14-Aug-2017
Saudi Banking - Beyond 2Q17: Navigating through slow growth and weak credit quality
2Q17 earnings down 3% Q-o-Q; SABB & BSF top picks
Saudi banks 2Q17 earnings fell 3% Q-o-Q (-2% Y-o-Y) on weak non-II and higher provisioning. Earnings were however slightly ahead of consensus estimates, benefitting from wider spreads. Key positive surprises were SABB (spreads & provisioning), ANB (spreads) and Aljazira (spreads & non-interest income). Apart from spreads, core earnings trends were generally weak. While there are some encouraging signs (dividend hike by banks, strong PMI in July & plans for Red Sea tourism project), we remain cautious in light of the low oil price, weak gov’t spending and anaemic overall GDP growth. We believe the pedestrian earnings growth for banks will stifle their stock performance in the ST.
Top picks: We prefer Dubai (DIB & ENBD) and Kuwait (NBK) banks over Saudi ones, as Dubai and Kuwait’s macro is more appealing. For Saudi focused investors, we highlight SABB – levered to higher interest rates & superior pre-provision ROA – and BSF – top-tier credit risk mgmt., recovery of CASA mix and an attractive div. yield. We downgrade Samba to Neutral and remove it from our MENA financials core Buy portfolio as we believe its profitability and defensive traits are priced in.
Key trends – Core earnings drivers generally weak
- Subdued loan growth: Loan growth remains sluggish, +0.5% Q-o-Q and -2.5% Y-o-Y. Weak gov’t spending, deflationary pressure, and repayment by corporates are constraints to growth, in our view. We expect the weak loan growth trend to persist in the ST as the economy de-levers and the banks address credit quality issues.
- Spreads – the key positive: Spreads widened 12bps Q-o-Q benefitting from lower cost of funds. We believe further improvement in spreads in 2H will be challenging as cost of funds have approached trough levels and banks are deploying liquidity into investments where yields are likely to be low relative to loans.
- Provisioning – weak corporate profitability keeps us cautious: Aggregate cost of risk rose to 66bps from 61bps in 1Q17. Weak corporate results suggest that there is scope for further credit quality deterioration. Our concerns will not dissipate until we see sustainable stability or improvement in credit quality metrics for two quarters.
- Hike in dividends – can these be sustained? Rajhi, NCB, BSFR, SABB & Samba hiked their interim dividends. We believe these banks have the capacity to maintain a high pay-out as they are well capitalised and are generating decent ROEs. With loan growth likely to be subdued in the short to medium-term, these banks can afford to release surplus capital, in our view.
Saudi banks 2Q17 earnings fell 3% Q-o-Q (-2% Y-o-Y) on weak non-II and higher provisioning. Earnings were however slightly ahead of consensus estimates, benefitting from wider spreads. Key positive surprises were SABB (spreads & provisioning), ANB (spreads) and Aljazira (spreads & non-interest income). Apart from spreads, core earnings trends were generally weak. While there are some encouraging signs (dividend hike by banks, strong PMI in July & plans for Red Sea tourism project), we remain cautious in light of the low oil price, weak gov’t spending and anaemic overall GDP growth. We believe the pedestrian earnings growth for banks will stifle their stock performance in the ST.
Top picks: We prefer Dubai (DIB & ENBD) and Kuwait (NBK) banks over Saudi ones, as Dubai and Kuwait’s macro is more appealing. For Saudi focused investors, we highlight SABB – levered to higher interest rates & superior pre-provision ROA – and BSF – top-tier credit risk mgmt., recovery of CASA mix and an attractive div. yield. We downgrade Samba to Neutral and remove it from our MENA financials core Buy portfolio as we believe its profitability and defensive traits are priced in.
Key trends – Core earnings drivers generally weak
- Subdued loan growth: Loan growth remains sluggish, +0.5% Q-o-Q and -2.5% Y-o-Y. Weak gov’t spending, deflationary pressure, and repayment by corporates are constraints to growth, in our view. We expect the weak loan growth trend to persist in the ST as the economy de-levers and the banks address credit quality issues.
- Spreads – the key positive: Spreads widened 12bps Q-o-Q benefitting from lower cost of funds. We believe further improvement in spreads in 2H will be challenging as cost of funds have approached trough levels and banks are deploying liquidity into investments where yields are likely to be low relative to loans.
- Provisioning – weak corporate profitability keeps us cautious: Aggregate cost of risk rose to 66bps from 61bps in 1Q17. Weak corporate results suggest that there is scope for further credit quality deterioration. Our concerns will not dissipate until we see sustainable stability or improvement in credit quality metrics for two quarters.
- Hike in dividends – can these be sustained? Rajhi, NCB, BSFR, SABB & Samba hiked their interim dividends. We believe these banks have the capacity to maintain a high pay-out as they are well capitalised and are generating decent ROEs. With loan growth likely to be subdued in the short to medium-term, these banks can afford to release surplus capital, in our view.
Shabbir Malik
Murad Ansari