting the full year guidance. Continued focus on cost management helped reduce OpEx -1.7% y/y, leading to improvement in C/I ratio of 37.1% from 38.7% in FY 15A. Credit costs primarily driven by retail/commercial and likely to hover at 55bps in FY 17e due to persistent pressure on some pockets of retail/commercial. CoR equated to 57bps compared with our expectations of 54bps, NBAD s guidance of 55bps and 44bps in FY 15A, with almost 95% of the provisioning charges driven by retail. Retail charges more than offset the strong recoveries in corporate and lower collective provisioning. National Bank of Abu Dhabi Copyright 2016, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 4
Retail/commercial stress to continue into FY 17e. Personal instalment loans in retail and lower end of SME were the troubled spots in NBAD s asset quality. NBAD has reduced its Commercial Product Programme loans to <1% of total loans now. Even though pressure has eased in some pockets, NBAD expects the stress to persist in some pockets such as civil construction and sub-contractors. As such, the lender maintained its CoR for FY 17e at similar levels to FY 16 on a standalone basis. NPL formation has declined in Q4/FY: We calculate NPL formation (based on gross impaired including interest in suspense) of 5bps for Q4 compared with 20bps in Q3, 10bps in Q2 and 94bps in Q4 15A. Full year NPL formation has also improved to 34bps of gross loans compared with 50bps in 2015. NPL ratio within the target of c.3%. NPL ratio continued to improve to 2.70% from 2.73% in Q3 and 2.76% in Q4 15A, while coverage reached 115% from 110% in Q3 and 105% at the end of 2015. Past due not impaired loans increased to 1.4% of gross loans from 0.9% in FY 15A, but most of the increase is in <30 day bucket. 95% of charges were specific due to retail/commercial. Specific charges accounted for 95% of total charges taken during the year compared with 75% in 2015 as NBAD saw stress in its retail/sme books. Capital supported by limited RWA growth. T1 ratio improved to 16.9% from 15.8% in Q3 and 15.7% in FY 15A (beating the FY 16 target of >15%) as RWA declined -1.4% y/y compared with growth of +10.0% in 2015. NBAD has proposed DPS of AED 0.45 compared with AED 0.36 (adjusted for bonus issuance), + 23.8% y/y, increasing the payout to 47% from 38% in FY 15A and leading to a yield of 4.4%. Reiterate our CORE BUY: We remain optimistic about NBAD s ability to generate high quality sustainable growth in Economic Profit, given its access to cheap funding (with government providing more support after withdrawing deposits in 2015), good asset quality, focus on nonfunded income and cost conscientiousness (we expect AED 1bn in cost savings). On pro-forma numbers, NBAD trades at 1.5x FY 16A book on trailing basis and 10.0x earnings vs. a RoE of 15.6% in FY 16A. National Bank of Abu Dhabi Copyright 2016, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 5
