• Earnings decline 22% Q-o-Q, miss estimates Arab National Bank (ANB) reported a disappointing set of earnings for 4Q2015 on strong spread compression and higher provisioning costs. Earnings of SAR594 million were 22% lower Q-o-Q and 21% below our estimates of SAR594 million. This is the lowest quarterly profit level over the past eight quarters. While spreads were likely dented by tighter market liquidity conditions, we were surprised by the sharp spike in credit costs. While balance sheet growth momentum was broadly steady Q-o-Q, the disappointing earnings are likely to dent market sentiment. We will be reviewing our earnings estimates for ANB once the detailed accounts are published.
• Spreads hammered by higher funding costs We estimate a 27bps Q-o-Q drop in ANB’s net interest spreads in 4Q2015, the strongest Q-o-Q decline since end of 2012. This is likely to be driven by a spike in funding costs as market liquidity environment tightened in 4Q2015, pushing up deposit rates. The bank also raised SAR2.0 billion in Tier II Sukuk during 4Q2015, which is also likely to have contributed the uptick in funding cost.
• Spike in credit costs surprises The biggest negative surprise in the results was the sharp increase in provisioning costs, which we estimate rose c50% Q-o-Q. We estimate that annualised credit costs rose to 91bps in 4Q2015 from 62bps in the previous quarter. While provisioning costs have been higher in the fourth quarter of the year in the past, we were expecting broadly stable trends due to the bank’s strong NPL coverage levels. At 218% in 3Q2015, ANB had the highest NPL coverage amongst Saudi banks. We believe the bank took a conservative view on asset quality, and opted to boost NPL coverage further. However, we await the release of detailed financials to see if there has been deterioration in asset quality.

Murad Ansari