• Earnings decline 18% Q-o-Q; misses our estimates Saudi British Bank’s (SABB) 4Q2015 earnings declined by 18% Q-o-Q to SAR939 million, almost 14%/12% below our/consensus estimates. Non-interest income weakened sharply, and was the main contributor to miss on our estimates. While we believe fee and forex income likely weakened slightly on slower business activity, we estimate that investment income also declined sharply in 4Q15. Investment income contributed c5% of total revenue over the past two quarters, and we estimate that it was negligible in 4Q15. We reiterate our Buy rating on SABB. While the bank is exposed to liquidity and asset quality pressures similar to its peers, SABB is a relatively better managed banking franchise in the kingdom, in our view.
• Spreads stable as deposits decline SABB’s net interest spreads improved marginally compared to the previous quarter. With system liquidity pressure likely to have translated into higher deposits rates, SABB appears to have shed expensive deposits to protect its net interest spreads. The bank’s overall deposit base contracted by 4.5% Q-o-Q, driving up the bank’s simple loans to deposit ratio to 84.8%. Adjusting the deposit base for the long term debt, we estimate that the bank’s LDR stood at 81.9%, which is comfortably below the regulatory guidance of 85%. SABB’s net loans also declined, driven by maturities at the yearend.
• Provisioning costs rise from a low base After falling to its lowest levels in in two years in 3Q2015, credit costs rose sharply. We estimate SABB’s annualised credit costs stood at 41bps in 4Q15 compared to 27bps in 3Q15. Recoveries on previously provisioned non-performing loans are likely to have eased from 3Q2015 levels, in our view. We await the releases of detailed financials to see if there has been any deterioration in asset quality at the end of the year. We expect credit costs to rise from the multi-years low of 34bps in 2015 as weaker economic environment weighs on the bank’s asset quality.

Murad Ansari