Exhibit 1: Pro forma Income Statement FY 15A FY 16A AED m NBAD FGB Adjust. Pro forma NBAD FGB Adjust. Pro forma Interest Income 9,351 8,290 17,641 10,166 8,546 18,712 Interest Expense 2,044 1,860 3,904 2,862 2,160 5,021 Net Interest Income 7,307 6,429 13,737 7,305 6,386 13,691 Fees & Commissions 2,106 1,700 3,807 2,178 1,849 4,027 FX Income 818 200 1,018 961 194 1,155 Investment Income 254 206 460 328 377 705 Dividend Income 0 647 647 0 545 545 Other Income 71 249 320 36 231 267 Non-Interest Income 3,249 3,003 6,251 3,503 3,196 6,699 Total Income 10,556 9,432 19,988 10,808 9,582 20,390 Total Operating Expenses 4,083 1,947 6,030 4,013 1,998 6,010 Pre-Provisions Income 6,473 7,485 13,958 6,795 7,584 14,380 Provisions 943 1,454 2,397 1,191 1,473 2,664 Associate and other income 0 2 2 0 0 0 Pre-Tax Income 5,530 6,033 11,562 5,605 6,112 11,716 Income Taxes 298 13 311 309 42 351 Net Income After Tax 5,232 6,019 11,251 5,296 6,070 11,366 Minority Interest 0 13 13 0 44 44 Net Income 5,232 6,006 11,238 5,296 6,026 11,322 Adjustments 201 129 330 283 138 422 Attributable profit 5,031 5,877 10,908 5,013 5,888 10,901 Source: Company Data, Arqaam Capital Research National Bank of Abu Dhabi Copyright 2016, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 6
Exhibit 2: Pro forma Balance Sheet FY 15A FY 16A AED m NBAD FGB Adjust. Pro forma NBAD FGB Adjust. Pro forma Total assets 406,564 227,496 644,098 420,714 245,108 675,835 Cash and CB 76,382 21,076 97,458 98,665 24,778 123,443 Interbank assets 10,892 15,097 25,989 8,523 17,416 25,939 Total loans 213,075 154,186 367,261 208,098 161,216 369,314 Loan loss provisions 6,125 4,420 10,545 6,409 4,468 10,877 Interest suspended 1,037 0 1,037 1,157 0 1,157 Net loans 205,914 149,766 355,680 200,532 156,748 357,280 Interest earning securities 76,049 20,908 95,936 78,925 27,384 105,287 Non trading 56,967 13,868 70,834 58,368 24,125 82,493 Held for trading 12,291 435-1,022 11,704 14,526 828-1,022 14,331 Held to maturity 6,791 6,605 13,397 6,032 2,431 8,463 Equity investments 36 1,784 1,820 43 1,889 1,931 Associates 0 40 40 0 40 40 Property investments 191 8,242 8,433 46 6,423 6,468 Net fixed assets 2,646 1,486 4,132 2,849 1,528 4,377 Other assets 34,455 9,098 43,553 31,132 8,903 40,034 Goodwill 0 195 10,865 11,059 0 170 10,865 11,035 Total liabilities 370,100 195,192 565,292 380,963 211,451 592,414 Repos 30,551 0 30,551 17,222 0 17,222 Interbank liabilities 39,503 17,883 57,386 40,964 22,164 63,128 Customer deposits 233,815 142,463 376,277 253,382 149,234 402,616 Debt securities 29,077 26,916 55,993 36,026 32,520 68,546 Senior debt 21,047 22,916 43,963 28,916 28,520 57,435 Subordinated debt 8,030 4,000 12,030 7,111 4,000 11,111 Other liabilities 37,155 7,930 45,086 33,368 7,534 40,902 Other Provisions 0 0 0 0 0 0 Common equity 36,464 31,904 78,405 39,751 33,224 82,988 Share capital 5,210 4,500 1,143 10,853 5,255 4,500 1,143 10,898 Share premium and reserves 24,293 2,250 17,652 44,196 26,988 2,250 17,553 46,790 convertible sukuk (equity portion) 108 0 108 108 0 108 Legal reserve 0 8,780-8,780 0 0 8,780-8,780 0 Other reserves 0 401 401 0 401 401 Proposed bonus share 0 0 0 0 0 0 Abu Dhabi Gov. tier I capital notes 0 341 341 0 324 324 Retained earnings 6,864 11,132 17,996 7,449 12,469 19,918 Proposed dividend 0 4,500 4,500 0 4,500 4,500 Minorities 0 400 400 0 433 433 Total equity 36,464 32,304 78,805 39,751 33,657 83,421 Total liabilities and equity 406,564 227,496 644,098 420,714 245,108 675,835 Source: Company Data, Arqaam Capital Research National Bank of Abu Dhabi Copyright 2016, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 7
