• Earnings in line with estimates; spread improvement surprises Al Rajhi reported 2Q16 earnings of SAR2,052mn, 2% higher Q-o-Q and in line with our forecast. Revenue growth however surprised positively, driven by a sharp improvement in net interest spreads. We estimate that Al Rajhi’s spreads rose by 34bps Q-o-Q, a sharp increase considering the funding cost pressure in the current environment. This is the third successive quarterly increase in Al Rajhi’s spreads. While the bank’s funding costs have risen, the improvement in asset yields is much stronger. We attribute the increase in spreads to i) shedding of low yielding investments; ii) steady growth in loans; and iii) investing in government bonds.
• Impressive balance sheet growth The bank’s loan growth momentum improved, with net loans rising by 3.7% Q-o-Q versus 2.9% Q-o-Q in 1Q16. The loan book expansion continues to be driven by retail lending, which accounted for 76% of the bank’s total loan portfolio in 1Q16. The management had indicated that the bank’s car financing product, though small relative to the size of the bank’s loan book, has been growing strongly. While deposits grew 2.3% Q-o-Q, which is impressive considering the challenging liquidity environment.
• But provisioning costs jump, raising asset quality concerns While top line growth has been impressive, we are slightly concerned by persistently high credit costs at Al Rajhi for the third successive quarter. We estimate the bank’s annualised credit costs rose to 115bps in 2Q16 versus 97bps in 1Q16. It has been reporting a steady increase in NPL ratio, which had risen to 1.65% in 1Q16 from 1.24% in 2Q15. Moreover, the bank’s NPL coverage has also declined steadily to 163% in 1Q16 from 197% in 2Q15.

Murad Ansari