• Weak Non-II drives 7% Q-o-Q earnings decline; in line with estimates Banque Saudi Fransi (BSF) reported 4Q2015 headline earnings of SAR950 million, in line with our estimates of SAR947 million, but slightly above Bloomberg consensus of SAR927 million. Overall, the results did not carry many surprises. Revenues declined by 3.4% Q-o-Q, largely driven by an 8% Q-o-Q drop in non-interest income. Considering weak business activity, we estimate that both investment and forex income are likely to have been weaker compared to the previous quarter. We rate BSF as a quality franchise with strong risk management track record, with margins leveraged to a higher interest rate environment. While we expect 2016 to be a challenging year for BSF, as well as Saudi banks in general, we believe that this is largely reflected in the stock’s valuation - BSF is trading at a 2016e P/BV of 1.0x. We reiterate our Buy rating on BSF.
• Spreads held up despite market liquidity pressures Net interest spreads were only 1bps weaker Q-o-Q, surprising us positively. We view this as positive considering strong liquidity pressure in 4Q2015. Funding costs are likely to have come under pressure, as reflected in the sharp increase in the interbank rate. However, BSF appears to have managed the pressure well, with minimal deterioration in net interest spreads. We believe that the bank’s strong deposit franchise (CASA mix of 74% in 3Q15) coupled with high gearing to interest rates allowed the bank to manage the liquidity pressures.
• Credit costs remain benign for now, but not sustainable We estimate BSF’s annualised credit cost at 18bps for 4Q2015, which was marginally higher than the previous quarter. For the full year 2015, credit costs stood at only 16bps, its lowest level since 2011. The bank’s low credit costs in 2015 were helped by write backs after aggressive provisioning during 2012-14. However, provisioning levels are unlikely to sustain at these levels, and we expect a steady increase over the next four quarters.

Murad Ansari