• 1Q16 earnings surprise on better spreads Samba reported 1Q16 earnings of SAR1,260 mn, 4% higher Q-o-Q, but broadly flat compared to 1Q15. Earnings beat our estimate by 7% on stronger-than-expected net interest spreads. Better deployment of liquidity – growing high-yielding loans and shedding low-yielding investments – is likely to be a key driver for improved spreads, in our view. Non-interest income was resilient, and as disclosed by the bank, it was supported by forex and fee income. While investment income eased from a high base in 1Q15, we estimate it was higher Q-o-Q.
• Credit costs normalise, rising from a low base We estimate Samba’s credit costs at 30bps in 1Q16, rising from an exceptionally low base. We are not too concerned by the sharp increase, as we believe 1Q16 credit costs represent a more normalised level for Samba. A steady stream of recoveries had driven the bank’s credit costs to an exceptionally low base over the past two years – averaging at c11bps. With NPL recoveries slowing and credit quality environment becoming challenging, the bank is likely to have taken a cautious view to build up its provisioning reserves. We forecast credit costs to average c50bps over 2016-18, as weaker economic environment weighs on credit quality.
• Liquid and geared to higher rates, Samba remains our preferred play While we expect earnings and growth outlook to remain challenging, Samba is well-positioned to face macro headwinds, in our view. The bank has a liquid balance sheet - LDR eased 150bps Q-o-Q to 74% on deposit growth - enabling the bank to negotiate funding cost pressures. Moreover, the bank’s asset re-pricing profile is largely short term. Based on 2015 year-end disclosures, 58% of the loan book and 48% of the investment book are re-priced within three months. We cut our 2016 earnings by 2%, and 2017 earnings by 10% and lower our fair value to SAR25.0. We maintain our Buy rating on Samba, which is our preferred play amongst Saudi banks.

Murad Ansari