• Earnings jump as non-interest income recovers Al Rajhi’s 4Q2015 earnings rose 13% Q-o-Q to SAR1,949 million, 12% above our estimate of SAR1,746 million. Earnings were boosted by a strong recovery in non-interest income, which jumped 42% Q-o-Q. While a detailed revenue split is not available, we believe investment income (a drag in previous quarters), normalised in 4Q2015. Loan growth was sluggish, which leads us to believe that fee income was likely relatively flat Q-o-Q. We have a Neutral rating on Al Rajhi. While 4Q2015 earnings have surprised positively, lacklustre loan growth trends and slower re-pricing of retail loans are key challenges to its profitability, in our view.
• Strong deposit franchise helps withstand pressure on spreads With a CASA deposit mix of c95%, Al Rajhi has one of the strongest deposit franchises in the country. This should have helped the bank to withstand funding cost pressure from tightening market liquidity. The bank also shed some of its deposit to manage funding costs. The bank’s investment book also contracted Q-o-Q, suggesting that low-yielding investments were shed. This is likely to have positively impacted asset yields, which had been under pressure due to downward pressure on the re-pricing of the retail loan portfolio.
• Loan growth remains lacklustre Al Rajhi’s net loans were flat Q-o-Q and up only 2% Y-o-Y in 2015. This was the slowest pace of growth since the end of 2009. The first and last quarters of the year tend to be the strongest quarters of credit growth for Al Rajhi. However, lacklustre growth trends over the past two quarters continued in 4Q2015, reaffirming our view that retail credit appetite remains weak. We expect 2016 to remain challenging for growth as weaker economic environment should weigh on wage growth, and hence dent incremental demand for retail credit.

Murad Ansari