Earnings down 19% Q-o-Q; credit quality a concern
Riyad Bank reported net profit of SAR848mn for 2Q17, -19% Q-o-Q and -26% Y-o-Y. Earnings missed our estimate of SAR963mn (consensus SAR969mn), on account of higher-than-expected provisioning and weak non-interest income. We estimate that Riyad’s cost of risk rose 43bps Q-o-Q to 100bps, suggesting credit quality had deteriorated this quarter. Riyad’s credit quality was stable sequentially in 1Q17, with NPL ratio at 0.8% and NPL coverage at 251% (2Q17 details are not available yet). Commerce, manufacturing and building & construction are important segments for the bank, in terms of loan exposure, and weakness in credit quality could have originated from these segments, in our view. We have a Neutral rating on Riyad. 
 
Spreads continue to widen, helped by lower funding costs
Spreads widened further (+10bps Q-o-Q to 2.59%), as cost of funds decline on improved system liquidity. Asset yield declined 4bps Q-o-Q, while cost of funds fell 15bps Q-o-Q. The bank’s spreads have been widening since 3Q16. Further improvement in spreads is likely to be slower, as asset yield is likely to trend lower, and as cost of funds starts to stabilise. We believe meaningful improvement in spreads hereon would hinge on pick-up in growth in earnings assets and increase in benchmark interest rates. Non-interest income declined 10% Q-o-Q and mgmt.’s comments suggest fee income had weakened after a strong 1Q17.
 
Loan book stabilises; we expect slight recovery in 2H17
The bank’s loan book appears to have stabilised after shrinking steadily since 2Q16. This suggests that pressure from the repayment of working capital lines by corporates is dissipating. The loan book was relatively flat Q-o-Q and down 9% Y-o-Y. We expect a slight recovery in loan growth in 2H, underpinned by growth in low-risk corporates and mortgages. A pick-up in confidence on the restoration of public sector’s employees’ allowances should provide a bit of support to credit appetite, in our view. Riyad’s deposits grew a moderate 2% Q-o-Q, and liquidity was broadly stable at 89%.

Murad Ansari
 
Shabbir Malik