Rating: Neutral  
Target Price: SAR12.5
Closing Price: SAR12.6 

Earnings down 1% Q-o-Q; credit quality continues to be weak
Alawwal Bank reported 2Q17 earnings of SAR322mn, down just 1% Q-o-Q (-40% Y-o-Y), as strong net interest income compensated for weak non-interest income. That said, earnings fell short of our forecast of SAR369mn (consensus of SAR367mn) on account of high provisioning and weak non-interest income. We estimate an annualised credit cost of 160bps in 2Q17, which was slightly lower than 165bps in 1Q17, but up c4x Y-o-Y (EFG estimate for 2Q17 was 113bps). The bank’s credit quality metrics deteriorated slightly in the previous quarter, and the current high provisioning level suggests that credit quality weakened in 2Q17 too. We expect Alawwal’s 2017 provisioning to remain elevated as its past due loans in the corporate and retail segments rose sharply in 2016.
 
Spreads widen; fees and FX income down sequentially
Net interest income rose 9% Q-o-Q driven by wider net interest spreads, a common trend for Saudi banks in 2Q17. We believe the improvement in spreads was led by a reduction in the cost of funds as liquidity pressure in the kingdom dissipates. We estimate that spreads rose 30bps Q-o-Q to 2.60%. Non-interest income was however weak, down 17% Q-o-Q, mainly due to lower fee (weak volume growth and subdued economic activity) and investment income.  
 
Loan book stabilises, which suggests easing repayment pressure; liquidity improves
Alawwal’s loan book stabilised (+0.4% Q-o-Q) after declining for two consecutive quarters. This suggests that repayments pressure, which started in 3Q16 in the corporate segment, has subsided. We see downside risk to our loan growth estimate of 1% for 2017, as we expect corporate and retail appetite to remain muted in 2H17. Deposit growth was relatively strong at 2% Q-o-Q (-5% Y-o-Y). Its liquidity improved slightly with LDR decreasing to 83% from 84% in 1Q17. In 1Q17, deposits declined 6% Q-o-Q as the bank let go of its expensive term deposits, however its CASA mix was still below the sector average at 41%.

Murad Ansari

Shabbir Malik