• Earnings rise 2% Q-o-Q as spreads continue to improve Samba Financial Group (Samba) reported earnings of SAR1,341mn, in line with our estimates, but ahead of Bloomberg consensus of SAR1,269mn. The strong improvement in net interest spreads was the highlight of the results, which rose for the third consecutive quarter. We estimate that spreads rose 20bps Q-o-Q, bringing the YTD improvement in spreads to 44bps. The fact that spreads improved despite a slight increase in deposits and a decline in loans re-affirms the strength of Samba’s deposit and lending franchise, in our view. Its loans-to-deposit ratio, at 75% as of 3Q16, remains well below sector average of 86% and provides the bank with significant room to manage funding cost pressure.
• Slight up-tick in provisioning costs We estimate that Samba’s cost of risk rose to 20bps in 3Q16, almost doubling on a Q-o-Q basis. However, they still remain well below normalised cost of risk of 30-35bps. While provisioning numbers suggest credit quality deterioration has been minimal, we believe the weak economic environment will eventually drive NPLs higher. While current provisioning levels are likely to be received positively by the market, we believe current credit cost levels are very low and are not sustainable.
• Loan book shrinks further as bank possibly cutting down on risk Net loans declined for the second consecutive quarter, falling 1% Q-o-Q. As a result, loan book on a year-to-date basis is flat. We suspect -similar to the previous down-cycle (2009-11) - Samba is likely to look at opportunities to reduce credit risk, which could result in a steady decline in the loan book over the next year. Moreover, with the bank’s current balance sheet liquidity position, it could look to selectively pick up higher-yielding assets.

Murad Ansari