• Earnings ahead as credit costs remain persistently low Riyad Bank reported 2Q16 earnings of SAR1,146mn, which were 23% above our forecast. Recurring earnings, adjusted for the one-off land sale gain, rose 20% Q-o-Q. Riyad’s provisioning costs continue to surprise positively, and partially drove the earnings beat. Though aggregate provisioning costs rose from a low base in the previous quarter, management disclosure suggests that the increase was driven by investment impairments. Management indicated that credit provisions were lower Q-o-Q. We estimate Riyad’s annualised credit costs at c25bps in 2Q16 compared to 75bps in 2015 and see the current credit costs level as unsustainable. We maintain our Neutral rating on the stock.
• Revenues recover on better spreads, investment gains Revenues jumped 15% Q-o-Q, driven by a combination of better spreads and strong non-interest income growth. We estimate that Riyad’s net interest spreads rose 15bps Q-o-Q, recovering from a sharp decline in the previous quarter. This was likely supported by a pick-up in investment yields after the bank started investing in floating rate government bonds. Non-interest income, excluding one-off land sale gains, also rose sharply. Management disclosure suggests that gains on non-trading investments were higher. Fee income continued to be sluggish as balance sheet growth remains slow.
• Deposit base shrinks; LDR hits regulatory ceiling Riyad’s deposit base declined for the second successive quarter, falling 1% Q-o-Q. This, coupled with 1.4% growth in the loan book, drove up the bank’s loans-to-deposit ratio to 90%, hitting the recently-relaxed regulatory ceiling. We expect this to put pressure on the bank to raise deposits aggressively to lower the LDR. This should put pressure on the bank’s funding costs, and in turn, on net interest spreads.

Murad Ansari