• Sharp spread improvement drives 9% Q-o-Q earnings growth Arab National Bank’s (ANB) 2Q16 earnings of SAR818mn was broadly in line with our estimates. However, net interest spreads surprised positively, rising 30bps Q-o-Q. Further tightening of balance sheet liquidity (LDR rose 338bps Q-o-Q) coupled with upward loan re-pricing and better investment yields is likely to have supported the sharp improvement, in our view. ANB’s LDR has risen by 640bps since the end of 2015, with the bank shedding deposits steadily.
• Non-interest income weakens despite slight uptick in loan growth Non-interest income weakened sequentially, down 10% Q-o-Q. According to company disclosure, fee income and gains on non-trading investments fell Q-o-Q. This was partially offset by better dividend and trading income. The decline in fee income, despite a slight increase in loan growth momentum suggests that trade related income is likely to have weakened further.
• Provisioning costs rise We estimate that ANB’s provisioning costs rose 23% Q-o-Q, offsetting the impact of higher spreads on earnings. We estimate the bank’s annualised credit costs climbed to 64bps in 2Q16 compared to 53bps in 1Q16. The bank also indicated that it has booked investment impairment in 2Q16, likely on the bank’s domestic investment portfolio.
• LDR hits regulatory ceiling; could put pressure on funding costs Adjusted for long-term loans, ANB’s loan-to-deposit ratio rose to 89.9%, almost hitting the regulatory ceiling of 90%. The bank’s deposit base has declined by 5% since the end of 4Q15, suggesting that it is continuing to shed expensive deposits. However, with the LDR near the regulatory ceiling, raising deposits should put pressure on funding costs, in our view.

Murad Ansari