• Earnings rise 3% Q-o-Q as net interest spreads surge Aggregate recurring earnings of listed Saudi banks grew 3% Q-o-Q in 2Q16, 4% above Bloomberg consensus. The sharp improvement in net interest spreads was the key positive surprise in the results, rising 10bps Q-o-Q. However, earnings growth was muted as the impact of better spreads was offset by weaker non-interest income and an uptick in provisioning costs. With sector liquidity tightening further, we prefer banks with balance sheet liquidity. Samba remains our defensive pick in the sector, with its LDR of 76% in 2Q16, which was well below the sector average of 84%. However, with earnings visibility remaining low, we do not see a significant valuation re-rating opportunity in the sector.
• Key highlights of results:
• Net interest spreads rose sharply, which we estimate increased 10bps Q-o-Q. While funding costs pressure is likely to have persisted, banks were able to more than offset the pressure by: i) tighter balance sheet liquidity management (LDR rose c203bps); ii) upward loan re-pricing; and iii) better investment yields. Banks have been rotating liquidity from maturing low yielding T-bills in to relatively higher yielding government bonds, which contributed to better spreads, in our view.
• Non-interest income weakened further, declining 1% Q-o-Q on lower fee and forex income. Loan driven fees and trade related income is likely to have eased, in our view. Investment income varied across banks according to results disclosures. Investment impairments drive up provisioning costs. While we estimate that credit costs edged up marginally, a number of banks attributed the increase in provisioning costs to investment impairments.
• Loan growth momentum eased, with net loans rising 1.5% Q-o-Q. Loan growth accelerated sharply in the previous two quarters, which was driven by a slowdown in government payments.
• Deposits declined 1.1% Q-o-Q, indicating that liquidity pressure continues to persist. Only four out of the 12 listed banks reported Q-o-Q growth in deposits. It is worth highlighting that this is the first time in almost 11 years that sector deposits have declined on a Y-o-Y basis.
• Balance sheet liquidity tightened further, with sector LDR rising c203bps Q-o-Q to c84%. Adjusting for long-term debt, LDR of four banks are now touching the regulatory LDR ceiling of 90%.

Murad Ansari