Global values Samba stock at SR77.6 per share and recommends ‘Hold’ on the stock
• Global values Samba stock at SR77.6 per share and recommends ‘Hold’ on the stock
SAMBA Financial Group –Result Update SAMBA Financial Group (Samba) although recorded an improved core banking performance (1H08), due to the subdued non-commission income the net income declined by 5.6% (from SR2.5bn in 1H07 to SR2.4bn in 1H08). Overall the performance was relatively better than (FY07) net income decrease of 7.7%. The bank with the asset base (FY07) of SR154.4bn stood 2nd in the Saudi banking sector, posting an annual growth of 24.5%. The bank’s total assets (YoY) showed an increase of 42.2% and YTD rise of 18.9% (from SR154.4bn in FY07 to SR183.6bn in 1H08).
Our fair value for Samba is estimated to be SR77.6 per share, based on DDM (80%) and adaptation of the Gordon Growth Model (20%). According to our fair value the banking scrip is 5.9% higher than the current market price of SR73.3 (as on Jul 26, 2008). Therefore, we downgrade on our earlier recommendation of “Buy” to “Hold” on the stock with a medium term perspective.
Financial Performance -FY07
Samba’s FY07 results recorded a decline in net income by 7.7% (from SR5.2bn in 2006 to SR4.8bn in 2007). The bank’s subdued performance was relatively better than the rest of the Saudi banking sector (FY07) that broadly experienced a profitability drop of 14.6%.
The bank’s special commission income posted an increase of 20.0% (from SR6.9bn in 2006 to SR8.3bn in 2007), while the special commission expense during the period showed an increase of 28.0%. Overall, SAMBA’s net special commission income after PLLs showed a rise of 14.8% (from SR4.0bn in 2006 to SR4.6n in 2007).
The bank’s encouraging top-line performance was subdued by the drop in non-commission income by 24.2%. The decline in non-commission income was a result of the decrease in fees from banking services, income from investment held at FVIS, and losses on non-trading investments. The fees from banking services recorded a considerable drop of 33.1% (from SR2.4bn in 2006 to SR1.6bn in 2007), which was mainly attributed to the reduction in income from share trading and fund management. The bank’s total operating income showed a decrease of 1.8% (from SR7.0bn in 2006 to SR6.8bn in 2007). The reduced operating income accompanied by the rise in operating expenses by 15.5% led to a lower bottom line figure.
Samba’s subdued financial performance in FY07 also had a dampening impact on the bank’s return ratios. The growth in assets and equity base (24.5% and 16.6%, respectively) at times of decreasing profits led to ROAA decline from 4.5% in 2006 to 3.5% in 2007 and ROAE drop from 41.2% in 2006 to 30.5% in 2007. The bank posted an EPS (based on 900mn shares) of SR5.3 in 2007 as compared to SR5.8 in 2006.
Samba with asset base (FY07) of SR154.4bn ranked 2nd in the Saudi banking sector, and captured 14.9% market share of the total Saudi banking assets. The bank’s balance sheet footing (total assets) strengthened over the years, posting a 3-year CAGR (2004-07) of 17.7% and an annual (FY07) growth of 24.5% (from SR124.0bn in 2006 to SR154.4bn in 2007).
Net Loans & Advances continued to constitute more than 50% of the bank’s total assets and showed an annual growth of 20.2% (from SR67.0bn in 2006 to SR80.5bn in 2007). Samba’s lending portfolio stays dominated by commercial and consumer loans facilities, having a contribution of 81% and 16%, respectively. The increase in NPLs by 23.1% (from SR1.5bn in 2006 to SR1.8bn in 2007), while the rise in provisioning by 7.7% (during the same period) led to decline in NPL coverage ratio from 182.4% in 2006 to 159.6% in 2007.
The customers’ deposits (FY07) representing 75.0% of the bank’s funding sources showed a 3-year CAGR (2004-07) of 20.0%. Samba’s deposit growth (FY07) of 22.1% (from SR94.8bn in 2006 to SR115.8bn in 2007) exceeded the overall industry growth of 21%. The shareholders’ equity (excluding proposed dividends) continues to strengthen over the years, posting a 3 year CAGR (2004-07) of 21.4% and also YoY rise of 21.0% (from SR14.1bn in 2006 to SR17.1bn in 2007). Although Samba remains a well capitalized bank with TIER-1 capital (FY07) at SR17.9bn, the drop in TIER-1 ratio from 16.4% in 2006 to 15.2% in 2007 signals the increase in risk-weighted assets in the bank’s portfolio.
Financial Performance -1Q08
The bank’s half yearly results showed an improved core banking performance. However, the subdued non-commission income dampened the bottom line results. The bank recorded YoY net income decline of 5.6% (from SR2.5bn in 1H07 to SR2.4bn in 1H08). The increase in the bank’s special commission income by 3.5% (from SR4.0bn in 1H07 to SR4.1bn in 1H08) was supported by the drop in special commission expense by 0.8%. Thus, leading to improved core banking performance as the net special commission income showed an increase of 6.6% (from SR2.3bn in 1H07 to SR2.5bn in 1H08).
Although the bank started recovering from the pressure on fees from banking services showing a rise of 7.4% (from SR830mn in 1H07 to SR891mn in 1H08), a significant (YoY) decline in trading income lead to an overall dampened non-commission income. The increase in provision for credit losses by 35.5% (from SR209mn in 1H07 to SR283mn in 1H08) added further pressure on the bank’s bottom line results.
The bank’s balance sheet footing continued to strengthen posting YoY total assets increase of 42.2% and YTD rise of 18.9% (from SR154.4bn in FY07 to SR183.6bn in 1H08). The loan & advances portfolio constituted 52.5% of the total assets, and showed YTD growth of 19.6% (from SR80.5bn in FY07 to SR96.3bn in 1H08). The customer deposits posted YTD rise of 5.1% (from SR115.8bn in FY07 to SR121.7bn in 1H08) and YoY increase of 23.8%. The equity base of the bank posted YoY growth of 14.5% while on YTD basis recorded an increase of 0.6% closing at SR17.9bn in 1H08.
Samba’s improving core banking performance coupled with its developed brand name places the bank in a positive position to derive maximum benefit through domestic as well as regional markets. Besides the bank’s future growth plans in Saudi Arabia, its recent announcements for expansion into Qatar and UAE (Dubai) markets will not only diversify its revenue sources but will also provide the bank with opportunities to effectively tap the booming Gulf economies. The increasing wealth generated by high oil prices will facilitate the bank in augmenting both its deposit base and financing business.
- Global values the company’s stock at an intrinsic value of QR96.4 per share. And revises its recommendation on the stock from “BUY” to “HOLD”.
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