Earnings up 11% Q-o-Q; ahead of estimates
ANB reported 2Q17 profit of SAR849mn (EPS: SAR0.85), up 11% Q-o-Q and 4% Y-o-Y. Earnings beat our estimate of SAR780mn (consensus: SAR743mn) due to strong net interest income. Although the loan growth trend remains weak, the bank’s spread widened 39bps to 2.83%, owing to a decline in the cost of funds. ANB’s cost of funds were propped up by a liquidity squeeze in 2016, which appears to have normalised this quarter. Further improvement in spreads is likely to be incremental and subject to improvement in asset yield, in our view. Non-interest income rose 2% Q-o-Q and mgmt.’s comments suggest that the increase was driven by stronger investment income as fee and FX income were weak Q-o-Q. Following these results we believe our estimates and TP have scope for potential upward revisions.
 
Provisioning high as bank is likely to have built NPL coverage
Provisioning was the key weak area this quarter. We estimate that ANB’s cost of risk rose to 79bps from 60bps in 1Q17 (57bps in 2Q16). The bank’s credit quality metrics had deteriorated in 1Q17, with NPL ratio rising 50bps Q-o-Q to 1.4% and NPL coverage dropping to 176% from 270% in 4Q16. Moreover, its past due loans at the end of 2016 had grown significantly, and represented 0.6% of gross loans. While the latest credit quality indicators are not available yet, we believe ANB may have focused on building its provision reserves this quarter. 
 
Loans and deposits shrink; ST growth prospects remain weak
Balance sheet trends continue to be weak. ANB’s loans and deposits shrank 1% Q-o-Q, and liquidity was broadly stable with LDR at 88%. Weak economic growth and reduced consumer spending (subsidy cuts and expat levy) is likely to keep credit appetite subdued. Moreover, working capital lines drawn down by the corporate sector in 2016 will continue to be repaid as the gov’t releases late payments. ANB let go of expensive term deposits in 1Q17. With system wide liquidity improving, we believe ANB continued to release term deposits in 2Q17, which led to a lower cost of funds this quarter.

Murad Ansari

Shabbir Malik