Rating: Neutral 
Target Price: SAR14.0
Closing Price: SAR13.9 

Earnings up 3% Q-o-Q; lower funding costs lift spreads
The Saudi Investment Bank (SAIB) reported a 3% Q-o-Q rise in 2Q17 net income to SAR356mn. Earnings were 17% ahead of our estimate of SAR305mn, driven by wider spreads and lower-than-expected provisioning. We estimate that net interest spreads rose 15bps Q-o-Q to 1.87%, driven by falling cost of funds. A weak deposit franchise, with relatively low CASA and relatively tight liquidity, meant that the bank struggled to maintain its spreads last year, and its spreads bottomed out to 1.29% in 4Q16. The bank has been a key beneficiary of the improvement in systemic liquidity, and its spreads have widened by 58bps over the past two quarters. Further spread improvement is subject to an increase in SAIBOR rates, which would help the bank’s largely corporate focused book to re-price upwards.
 
Above-sector average loan and deposit growth; capital position relatively weak
SAIB’s loan growth was decent at 2% Q-o-Q vs. the sector, which grew 0.3% Q-o-Q in 2Q17. Deposit growth at 3% Q-o-Q was also above sector average of 1.6% Q-o-Q. The bank’s liquidity improved, with LDR easing to 87% from 88% in 1Q17. SAIB released expensive term deposits in 4Q16 and 1Q17, which contributed to an improvement in its cost of funds, in our view. The bank enhanced its capitalisation by issuing a SAR500mn Tier 1 sukuk in 4Q16 to boost its lending capacity. However, its capitalization, as of 1Q17, was still low relative to the sector, with CAR at 16% vs. the sector average of 19%.
 
Credit quality: Focus on rebuilding provision buffer
Provisioning, although better than expected, was up Q-o-Q, suggesting the bank has focused on building its NPL coverage. The bank’s cost of risk rose to 42bps vs. 30bps in 1Q17 and 38bps in 2Q16 (EFG estimate 50bps). SAIB’s NPL ratio stabilised Q-o-Q in the previous quarter at 1.8%, after nearly doubling in 2016. However, its NPL coverage dropped from c200% in 2Q16 to 94% as of 1Q17, which was low relative to the sector. Mgmt. may have decided to rebuild the bank’s provision buffer this quarter to position itself better for IFRS 9 implementation, in our view.

Murad Ansari

Shabbir Malik