• 1Q16 earnings hit by provisioning; cut estimates and FV We estimate that Albilad’s provisioning costs jumped almost 10x Q-o-Q, driving a 15% Q-o-Q drop in earnings to SAR175mn. While revenue growth was strong, it was more than offset by higher provisioning costs. We suspect that similar to 4Q15, there could be some investment impairments booked in 1Q16. The bank’s NPL coverage also fell to 168% in 4Q15, possibly requiring an uplift. We forecast credit costs to rise from a low base of 22bps in 2015 and average 45bps over 2016-18. We cut our 2016-17 earnings by 5% and lower our fair value to SAR17.5 (adjusted for 20% stock dividend). We downgrade our rating to Sell given its demanding valuation. At 15.0x 2016e earnings and 1.7x 2016e book value, Albilad’s valuations are at a significant premium to the sector average 2016 P/E of 9.7x and P/BV of 1.2x.
• Spreads improve, but growth and Tier II issue could add pressure Albilad’s net interest spreads have steadily recovered over the past four quarters, after a steep decline in 2014. We estimate that spreads improved by 6bps Q-o-Q in 1Q16. However, we believe that this improving trend could be at risk as funding costs rise. The banks’ LDR rose to 85% in 1Q16 and the continuation of this strong growth trend would require stronger deposit growth. The bank has also announced plans to raise between SAR1.0-2.0 billion through Tier II Sukuk to augment its capital adequacy. Given the recent pricing trends, the cost of the Sukuk issue could add further pressure to the bank’s overall funding costs.
• Loan growth accelerates, but 1Q16 growth level unlikely to sustain Loan growth momentum picked up sharply over the past two quarters, with the bank reporting 9.0% Q-o-Q growth in 1Q16. While the year has started off on a strong note for Albilad, we view its 1Q16 loan growth rate as unsustainable in the current macro environment. We expect loan growth to moderate over the next three quarters and forecast 14% loan book expansion for the full year.

Murad Ansari