• 1Q16 earnings supported by low provisioning, gain on land sale Riyad Bank reported 1Q16 earnings of SAR1,174 million, supported by a sharp decline in credit costs, and a capital gain of SAR201 million on a land sale. Pre-provision earnings fell 4% Q-o-Q and were broadly in line with our forecast. We estimate its annualised credit costs declined to only 22bps in 1Q16, likely helped by recoveries. We view this as unsustainable and expect credit costs to rise to over the next three quarters. We cut our earnings estimates by 5% for 2016 and 10% for 2017 and lower our fair value to SAR12.50. We reiterate our Neutral rating on the stock.
• Revenues dented by weaker spreads, lower non-interest income Riyad’s revenues declined 7% Q-o-Q even though volume growth was strong. We estimate that the bank’s net interest spreads declined 21bps Q-o-Q in 1Q16, which we believe was due to a sharp increase in funding costs. Even though the bank appears to have shed deposits, it was not sufficient to prevent spread erosion. We expect Riyad’s spreads to remain under pressure in the near term, but expect a gradual recovery as the loan book gets re-priced. As per the bank’s 2015 disclosures, 67% of the loan book and 51% of the investment book will be re-priced within one year. Non-interest income also declined 8% Q-o-Q, likely on lower fees and forex income, as well as a decline in investment income.
• Loan growth recovers sharply, but likely to moderate At 5.5% Q-o-Q, Riyad’s loan growth was strong for the second consecutive quarter. Slower government payments over the past six months are likely to have triggered a recovery in credit demand, as businesses utilise their credit lines to meet their working capital requirements. While the bank’s headline loan-to-deposit ratio appears stretched at 92%, adjusted for the long-term loan and Sukuk, regulatory LDR of 84% is well within revised central bank guidance levels. We expect a gradual moderation in loan growth over the next three quarters, and forecast loan growth of 7% for 2016.

Murad Ansari