• Weak deposit franchise a key concern; cut estimates, FV The Saudi Investment Bank (SAIB) reported 1Q16 earnings of SAR210 million, 8% lower Q-o-Q and 43% below our forecast. We estimate that SAIB’s net interest spreads contracted 13bps Q-o-Q, likely due to higher funding costs. SAIB’s CASA deposit mix of 28% as of end-2015 is one of the lowest in the sector. The company’s small deposit franchise is one of our key concerns on its ability to offset funding cost pressures. We expect the bank’s net interest spreads to remain under pressure in the near term. We cut our 2016 earnings by 8% and 2017 earnings by 15% and lower our fair value to SAR14.5 (adjusted for 7.6% stock dividend). Though valuations are at a discount to the sector, we believe they are justified by the bank’s low profitability profile. We maintain our Neutral rating on the stock.
• Provisioning remains at elevated levels We estimate that provisioning levels remain elevated and were the key driver of negative earnings. While detailed results are not available, we suspect that the bank took further impairment on the investment book. As of 4Q15, the bank had equity and mutual fund investments of SAR1,439 million. Medgulf Insurance, of which SAIB owns 19% stake, saw a 24% stock price decline in 1Q16, and is likely to have partially contributed to investment impairments, in our view.
• Loan growth to be challenged by funding constraints SAIB’s net loans grew 2.6% Q-o-Q, maintaining a steady growth momentum from the previous quarter; however, deposit growth remained sluggish at 1.5% Q-o-Q, and represents the key challenge for sustaining loan growth, in our view. The bank’s loan-to-deposit, adjusted for long term loans, rose to 83%. Though, there is still head room for growth, we believe incremental funding to sustain loan growth could further dent the bank’s net interest spreads.

Murad Ansari