• 1Q16 results: spreads supported by liquidity mgmt.; cut estimates, FV Stronger than expected net interest spreads drove a 26% Q-o-Q increase in 1Q2016 earnings to SAR749 mn, 13% above our forecast. We estimate ANB’s net interest spreads rose 15bps Q-o-Q, largely helped by shedding of liquidity. Deposits declined by 2.7% Q-o-Q, while the bank shed low- yielding investments, driving a 30% Q-o-Q decline in the investment book. With the headline loan-to-deposit ratio rising to 88%, we estimate that ANB has limited liquidity room to support spreads further. Raising deposits could drive up funding costs, pressuring spreads. We cut our earnings estimates by 16% for 2016, and 20% for 2017. We lower our fair value to SAR22.0 from SAR30.0 and downgrade our rating to Neutral from Buy.
• Provisioning eases sequentially, but risks remain We estimate that ANB’s annualised credit costs eased to 55bps in 1Q16 from 88bps in 4Q15, but were broadly stable Y-o-Y. Credit costs had jumped in 4Q15 on stronger general provisioning as the bank strengthened its provisioning buffer. However, as the asset quality outlook remains challenging, credit costs could rise steadily in 2H2015-2017, in our view. At 224%, ANB has one of the strongest NPL coverage amongst Saudi banks, which can be used to absorb asset quality deterioration. We expect credit costs to rise to 67bps in 2016 compared to 58bps in 2015.
• High LDR constrains loan growth outlook ANB’s headline loans-to-deposit ratio climbed to 88%, while adjusted LDR (incorporating LT loans) edged up to 87%. This leaves little head room for loan growth, in our view. As deposit growth remains challenging and expensive in the current environment, we see limited room for loan growth. While the central bank’s revised guidance on LDR at 90% allows some room for growth, ANB is likely to use this room to manage its deposit liquidity, rather than loan growth. We forecast loan growth to slow to 3% in 2016 but increase to 6% in 2017.

Murad Ansari