• Recurring earnings rise 3% Q-o-Q; spreads unchanged Bank Aljazira announced 2Q16 earnings of SAR178mn, 16% above our estimate. Adjusted for land sale gains in the previous quarter, recurring earnings grew 3% Q-o-Q. Net interest spreads were broadly stable sequentially. We believe that improved liquidity management allowed the bank to offset the impact of higher funding costs. While it is a relatively small banking franchise, Aljazira has seen a strong increase in funding costs over the past two quarters despite shedding of deposits. Better liquidity management – LDR has risen to 87% from 75% a year ago – has allowed the bank to manage pressure on spreads.
• Non-interest income flat Q-o-Q on better trading income We were expecting the bank’s broking income to decline, driven by a 12% Q-o-Q drop in the value traded on the Tadawul in 2Q16. Broking income contributes c7-8% of the banks total revenue. However, result disclosures indicate that trading income was stronger compared to 1Q16, which appears to have mitigated the impact of lower broking income. Fee income is likely to have also eased on slower loan growth compared to the previous quarter.
• Slight uptick in credit costs We estimate that Aljazira’s annualised credit costs rose to 32bps in 2Q16 compared to 26bps in 1Q16. The bank benefitted from strong provision write-backs in 2H15, which pushed down the banks credit costs to only 12bps in 2015.
• Loan growth slows Aljazira’s loan book growth slowed to 2.1% Q-o-Q in 2Q16 from 3.5% in 1Q16. We suspect the stronger loan growth in 1Q was utilisation of liquidity in anticipation of the SAR2.0bn tier II Sukuk issue completed in May 2016.

Murad Ansari