• Adjusting FV for 100% stock dividend; remain Neutral We adjust our fair value for Saudi Hollandi Bank to SAR14.5 for the 100% stock dividend the bank announced for 2015. The bank’s outstanding shares have increased to 1,143 million from 572 million shares as a result of the corporate action. The bank had also announced a cash dividend of SAR0.25/share for 2015, sharply lower than SAR1.0/share announced for 2014. Given the challenging outlook for 2016-17, the bank appears to have focused on maintaining its capitalisation level, which is likely to have led to a cut in cash dividend. We maintain our Neutral rating on the stock. SHB’s valuations – 2016e P/E of 1.1x and P/BV of 8.1x – are broadly in line with sector average.
• 1Q2016 results were better than expected SHB’s 1Q2016 results came in ahead of our expectations, with non-interest income recovery particularly surprising us. However, the bank’s net interest spreads, which had been on a steady uptrend over 2014-15, were dented by higher funding costs. The bank’s net interest spreads eased by 4bps Q-o-Q in 1Q2016, and we expect pressure from higher funding costs to persist in the near term. The bank’s relatively weaker deposit franchise, reflected in a CASA deposit mix of 38% versus sector average of 63%, makes its spreads vulnerable to funding costs pressures, in our view.
• High LDR limits headroom for loan growth The bank’s loans-to-deposit ratio (LDR), adjusted for long-term loans, rose to 87.6% in 1Q2016, just shy of the ceiling of 90% recently revised by the Central Bank. This limits room for further balance sheet liquidity optimisation, in our view. While loan growth in 1Q2016 was strong (17% Y-o-Y), limited headroom on LDR will make future growth dependent on the bank’s ability to grow its deposit base. We expect loan growth to moderate over the next three quarters.

Murad Ansari