• Low provisioning costs drive earning beat Banque Saudi Fransi (BSF) reported 2Q16 earnings of SAR1048mn, 3% lower Q-o-Q, but 12% ahead of our estimates. The bank also announced a cash dividend of SAR0.55/share for 1H16. Earnings beat was driven mainly by lower-than-expected provisioning costs, as BSF benefitted from continuation of benign asset quality trends. We estimate BSF’s annualised credit costs of 10bps for 2Q16, which declined from 13bps in the previous quarter. BSF’s credit costs are below normalised levels, and we expect weaker economic environment to weigh on credit quality over the next 6-12 months; however, with the stock currently trading at close to book value, we believe the expected asset quality stress is priced in.
• Loan growth remains in low single digit; deposit base weakens BSF’s loan growth remained sluggish relative to the sector. Net loans grew 4.0% Y-o-Y compared to c9.0% for the sector; however, BSF’s loan growth momentum accelerated to 3.7% Q-o-Q compared to 1.2% Q-o-Q in the previous quarter. The bank’s consumer loan book has been growing steadily since 1Q15 and is likely to have partially supported the loan book expansion. The bank’s deposit base, however, contracted, declining 2.1% Q-o-Q, driving the bank’s loans-to-deposit ratio (adjusted for long-term loans to 89%). Tighter balance sheet liquidity is likely to limit room for further loan book expansion, in our view.
• Revenue growth stunted by weaker spreads, lower Non-II Even though loan book growth momentum improved, BSF’s revenues declined 2% Q-o-Q and were broadly flat on a Y-o-Y basis. We estimate that net interest spreads eased by 7bps Q-o-Q, suggesting that deposit pricing pressure had outpaced loan re-pricing. Non-interest income (Non-II) declined 6.5% Q-o-Q as trading and investment income weakened from a high base in the previous quarter. The management disclosed that forex income improved compared to the previous quarter.

Murad Ansari