In its newly updatedequity research report on the Saudi banking sector, NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, continues to believe that the banking sector offers a compelling investment opportunity due to a strong loan growth outlook, coupled with the bottoming out of NIMs contraction.
“Off the back of the recent rally in Saudi banks (sector up 19.2% YTD), we downgrade Saudi Hollandi Bank Neutral and Bank AlJazira to Underweight, while our top picks include AlRajhi, Samba and Riyad Bank given their superior ability to expand their loan books due to higher capital,” said Mahmood Akbar, equity research analyst at NCB Capital.
He went on to explain: “Following the significant share price rally of SHB and BJAZ (up 34.7%% and 17.6% YTD respectively), we downgrade each stock to Neutral and Underweight respectively. Nonetheless, we continue to prefer SHB among the small-cap banks and see a high probability of a re-rating once interest rates pick up. BJAZ, on the other hand, trades at a 10.6% premium at 12.0x P/E for 2014E compared to the sector average of 10.9x despite reporting a 4.1% lower RoE.”
The updated equity research report states a continued preference for the large-cap banks AlRajhi, Samba and Riyad, due to their large Tier I capital (>17%), which will enable them to grow their loan books. However, in a rising interest rate environment, NCB Capital favours the banks which are focused on corporate lending and hence can quickly re-price their asset portfolio. This would include BSF, SHB and Samba.
“Based on our recent meetings, the senior management of local banks continue to be broadly neutral on the outlook of interest yields,” said Mahmood Akbar. “In particular, the high competition among banks has been the major factor keeping a lid on the loan yields. Some of the recent rise in the CoF has been passed on to the borrowers which overall offset the impact on NIMs. However, we believe that NIMs will bottom out this year and have the potential to pick up going forward.”
Continuing his observations, Mahmood Akbar said: “Our forecasts for loans and net profit for 2013E and 2014E have not changed significantly. In addition, our forecasts for NIMs continue to be conservative; overall we only expect 5bps improvement during 2012-16E led by a change in the asset mix. We need to see evidence on improving loan yields for like-for-like loans before incorporating a rise in interest rates in our estimates.”
Profit growth to pick up in 2014E
“We expect AlRajhi’s net income to grow only 1.9% YoY in 2013E, despite the strong loan growth, due to lower NIMs and subdued fee income,” said Mahmood Akbar. “Nonetheless, the bank is set to benefit from its dominant position in the retail segment to continue increasing its loan book which will be the key driver for its bottom-line growth. For 2014E, we expect this to contribute to a net income growth of 9.8%. Overall we expect a profit CAGR of 11.6% during 2013E-16E. We remain Overweight on AlRajhi with a revised PT at SR91.8.”
SAMBA FINANCIAL GROUP:
Lending focus and bottomed-out NIMs
NCB Capital believes that the low loan to total deposit ratio will enable Samba to grow its loan portfolio faster than the industry average. Its focus to increase the loan-to-customer deposit ratio and maintain NIMs will aid the growth in NSCI. Although the provision coverage remains below the industry average, strong top-line income would provide cushion against any increase in provisions. NCB Capital expects net profits to grow 8.9% and 6.5% YoY in 2013E and 2014E respectively led by the favourable asset mix which will lead to an increase in spreads.
NIMs protected by favourable asset mix
“Favourable loan mix and maintained NIMs are the key positives for RIBL,” noted Mahmood Akbar. “The bank has maintained its retail to corporate loans ratio at about 1:3. This, coupled with the focus to improve NIMs will enable the bank to negate the lower yields from the treasury (-43bps YoY in 2Q13) with higher NIMs from retail (+60bps YoY) and corporate (+12bps YoY). We expect RIBL to maintain its 2013E NIMs while the industry (ex. AlRajhi) will see a drop of 7bps.”
SAUDI HOLLANDI BANK:
Growth potential priced-in; downgrade to Neutral
“We revise our 2013E net loans, NSCI and net income forecast 5.9%, 5.0% and 7.7% upwards respectively on the strong 2Q13 performance,” stated Mahmood Akbar. “Strong lending activity coupled with the increasing fee and other income is likely to cushion increase in provisions and enable SHB to post a 13.4% YoY growth in net income in 2014E, better than industry aggregate of 9.1%. However, we believe that the growth potential has been priced-in by the market. Hence, we downgrade SHB to Neutral, but prefer it over the smaller banks.”
BANQUE SAUDI FRANSI:
Lower operating cost to aid pre-provision profit
‘We see BSF’s declining NIMs as a concern,” observed Mahmood Akbar. “However, we believe that the bank has been following a strategy to focus on corporate loans, which gives it a benefit of one of the lowest operating costs (SR14mn per SR1bn of loans) as compared to industry aggregate of (SR19mn per SR1bn of loans). This partially offsets the impact on the bottom line from tight margins. It is also a key advantage as the increase in the interest rate coupled with the lower operating cost will increase its pre-provision profits at a CAGR of 11.6% in 2012-17E.”
Strong profit growth; re-rating on higher yields
NCB Capital remains Neutral on SABB with a revised PT of SR43.0. Continued growth in net loans, widening NIMs from favourable asset mix and increasing fee and other income are likely to drive higher net profits. “We expect 2014E profit growth of 10.2% vs peers of 9.1%; however, we believe a re-rating on the stock requires higher like-for-like loan yields,” said Mahmood Akbar. “Despite our Neutral call on the stock we advise having SABB as part of a diversified portfolio given its excellent management, relatively diversified loan book and a strong fee and other income growth.”
ARAB NATIONAL BANK:
Losing loan market share to competition
“We remain Neutral on ANB with a revised PT of SR32.7,” said Mahmood Akbar . “ANB’s loan portfolio has been declining for the previous two quarters. Our revised estimates suggest that ANB will post lowest annual loan growth at only 3.4% vs industry’s 12.2% for 2013E. We believe high competition in lending will reduce its market share which will reduce the profit growth in 2014E to 6.7% from 7.8% in 2013E”
Downgrade to UW; peers offer better returns
“We are downgrading BJAZ to Underweight, although our PT of SR24.9 is broadly unchanged,” stated Mahmood Akbar. “The rating downgrade is mostly on the back of relatively high valuations with the stock trading at an 20.7% premium to the market. We are also concerned about the low NPL coverage ratio that stands at 135% vs. industry’s 155%. To reach industry levels, BJAZ will require posting additional SR260mn of provisions, which could result in 16.2% YoY decline in net income for 2013E.”
THE SAUDI INVESTMENT BANK:
Growth potential over-valued
NCB Capital believes that NSCI driven by the strong loan growth as well as improved fee and other income are likely to keep SAIB’s top-line growth better than industry peers. “We reduce our provision estimates by 16.7% from previous estimates on reduced NPLs and better NPL coverage (>200%). Consequently, our forecast suggests that SAIB will record highest net income growth of 30.2% YoY for 2013E amongst its peers. However, we believe that market has already captured its growth potential; hence, we remain Neutral with a PT of SR20.2..”
Trading at excessive premium
“Rapidly expanding loan books, strong asset quality and increasing net income growth, has enabled the bank’s stock to trade at an average forward P/E premium of 46% compared to other peers, “ concluded Mahmood Akbar. “However, we believe current prices values this growth at an excessive premium due to 1) higher operating cost as compared to peers and 2) cost of risk to remain higher (average 1.3% during 2013E-17E) than peers (0.73%). Hence we maintain our Underweight rating on the stock with a PT of SR17.7.