• Earnings decline 5% Q-o-Q, beat estimates on stronger spreads Riyad Bank reported 4Q2015 earnings of SAR851 million, 12% ahead of our estimates, but were in line with Bloomberg consensus. We were surprised by the sharp improvement in net interest spreads, which rose by 16bps Q-o-Q. To add perspective, this is the sharpest Q-o-Q spread improvement in the past four years. The improvement in spreads is also surprising, given the surge in deposits in the current environment of liquidity squeeze, which is likely to have weighed on funding costs. We, therefore, believe spreads might have been bolstered by some one-off adjustments. We have a Neutral rating on Riyad. Slower growth, coupled with pressure on asset quality and margins, should weigh on the bank’s profitability, in our view.
• Loan growth recovers sharply After sluggish growth in the first three quarters of the year, loan book grew sharply in 4Q2015, rising 5% Q-o-Q. The strong loan book expansion in 4Q2015 has allowed Riyad to end 2015 with growth of 8.4%, which was broadly in line with sector average. Growth is likely to have been driven by expansion corporate loan book, in our view, as retail credit demands remained relatively subdued. While deposit growth recovered sharply, it was outpaced by loan growth. This drove up the bank’s adjusted loans-to-deposit ratio to 83% in 4Q2015.
• Provisioning costs remain high We estimate that Riyad’s annualised credit cost for 4Q2015 came in at 100bps, third successive quarter of provisioning above the bank’s normalised level of 60-65bps. The bank has been reporting small but steady asset quality deterioration since the beginning of 2015. Even though the bank has been provisioning aggressively, NPL coverage of 147% in 3Q12015 was the lowest in the sector. We expect provisioning pressure to persist at c90-100bps as the bank addresses asset quality deterioration and improves NPL coverage.

Murad Ansari