• Global values RIBL stock at SR37.2 and recommends ‘HOLD’ on the stock
Global Investment House – Kuwait- Riyad Bank –Investment Update- Riyad Bank (RIBL), based on FY07 results, was the only Saudi bank showing a positive net income increase of 3.5% (from SR2.9bn in 2006 to SR3.0bn in 2007), while all other banks witnessed subdued profitability results. The bank’s 1Q08 results also showed improving performance posting a net income increase of 5.4% (from SR655mn in 1Q07 to SR690mn in 1Q08). RIBL’s asset base continued to strengthen posting YoY increase of 42.7% and YTD rise of 10.7% (from SR121.3bn in FY07 to SR134.3bn in 1Q08).
Based on the combination of two (DDM & GGM) valuation techniques, RIBL share reveals an estimated fair value of SR37.2 per share, which is 4.0% higher than the current market price of SR35.8 per share (as on Jun 24, 2008). At the current market price, RIBL is traded at 2008E P/E and P/BV multiples of 15.9x and 2.1x, respectively. Therefore, we downgrade on our earlier recommendation of “Buy” to “Hold” on the RIBL stock with a medium term perspective.
Financial Performance -FY 2007RIBL’s special commission income showed an increase of 12.7%, rising from SR5.5bn in 2006 to SR6.2bn in 2007. This was mainly generated by income from loans & advances contributing 73% to the top-line. The special commission expense rose by 14.0% (from SR2.5bn in 2006 to SR2.9bn in 2007). Overall, RIBL’s net special commission income after PLLs posted an increase of 14.4% (from SR 2.5bn in 2006 to SR2.9bn in 2007).
RIBL’s non-commission income decrease (FY07) of 3.0% was relatively better than the Saudi banks’ total non-commission income drop of 29.6% in 2007. The drop in the bank’s non-commission income was led by the decline of 23.3% in fees from banking services, while the net gains on non-trading investments supported the pressure.
Despite the increase in RIBL’s (FY07) net income, a decline in the bank’s ROAA and ROAE ratios was mainly driven by the balance sheet growth. The bank showed a decrease in ROAA from 3.3% in 2006 to 2.8% in 2007, and the drop in ROAE from 27.7% in 2006 to 26.1% in 2007.
RIBL with an asset base (FY07) of SR121.3bn ranked 4th in the sector and was able to capture 11.7% market share of the total Saudi banking assets. The bank’s balance sheet footing strengthened over the years posting a 3-year CAGR (2004-07) of 17.8%, with YoY increase of 29.1% (from SR94.0bn in 2006 to SR121.3bn in 2007). In May-08, after fulfilling all the relevant formalities, the 140% rights issue was also approved. Thus, increasing RIBL’s outstanding shares from 625mn to 1,500mn. The bank’s increase in NPLs by 31% (from SR836mn in 2006 to SR1,095mn in 2007) was in line with the growth of over 29% in Net Loans and Advances. Although the loan provisions were increased by 3%, a higher rise in NPLs led to the drop in NPL coverage ratio from 177% in 2006 to 139% in 2007.
Source: RIBL Financial Reports & Global Research
The customer deposits (FY07) representing 69.5% of the bank’s funding sources, showed a 3-year CAGR (2004-07) of 19%. Time deposits led the category with 59% share of the total. RIBL’s deposit growth (FY07) of 22% (from SR69.1bn in 2006 to SR84.3bn in 2007), exceeded the overall industry growth of 21%.
Financial Performance -1Q08RIBL’s special commission income rise (YoY) of 12.8%, coupled with 3.6% decrease in special commission expense resulted in an encouraging increase in net special commission income by 27% (from SR770mn in 1Q07 to SR980mn in 1Q08). The bank also posted a (YoY) growth of 14.8% in fees from banking services. The reduction in provision for credit losses by 41.7% accompanied by an encouraging core banking performance, translated into the net income increase of 5.4% (from SR655mn in 1Q07 to SR690mn in 1Q08).
RIBL posted an encouraging YoY asset base growth of 42.7% (from SR 94.1bn in 1Q07 to SR 134.3bn in 1Q08) and YTD increase of 10.7%. The loan & advances portfolio with 53% share of the total assets (1Q08), showed (YoY) increase of 34.4%. Simultaneously, the bank’s cash position also improved significantly (YoY) mainly due to higher reverse repos with SAMA. The customers’ deposits posted a (YTD) rise of 14.7% (from SR84.3bn in FY07 to SR96.7bn in 1Q08). Although the bank’s equity base posted a (YTD) decline of 2.7% (recording FY07 final dividend payment), it showed YoY increase of 10.9% closing at SR12.8bn in 1Q08.
Saudi Arabia’s strong macro-economic outlook, favorable demographics, along with the mega infrastructure investments spurred by petrodollars will provide the Kingdom’s financial institutions with enormous business opportunities leading towards a higher corporate earnings growth. After the relatively dampened market activity at Tadawul in 2007, going forward, besides other domestic stimulants the increased focus of foreign players on the GCC markets could largely benefit Saudi stock market activity. We expect RIBL’s net income (FY08) to record a rise of 12.3%. RIBL’s continuing focus on core banking activities, accompanied by its openness for expansion through joint ventures in Gulf, business acquisitions, and venturing into other businesses lines provide the bank with a wide array of profit generating opportunities. The diversified revenue stream will also further enhance the bank’s ability to effectively manage the market pressures. Investment IndicatorsPrice (as on June 24, 2008) Shares in Issue mn Market Cap SR mn 52-week price range (SR)35.8 SR 1,500 53,625.0 26.14 – 52.80Year Operating Income(SRmn) Net Profit(SRmn) EPSSR BVPSSR ROAE(%) P/E(x) P/BV(x)2009 (E) 6,533 4,162 2.8 18.1 15.6% 12.9 2.02008 (E) 5,396 3,383 2.3 17.4 17.7% 15.9 2.12007 (A) 4,823 3,011 2.0 8.1 26.1% 24.6 6.12006 (A) 4,514 2,909 1.9 7.3 27.7% 17.3 4.6*Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price in the Saudi Stock Exchange as on Jun 24, 2008.Source: RIBL Financial Reports and Global Research Estimates