• Earnings rise 4% Q-o-Q as spreads continue to improve Samba Financial Group’s (Samba) 2Q16 earnings rose 4% Q-o-Q to SAR1,314mn, slightly above our forecast of SAR1,274mn and Bloomberg consensus of SAR1,269mn. Net interest spreads improved for the second consecutive quarter, rising by an estimated 14bps Q-o-Q. Amongst the Saudi banks, Samba has the most liquid balance sheet – LDR of 76% is the lowest in the sector. The bank has benefited from higher liquidity, and shed deposits to manage funding costs pressures. The bank also is likely to have benefited from upwards loan re-pricing, as almost 85% of the loans are to corporate, which re-price on a quarterly basis. Samba remains our top pick in the sector due its excess liquidity buffer and strong asset quality management track record.
• But non-interest weakens on sluggish volume growth Samba’s net loans declined by 1.2% Q-o-Q after growing steadily in the previous two quarters. This is likely to have dented loan driven fee income growth in 2Q16. Moreover, data from the central bank suggests that trade volumes have also been sluggish since the start of 2016, which is also likely to have weighed on fee income. The bank also disclosed in its results announcement that forex and investment income were lower sequentially. We expect fee income growth in 2016 to be challenging, with investment income likely to remain a swing factor.
• Provisioning costs remains persistently below normalised levels We estimate annualised credit costs of c7bps for Samba in 2Q16, which remains well below the average credit costs of c30bps over 2011-14. While the bank has benefited from recoveries and lower NPL formation so far, we view the current credit costs levels as unsustainable. We expect a weaker macro-economic environment to weigh on the sector’s credit quality, which should translate in to a gradual pick up in credit costs over the next 6-12 months.

Murad Ansari