UNB reported a net loss of AED79mn for 4Q18 compared to a net profit of AED288mn in 4Q17 and our estimate of AED401mn. The bank reported an AED232mn fair value loss on investment properties. Excluding this one-off, earnings would have been AED153mn, down 47% Y-o-Y on weak fee income, higher provisioning and operating expenses.
 
FY18 net income stood at AED1.19bn, a decline of 28% Y-o-Y on a 48% Y-o-Y drop in non-interest income.
 
Dividend below our estimate: The Board has proposed a DPS of AED0.20 for 2018, flat Y-o-Y, but below our estimate of AED0.25. The proposed dividend implies a dividend yield of 3.9%.
 
Our view of the results: Weak results as provisioning costs spiked with cost of risk at 221bps in 4Q18, up from 73bps in 3Q18 and 166bps in 4Q17, above our forecast of 106bps. Credit quality deteriorated sequentially with NPL ratio up 60bps Q-o-Q to 4.3%. Non-interest income dropped sequentially, mainly due to revaluation loss on investment properties and a AED3mn loss on investment in securities. Spreads shrank 6bps Q-o-Q as higher funding costs more than offset stronger asset yields. Operating expenses were high, up 7% Q-o-Q, while revenues fell 24% Q-o-Q. Balance sheet trends were however strong with i) loan growth accelerating to 4.5% Q-o-Q in 4Q18, from 2.8% in 3Q18 and ii) deposit growth rising to 6.1% Q-o-Q in 4Q18, from 3.9% in 3Q18. Real estate and mortgages, energy and services were the key sectors driving loan growth in 4Q18. The bank’s deposit growth was biased towards time and Islamic deposits. 
 
Main positives: Strong loan growth (+4.5% Q-o-Q) and deposit growth (+6.1% Q-o-Q)
Main negatives: Pressure on spreads (-6bps Q-o-Q to 2.32%); higher-than-expected provisioning (cost of risk 221bps versus EFGe of 106bps); large revaluation loss on investment property; Higher-than-expected operating expenses 
 
Union Natl. Bank: AED5.15 as of 11 Feb. 2019, Rating: Neutral, TP: AED5.20/share, MCap: USD3,861mn, UNB UH/UNB.AD