• Earnings rise 5% Q-o-Q on strong non-interest income Saudi Hollandi Bank (SHB) reported 2Q16 earnings of SAR539mn, above our estimate of SAR490mn, and Bloomberg consensus of SAR479mn. Non-interest income was the key driver of the earnings surprise, up 6% Q-o-Q. Results disclosure suggests that gains on non-trading investments were strong during the quarter. Fee and forex income is likely to have remained subdued as balance sheet volume growth was sluggish.
• Marginal improvement in spreads We estimate that SHB’s net interest spreads rose 2bps Q-o-Q, recovering from a sharp decline in the previous quarter. This was likely driven by upward re-pricing on loans on higher benchmark rates, as well as higher risk margins. The improvement in spreads was possibly restrained by stronger deposit growth, in our view. However, it helped ease the bank’s loan-to-deposit ratio by 140bps Q-o-Q.
• Slight contraction in loan book SHB reported a 0.6% Q-o-Q decline in net loans in 2Q16. The slight contraction comes after three successive quarters of strong growth. While credit risk appetite is likely to have been weak, it was also constrained by the bank’s higher loan-to-deposit ratio.
• Easing of credit costs offset by investment impairments We estimate that SHB’s provisions rose 10% Q-o-Q. Management disclosed in the results announcement that although credit costs eased, they were largely offset by impairment on the bank’s available for sale investments. We estimate the bank’s annualised credit costs at c49bps for 2Q16.

Murad Ansari