• Earnings rise 5% Q-o-Q; below estimate as provisioning remains high Bank Albilad (Albilad) reported 2Q16 earnings of SAR184mn, below our forecast of SAR202mn. Provisioning costs appear to have remained high for the second consecutive quarter driving the earnings miss. The result disclosures indicate that although credit costs were lower, the bank took further investment impairments in 2Q16. We suspect that the investment impairments were driven by the bank’s exposure to domestic equities. In 1Q16, the bank had taken an investment impairment of SAR31mn, and we estimate a similar level of impairment in 2Q16.
• Loan book contracts after a sharp increase in 1Q16; deposits decline After reporting 9% Q-o-Q growth in the previous quarter, Albilad’s loan book shrunk 1.1% Q-o-Q in 2Q16. The stronger loan growth in the previous quarter was partially in anticipation of the Tier II debt issue, which is expected to strengthen the bank’s capital ratio. The bank capitalised on strong credit demand in the previous quarter. While we expect Albilad’s loan growth momentum to slowdown compared to previous years, we still expect it to remain above the sector average. Deposit growth however should remain challenging. Albilad’s deposits declined by 4% Q-o-Q, driving up the bank’s loan-to-deposit ratio to 87%.
• Spreads weaken sequentially We estimate that Albilad’s net interest spreads declined 4bps Q-o-Q, giving up most of the gains made in the previous quarter. Spreads improvement in the previous quarter was supported by loan growth outpacing deposit growth, leading to tighter balance sheet liquidity. However, slower loan growth momentum and higher funding costs dented net interest spreads in 2Q16. With the bank’s LDR at 87% at the end of 2Q16, we expect pressure to build up to increase deposits, which should further dent spreads, in our view.

Murad Ansari