DIB's 2Q09 net income of AED450 million is down 40% from 2Q08 but up 22% quarterly and is 20% above our estimates. Earnings were mainly driven by improved net interest margin (NIM) and capital markets, which offset the higher than expected loan loss charges. During the quarter, NIM expanded to 2.79% from 2.66% in 1Q09. This helped the bank generate 16% better than expected net interest income. Loan volume, however, continues to decline quarterly, which we believe stems from its Islamic orientation. Loan book shrank 1%, QoQ in the second quarter after declining 1.8% in 1Q09. With limited sectors to invest in, we expect loan growth to be tepid during the rest of the year. As such, we cut our loan book growth assumption for FY09e to 3% from 7.5%. Deposits also declined by 7% quarterly after increasing by an impressive 15% in 1Q09.
Consequently, loan to deposit (LD) ratio increased to 89% in 2Q09 from 83% in 1Q09. However, this does not limit growth as it is well below 100%. Loan to stable resources ratio was 84% at the end of the second quarter.
Loan loss charges were 35% higher than our expectations at AED135 million and up 208% from 2Q08, resulting in a 40% YoY fall in profits. Given the current economic conditions and the real estate tilt in its loan portfolio, we increase our provisioning charges estimates by 27% to AED487 million in Fy09e and by 8% to AED437 million in FY10e. Coverage ratio (loan loss reserve to non-performing loans) continues to be below 100% and as such any significant increase in non-performing loans poses downside risk to bottom line. We highlight that DIB has no exposure to the troubled Saudi groups. With approximately half of its loan portfolio in retail and real estate, asset quality will continue to weigh on its asset quality and growth. Note that government represents only 9% of its loan book.
Improved capital markets helped the bank generate AED45 million from its investment portfolio in 2Q09 vs. losses of AED4 million in 1Q09 and AED372 million in 4Q08. Fee income, however, was AED174 million vs. our expectation of AED189 million. With soft loan growth expectations during the rest of the year, we do not see an upside in fee
income in the coming quarters. Accordingly, we reduce our FY09e non-interest income
(which includes fee income and investment income) by 5% to AED1.2 billion. Improved
margins, however, offset the increase in loan loss charges and reduction in non-interest
income and thus lead to a 5% increase in our FY09e earnings estimate.
We reiterate our “Hold” recommendation and maintain our TP of AED3.22. Our TP
provides an upside potential of 20.6%. Despite the quarter's results being better than
expected, we find them to be lacklustre with loan book shrinking QoQ and asset quality
continuing to weigh in on earnings.
