• Earnings broadly flat Q-o-Q; spreads improve further Saudi British Bank’s (SABB) 2Q16 earnings rose 1% Q-o-Q to SAR1,152mn, slightly above our estimate of SAR1,096mn and Bloomberg consensus of SAR1,102mn. The bank’s net interest spreads improved for the second consecutive quarter, rising 10bps Q-o-Q. This is on top of c9bps Q-o-Q improvement in the previous quarter. We believe that the improvement was supported by upward loan re-pricing, and better balance sheet liquidity management. SABB’s loan-to-deposit ratio rose by 146bps Q-o-Q as the bank appears to have shed some of its expensive deposits.
• But non-interest income weakens Revenues eased 2% Q-o-Q despite strong spread improvement as non-interest income declined sharply. The results disclosure suggests that fee and investment income were lower sequentially, driving a 15% Q-o-Q decline in non-interest income. Investment income was particularly strong in the previous quarter. We believe fee income on the other hand is likely to have declined on sluggish balance sheet growth.
• Credit costs ease sharply We estimate that SABB’s credit costs declined sharply to c29bps, compared to 45bps in the previous quarter. While asset quality is likely to have remained broadly stable, we believe that credit cost levels are exceptionally low given the current weak economic environment. We expect a pick-up in asset quality deterioration from the end of 2016.
• Loan growth momentum slows After strong growth in the previous quarter, net loans grew only 1% Q-o-Q. While slower government spending is driving down credit demand, we believe that banks have also become selective in picking up assets. We expect loan growth momentum to slow down further in 2H16.

Murad Ansari