Aggregate earnings of listed banks declined 4% Q-o-Q Against our expectations, on an aggregate basis net interest spreads held up well, given liquidity pressures We estimate that provisioning costs rose 26% Q-o-Q; precautionary provisions or asset quality deterioration- Deposits declined as banks managed balance sheet liquidity to protect spreads Loan growth was decent at 2.5% Q-o-Q; a slight pick-up from previous quarter Stock preferences: BSF (Buy, 2016e P/BV 1.0x) , Samba (Buy, 2016e P/BV 0.9x) – both are relatively defensive names, in our view Earnings surprises: -  Positive: Al Rajhi, Riyad, Aljazira; -  Negative: ANB, SAIB, SABB   Provisioning spikes; building buffer or asset quality deterioration- Aggregate earnings of listed banks declined 4% Q-o-Q in 4Q2015. While revenues were broadly stable (1.5% Q-o-Q), it was higher provisioning that delivered the key surprise. We estimate that provisioning costs rose 26% Q-o-Q/47% Y-o-Y in 4Q2015. In the absence of detailed accounts, however, it is difficult to assess whether provisioning was precautionary (i.e., aimed at improving NPL coverage) or driven by asset quality deterioration. While slowdown in the economy should weigh on asset quality, we were expecting signs of deterioration to emerge around 2H2016. But clearly, this is likely to be a source of concern. SAIB, ANB, NCB, SABB, SHB – all reported significant increase in provisioning costs in 4Q2015.   Spreads held up surprisingly well; LDR moves up to nine-year high: Against all the hype of a liquidity squeeze, banks managed to report relatively steady net interest spreads (+4bps Q-o-Q), on an aggregate basis. There were exceptions though, with ANB reporting a sharp drop in NIMs while NCB and Riyad reported strong increases. However, this was partially helped by banks opting to shed deposits/liquidity to protect spreads - NCB reported a SAR40 billion (11% Q-o-Q) decline in deposits. This drove up the sector loans-to-deposit ratio to 82.4% in 4Q2015 – highest level since 3Q2008. Adjusting for NCB, LDRs were at 83.6% - also at their nine-year highs. So there is indeed some liquidity squeeze, but banks have managed it in 4Q2015. Our channel check suggests that deposit rates started easing in January, and this could ease some pressure on funding costs in 1H2015.   Loan growth improves, but not a focus in view of other concerns. Net loans of the listed banks grew 2.5% Q-o-Q compared to only 0.6% Q-o-Q growth in 3Q2015. However, with most banks guiding to mid-single digit growth, we believe it is unlikely to be a key driver of growth. Spreads and provisioning are likely to be more in investor focus, in our view.   Stock preference – Samba (Rating: Buy, 2016e P/BV 0.9x) and BSF (Rating: Buy, 2016e P/BV 1.0x): With stock prices correcting sharply, everything is cheaper compared to a month ago. Our stock preference in the current environment is geared to defensive names – banks with i) ability to withstand funding costs pressures coupled with ability to benefit from higher interest rates, and ii) strong credit risk management track record. BSF and Samba are our top picks in the sector. (Valuation table attached). For those willing to take higher risk, Aljazira (Rating: Neutral, 2016e P/BV 0.6x) could be the stock to play, with the stock trading at a steep discount to book value. (Murad Ansari)