Q4 Revenues: AED 2,715m (+6.2% y/y, +1.1% q/q, +1.3% vs. AC and +2.2% vs. consensus) Pre-provision profit: AED 1,719m (+13.2% y/y, +2.0% q/q and +7.4% vs. AC) Net profit: AED 1,329m (+28.3% y/y, +0.6% q/q, +6.3% vs. AC and +1.6% vs. consensus) Loans: AED 208.1bn (-2.3% y/y, -2.2% q/q and -5.2% vs. AC) Deposits: AED 253.4bn (+8.4% y/y, +4.3% q/q and +3.9% vs. AC) FY Revenues: AED 10,808m (+2.4% y/y, +0.3% vs. AC and +0.0% vs. consensus) Pre-provision profit: AED 6,795m (+5.0% y/y and +1.8% vs. AC) Net profit: AED 5,296m (+1.2% y/y, +1.5% vs. AC and +0.7% vs. consensus) Exhibit 2: National Bank of Abu Dhabi Q4/FY 16A results AED m Q4 16A Q4 16e vs. AC Q3 16A q/q 16 Q4 15A Q3 15A q/q 15 y/y Q4 y/y Q3 FY 16A FY 16e vs. AC FY 15A y/y FY Interest income 2,559 2,464 3.8% 2,577 (0.7%) 2,425 2,320 4.5% 5.5% 11.1% 10,166 10,072 0.9% 9,351 8.7% Interest expense 729 622 17.2% 769 (5.2%) 581 487 19.4% 25.6% 58.2% 2,862 2,754 3.9% 2,044 40.0% Net interest income 1,830 1,842 (0.7%) 1,807 1.2% 1,844 1,834 0.5% (0.8%) (1.4%) 7,305 7,317 (0.2%) 7,307 (0.0%) Fee & commission 485 560 (13.5%) 512 (5.4%) 537 492 9.2% (9.7%) 4.2% 2,178 2,254 (3.4%) 2,106 3.4% Forex 93 194 (52.3%) 220 (57.9%) 224 281 (20.3%) (58.6%) (22%) 961 1,063 (9.6%) 818 17.6% Investment 293 62 371.1% 136 nm (56) (11) nm nm nm 328 97 238.2% 254 29.0% Other 14 21 (30.6%) 8 85.4% 8 1 509.2% 70.3% 459.6% 36 42 (14.8%) 71 (48.9%) Non-interest income 885 837 5.7% 877 0.9% 713 763 (6.5%) 24.1% 14.9% 3,503 3,456 1.4% 3,249 7.8% Total income 2,715 2,680 1.3% 2,684 1.1% 2,557 2,597 (1.5%) 6.2% 3.4% 10,808 10,773 0.3% 10,556 2.4% Operating expenses 996 1,080 (7.8%) 1,000 (0.4%) 1,039 1,017 2.1% (4.2%) (1.7%) 4,013 4,097 (2.0%) 4,083 (1.7%) Operating profit 1,719 1,600 7.4% 1,684 2.0% 1,518 1,580 (3.9%) 13.2% 6.6% 6,795 6,677 1.8% 6,473 5.0% Loan loss provisions 311 305 1.8% 287 8.2% 436 171 154.9% (28.7%) 68.0% 1,191 1,185 0.5% 943 26.3% Total provisions 311 305 1.8% 287 8.2% 436 171 154.9% (28.7%) 68.0% 1,191 1,185 0.5% 943 26.3% Group net income 1,329 1,250 6.3% 1,320 0.6% 1,036 1,326 (21.9%) 28.3% (0.5%) 5,296 5,217 1.5% 5,232 1.2% Attributable net income 1,329 1,250 6.3% 1,320 0.6% 1,036 1,326 (21.9%) 28.3% (0.5%) 5,296 5,217 1.5% 5,232 1.2% Adjusted net income 1,257 1,185 6.0% 1,247 0.7% 964 1,262 (23.6%) 30.4% (1.1%) 5,013 4,941 1.5% 5,031 (0.4%) Cost/income ratio 36.7% 40.3% 37.3% 40.6% 39.2% 37.1% 38.0% 38.7% Loans/deposit ratio 82.1% 90.0% 87.6% 91.1% 93.5% 82.1% 90.0% 91.1% Annualized LLP 0.60% 0.56% 0.54% 0.82% 0.31% 0.57% 0.54% 0.44% NPL ratio 2.70% 2.73% 2.76% 2.62% 2.70% 2.76% Coverage 115.0% 110.0% 105.0% 115.0% 115.0% 105.0% TI ratio 16.9% 15.8% 15.7% 15.6% 16.9% 15.7% Gross loans 208,098 219,467 (5.2%) 212,752 (2.2%) 213,075 219,793 (3.1%) (2.3%) (3.2%) 208,098 219,467 (5.2%) 213,075 (2.3%) Deposits 253,382 243,853 3.9% 242,876 4.3% 233,815 235,014 (0.5%) 8.4% 3.3% 253,382 243,853 3.9% 233,815 8.4% Source: Company Data, Arqaam Capital Research National Bank of Abu Dhabi Copyright 2016, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 8
