Saudi Awwal Bank reports Q2 profit in line with estimates

Saudi Awwal Bank (TADAWUL:1060) reported Q2 net profit largely in line with consensus, despite lower-than-expected net interest income and higher cost of risk. This was primarily offset by robust non-interest income, which exceeded expectations by up to 12% and grew 15% year-over-year from foreign exchange and fee income. While net interest margin decreased 10 basis points due to higher funding costs, the bank maintained flat operating expenses, managed provisions within its 2025 guidance at 31 basis points, and achieved solid loan growth of 1.4% and deposit growth of 2.3% quarter-over-quarter.

Analysis

Saudi Awwal Bank (TADAWUL:1060) reported second-quarter net profit largely in line with consensus estimates, indicating a stable bottom-line performance despite mixed underlying drivers. Key weaknesses were observed in core lending profitability, with Net Interest Income (NII) missing expectations by 1% to 1.5% and Net Interest Margin (NIM) contracting by 10 basis points quarter-over-quarter due to higher funding costs. These negative factors, along with a higher-than-expected cost of risk, were offset by a significant outperformance in non-interest income, which grew 15% year-over-year and exceeded forecasts by up to 12%, driven by strong foreign exchange and fee income. While provisions for the quarter were elevated, the implied cost of risk of 31 basis points remains within the bank's full-year 2025 guidance of 25-35 bps. The bank demonstrated effective cost control with flat operating expenses and achieved solid balance sheet growth, marked by a 1.4% quarterly increase in loans and a 2.3% rise in deposits, importantly including a 4% growth in valuable demand deposits.

Key Decisions for Investors

• Investors should monitor the bank's Net Interest Margin in upcoming quarters, as the 10 bps contraction highlights a key vulnerability to funding cost pressures.
• Evaluate the sustainability of the strong non-interest income, as its outperformance was crucial in offsetting weakness in core interest-based earnings this quarter.
• Consider the bank's ability to manage its cost of risk within its annual guidance as a positive sign of stability, despite the quarterly increase being attributed to specific clients.
• The solid loan and deposit growth, coupled with flat operating expenses, suggests operational strength, warranting a close watch on whether the bank can translate this balance sheet expansion into improved profitability.