Summary: SAMA’s stats for January show that loan growth remains weak while investment book growth continues to be strong and liquidity is satisfactory. Earnings growth was solid at 18% Y-o-Y in January, likely driven by wider spreads. Meanwhile POS activity remains buoyant and volume of new LCs opened is holding up well. 
 
Looking ahead: The lagged effect of previous US rate hikes (7 over the last two years) should help drive spreads even if there are no more rate hikes. We expect mortgages and public sector debt to drive growth in interest earning assets. Corporate loan demand still appears weak, but higher gov’t capex (2019 budget envisages a 20% increase) and potential loan demand from Aramco’s acquisition of Sabic, should drive corporate loan growth recovery. We expect bank stocks to be well supported by passive flows. Our strategist expects equity passive inflows in phases from FTSE trackers in March (cumulative USD6.0bn over five phases) and MSCI trackers in May (cumulative USD11.0bn over two phases). 
 
Top picks: NCB offers multiple engines of growth while a potential merger with Riyad should further enhance its regional clout and unlock strategic benefits and synergies. NCB is well positioned to benefit from Saudi’s EM upgrade as its current foreign ownership is low at 2% and flows / ADVT is high at 100+ days. We also have a Buy on Rajhi: mgmt.’s 2019 guidance is firm and as it offers unmatched funding (sticky CASA and exceptionally low CoF) and sector leading ROEs.  
 
Loan growth remains weak: Sector loans were down 0.2% M-o-M in January compared to a decline of 0.8% a month ago. On a Y-o-Y basis, loans were up 2.4% in January 2019 compared to 2.8% in December 2018. 
 
Monthly profit up 18% Y-o-Y: Sector profit rose 18% Y-o-Y in January compared to a decline of 4% Y-o-Y a year ago. Sector profit was up +51% Y-o-Y in December, mainly due to lower provisioning. 
 
Deposits down slightly: Deposits declined 1.6% M-o-M but were up 0.9% Y-o-Y. Sector liquidity remains satisfactory, in our view, with LDR at 87% as of January compared to 86% a year ago. 
 
Investments growth strong: Investments rose 4% M-o-M and 19% Y-o-Y in January.  The strong growth in investments was driven by growth in public sector investments (+5% Q-o-Q and +22% Y-o-Y). The gov’t expects a budget deficit of SAR131bn (4.2% of GDP) for 2019 versus a deficit of SAR137bn in 2018, which suggests that gov’t will have similar funding requirements in 2019.       
 
Macro – POS, LCs & ATM volumes: Point-of-sale (POS) transaction volumes continue to be strong in January - up 52% Y-o-Y. By value, POS transactions were up 16% Y-o-Y. Rajhi, NCB and Riyad have the largest network of POS terminals in the Kingdom.  The volume of new LCs opened is holding up well for the last two months. In January, it was up 5% Y-o-Y, while in December it was up 9% Y-o-Y. NCB and SABB are the key players in trade. ATM transactions were up 2% Y-o-Y in January. Rajhi, NCB and Riyad have the largest ATM networks in Saudi Arabia.
 
Trading activity on Tadawul: Value traded on Tadawul was down 17% Y-o-Y,  but up 13% Y-o-Y.  Rajhi, NCB & BJAZ were the most active brokers on Tadawul in January. (Shabbir Malik, Company)