Exhibit 3: NBAD valuation (AED m) Year-end 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e perp subtotal % of total 1. DCF Net profit 3,683 3,708 4,332 4,744 5,579 5,232 5,296 5,552 5,820 5,745 6,374 6,920 7,196 Other adjustments (comprehensive income) 240 240 240 240 187 201 283 283 283 283 283 283 295 Minus: excess return excess capital 110 96 242 217 211 211 308 418 472 507 536 568 591 Risk free rate 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Tax shelter -- -- -- -- -- -- -- -- -- -- -- -- -- Adjusted net profit 3,333 3,371 3,851 4,286 5,180 4,819 4,704 4,850 5,065 4,955 5,555 6,068 6,311 Capital requirements 15,730 18,319 17,710 21,693 25,025 27,529 27,135 27,603 29,112 31,782 34,699 37,892 39,408 RoEcC 21.2% 18.4% 21.7% 19.8% 20.7% 17.5% 17.3% 17.6% 17.4% 15.6% 16.0% 16.0% 16.0% Cost of capital 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% Capital charge 1,809 2,107 2,037 2,495 2,878 3,166 3,121 3,174 3,348 3,655 3,990 4,358 4,532 Economic profit 1,524 1,265 1,814 1,791 2,302 1,653 1,584 1,676 1,717 1,300 1,565 1,711 1,779 Discount factor -- -- -- -- -- -- 1.00 0.90 0.80 0.72 0.65 0.58 NPV of Economic Profit -- -- -- -- -- -- -- 1,676 1,540 1,045 1,129 1,107 1,032 DCF EVA Forecast period 6,497 Perpetual growth rate (GDP) 4.0% Terminal Value 23,724 Terminal value discounted 13,766 21.3% Required Capital 27,135 41.9% Value of the bank operations 47,398 73.2% 2. Capital surplus/deficit Available capital: Shareholders equity 20,113 22,389 27,133 30,671 33,963 36,464 39,751 43,280 46,824 50,483 54,564 59,010 Less Goodwill & intangibles -- -- -- -- -- -- -- -- -- -- -- -- Less non equity elements reported shareholders equity Less Dividends (if included in reported equity) (718) (861) (1,366) (1,734) (1,892) (1,890) (2,340) (1,738) (1,993) (1,802) (2,010) (2,190) Tangible equity 19,396 21,528 25,767 28,937 32,072 34,574 37,411 41,542 44,831 48,681 52,554 56,820 Capital needs RWAs (Basel II) 151,562 174,781 177,068 216,900 250,213 275,258 271,316 276,000 291,088 317,788 346,959 378,884 RWAs (Basel III) 157,265 183,155 177,068 216,900 250,213 275,258 271,316 276,000 291,088 317,788 346,959 378,884 Equity as % RWA 0 0 0 0 0 0 0 0 0 0 0 0 Financial stakes 3 3 3 3 3 3 3 3 3 3 3 3 Capital Requirements 15,730 18,319 17,710 21,693 25,025 27,529 27,135 27,603 29,112 31,782 34,699 37,892 Surplus capital 3,666 3,210 8,057 7,244 7,047 7,045 10,276 13,938 15,718 16,898 17,854 18,928 10,276 15.9% 3. Other adjustments Real estate losses (9) Tier-1 50% credit 3,377 Equity investment losses Under/overprovisioning not covered in forecast period 1,833 Level 3 assets Total adjustments 5,201 8.0% 4. Dividends 1,890 2.9% Total Fair Value 64,764 100% Fully diluted number of shares 5,201 Fair value per share (AED) 12.5 Current share price 10.4 Upside 20.3% Implied P/E (x) 12.9 12.9 12.3 Implied P/tNAV (x) 1.8 1.6 1.5 Source: Company Data, Arqaam Capital Research National Bank of Abu Dhabi Copyright 2016, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 9
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