24-Jul-2017
Bank Albilad - 2Q17: Strong loan growth and wider spreads offset provisioning pressure
Rating: Sell
Target Price: SAR16.5
Closing Price: SAR19.3
Earnings up 4% Q-o-Q, beat estimates
Bank Albilad reported 2Q17 net profit of SAR239mn, +4% Q-o-Q and +30% Y-o-Y. Earnings beat our estimate of SAR215mn and consensus of SAR221mn due to strong net interest income. Core revenue trends were generally good, with net interest income growth underpinned by strong loan growth and wider spreads. We estimate that spreads widened 14bps Q-o-Q and 52bps Y-o-Y in 2Q17. Non-interest income however weakened sequentially, with mgmt. comments suggesting sequential declines in fees, FX and investment income. We expect Albilad’s fee income to remain under pressure, as new expat levies hit the bank’s remittance business in 2H17 – remittance accounted for 60% of Albilad’s fee income in 2016.
Solid balance sheet growth trends
Loan growth continues to be robust at 5% Q-o-Q, well ahead of the sector growth rate. Albilad recapitalised in 4Q16 via a SAR2bn Tier II sukuk, which created adequate room for balance sheet growth (CAR c20% as of 1Q17), in our view. We expect the bank to continue focusing on corporate lending opportunities in the ST. Retail loan growth should remain subdued, however a pick-up in appetite for mortgages could help drive retail loan growth in 2018, in our view. We see upside risk to our loan growth estimate for 2017 in light of the strong loan growth trend in 1H17. The bank’s deposit growth was decent at 3% Q-o-Q and 7% Y-o-Y, however liquidity tightened slightly with the LDR rising 200bps to 87% in 2Q17.
Credit quality continues to be a concern
The bank’s provisioning rose with credit costs at 78bps (estimated) versus 52bps in 1Q17, suggesting a deterioration in credit quality. Albilad’s credit quality metrics had improved in 1Q17 with the NPL ratio declining to 1.1% from 1.4% in 4Q16. The bank also had sufficient NPL coverage at 245%. However, Albilad’s higher risk appetite (loan growth is well above sector average) and its corporate exposure to mid-tier clients, increases the risk of NPL formation in the prevailing weak economic environment. Asset quality deterioration poses the biggest downside risk to our earnings estimates for Albilad.
Murad Ansari
Shabbir Malik
Target Price: SAR16.5
Closing Price: SAR19.3
Bank Albilad reported 2Q17 net profit of SAR239mn, +4% Q-o-Q and +30% Y-o-Y. Earnings beat our estimate of SAR215mn and consensus of SAR221mn due to strong net interest income. Core revenue trends were generally good, with net interest income growth underpinned by strong loan growth and wider spreads. We estimate that spreads widened 14bps Q-o-Q and 52bps Y-o-Y in 2Q17. Non-interest income however weakened sequentially, with mgmt. comments suggesting sequential declines in fees, FX and investment income. We expect Albilad’s fee income to remain under pressure, as new expat levies hit the bank’s remittance business in 2H17 – remittance accounted for 60% of Albilad’s fee income in 2016.
Solid balance sheet growth trends
Loan growth continues to be robust at 5% Q-o-Q, well ahead of the sector growth rate. Albilad recapitalised in 4Q16 via a SAR2bn Tier II sukuk, which created adequate room for balance sheet growth (CAR c20% as of 1Q17), in our view. We expect the bank to continue focusing on corporate lending opportunities in the ST. Retail loan growth should remain subdued, however a pick-up in appetite for mortgages could help drive retail loan growth in 2018, in our view. We see upside risk to our loan growth estimate for 2017 in light of the strong loan growth trend in 1H17. The bank’s deposit growth was decent at 3% Q-o-Q and 7% Y-o-Y, however liquidity tightened slightly with the LDR rising 200bps to 87% in 2Q17.
Credit quality continues to be a concern
The bank’s provisioning rose with credit costs at 78bps (estimated) versus 52bps in 1Q17, suggesting a deterioration in credit quality. Albilad’s credit quality metrics had improved in 1Q17 with the NPL ratio declining to 1.1% from 1.4% in 4Q16. The bank also had sufficient NPL coverage at 245%. However, Albilad’s higher risk appetite (loan growth is well above sector average) and its corporate exposure to mid-tier clients, increases the risk of NPL formation in the prevailing weak economic environment. Asset quality deterioration poses the biggest downside risk to our earnings estimates for Albilad.
Shabbir Malik