BJAZ reported a weak set of Q3 22 earnings. Net profit increased by 13.8% yoy (-9.7% qoq) to SAR SAR233mn (up 13.8% yoy, down 9.7% qoq), it was significantly lower than the SNB Capital and consensus estimates of SAR281mn and SAR288mn, respectively. The drag on the earnings came from higher operating expense (ex-provisioning), which increased by 15.3% yoy (+6.1% qoq) to SAR503mn and was much higher than our estimate of SAR434mn. Adjusting for Tier 1 sukuk, net income stood at SAR230mn in Q3 22, up 26.1% yoy (-3.7% qoq). Total revenues came in at SAR881mn (+0.3% yoy) and was higher than our estimate of SAR815mn.
Revenues increased marginally by 0.3% yoy to SAR881mn and was higher than our estimate of SAR815mn. Fee and other income increased by 26.9% yoy (+23.1% qoq) to SAR260mn, which offset the impact of lower NSCI. NSCI decreased by 7.7% yoy (+4.3% qoq) to SAR622mn, but was marginally higher than our estimate of SAR609mn.
NIMs were in-line with our estimates and declined c56 bps yoy (flat qoq) to 2.2%. Asset yields expanded to 3.8% (Q2 22: 3.4%, Q3 21: 3.4%), compared to our estimate of 3.6%. Funding costs witnessed a rise of c100bps yoy to 1.5% and were higher than our estimate of 1.3%. Although substantial rise in the cost of funds has been a common theme across the sector during Q3 22, but rising cost of funds for BJAZ has surprised us due to relatively low LDR for the bank.
Operating expenses (ex-provisioning) increased 4.8% yoy (+6.3% qoq) to SAR501mn and were much higher than our estimate of SAR426mn. As a result, cost-to-income increased to 56.9% vs. 54.5% in Q3 21 and was also higher than our estimate of 52.3%. We believe this is a key negative of the results.
The bank provisions declined by 35.3% yoy to SAR103mn, however, it more than doubled qoq from SAR40mn. Consequently, cost of risk declined c48bps yoy and increased c40bps qoq to 0.6%, higher than our estimate of 0.4%.
BJAZ’s loan book grew 15.9% yoy (+3.2% qoq) to SAR68bn, in-line with our estimates. Deposits increased 10.8% yoy (-5.0% qoq) to SAR82bn, lower than our estimate of SAR89bn. Subsequently, L/D ratio increased to 82.3%, however, still one of the lowest in the sector.
We are Neutral on BJAZ with a PT of SAR26.3. Currently, the stock trades at 2023f PB of 1.6x versus the peer average of 2.0x. We believe even though the bank still is in a comfortable liquidity position, we believe below ROE generation as compared to its peers is a key concern.