The Saudi British Bank –Result Update -The Saudi British Bank (SABB) showed encouraging 1Q-08 results posting YoY net income increase of 23% (from SR616mn in 1Q-07 to SR757mn in 1Q-08), which was in contrast to the net income decline of 14% in FY07. The improved YoY net income resulted in the rise of EPS (based on 600mn shares) from SR1.03 in 1Q-07 to SR1.26 in 1Q-08. During 1Q-08, the bank’s special commission income rose by 17% (from SR1.2bn in 1Q-07 to SR1.4bn in 1Q-08) that led to the net special commission income increase of 20%. The bank with YTD total assets growth of 8.3% (from SR98.2bn in FY07 to SR106.4bn in 1Q-08), also showed an encouraging YoY asset base growth of 34%.
The fair value for SABB is estimated to be SR104.69 per share, based on DDM (80%) and Gordon Growth Model (20%) valuation methods, which is 2.2% less than the current market price of SR107.0 per share (May 03, 2008). At the current market price, SABB’s shares are trading at (2008E) P/E and PBV multiples of 19.7x and 5.9x, respectively. Therefore, we maintain our earlier recommendation of “Hold” on the stock with a medium term perspective.
Financial Performance –FY07SABB FY07 net income posted a decline of 14.3% (from SR3.0bn in 2006 to SR2.6bn in 2007). The subdued performance was somewhat in tandem with the rest of the Saudi banking sector that broadly experienced a profitability drop of 14.6%, mainly because of lower fee-based income (linked to dampened trading activity at Tadawul).
The bank’s special commission income showed an increase of 18% (from SR4.4bn in 2006 to SR5.2bn in 2007), along with the rise in special commission expense by 17%. Thus, posting the net special commission income increase of 18% (from SR2.6bn in 2006 to SR3.1bn in 2007). SABB’s banking spreads were well maintained between FY06: 3.8% to FY07: 4.2% for the last couple of years.
The decline in fees from banking services (non-interest income) was the major dampener leading to subdued profitability in 2007. The banking fees showed a significant drop of 48% (from SR1.7bn in 2006 to SR0.9bn in 2007) that was mainly because of reduction in share trading income. A considerable decrease of 34% in non-interest income led to the decrease of 9% in total operating income (from SR4.4bn in 2006 to SR4.0bn in 2007). Overall the bank’s lower performance in FY07 had a visible impact on the profitability ratios as ROAA decline from 4.2% in 2006 to 3.0% in 2007, and ROAE drop from 38.7% in 2006 to 28.9% in 2007. The bank posted an EPS (based on 600mn shares) of SR4.34 in 2007 as compared SR5.07 in 2006.
The bank with an asset base of SR98.2bn was able to capture 9.5% of the Saudi banking assets (FY07: SR1.0trn), and ranked 6th amongst the Saudi banks. The bank’s balance sheet footing strengthened over the years, posting three years (2004-07) CAGR of 19%. The total assets posted an annual growth of 27% rising from SR77.2bn in 2006 to SR98.2bn in 2007. A significant portion of 63% of the bank’s assets was generated through Net Loans & Advances that posted a growth of 46% (from SR42.5bn in 2006 to SR62.0bn in 2007). The bank’s lending portfolio was dominated by commercial loan facilities with increased lending to the commerce segment. The growth in the bank’s loan book was accompanied by the increase in NPLs by 19% (from SR165mn in 2006 to SR197mn in 2007). Source: SABB Financial Reports & Global Research
The customer deposits (FY07) constitute 73% of SABB’s funding sources, showed CAGR (2004-07) of 17%. The bank’s deposit base posted an annual growth of 17% (from SR59.3bn in 2006 to SR71.8bn in 2007), as compared to the industry deposit growth of 21%. The shareholder’s equity continues to strengthen over the years posting CAGR of 21% (from SR5.4bn in 2004 to SR9.5bn in 2007). Although SABB remains adequately capitalized bank with TIER-1 capital SR10.4bn, the bank’s in TIER-1 ratio dropped from 17.9% in 2006 to 13.5% in 2007.
Financial Performance –1Q-08SABB’s increase in special commission income by 17% (from SR1,180mn in 1Q-07 to SR1,385mn in 1Q-08) was successfully translated into net income increase of 23% (from SR616mn in 1Q-07 to SR757mn in 1Q-08). Although the growth of business was accompanied by the rise of 13% in special commission expense, the net special commission income rose by 20% (from SR711mn in 1Q07 to SR854mn in 1Q08).
Contrary to the impression that the increased competition from the fee-based activities in the Kingdom, along with any exposure to US market may add pressure on the bank’s ability to generate fee income; SABB posted a significant growth of 63% in fees from banking services (from SR205mn in 1Q-07 to SR334mn in 1Q-08).
The bank with YTD asset growth of 8.3% (from SR98.2bn in FY07 to SR106.4bn in 1Q08), showed an encouraging YoY asset base growth of 34%. The loan & advances portfolio, constituting 63% of the bank’s total assets, posted YTD growth of 7.5% and YoY increase of 56%. The customer deposits constituting 78% of SABB’s funding sources, posted YTD rise of 8.6% (from SR76.0bn in FY07 to SR82.6bn in 1Q08) and YoY increase of 30%. Although the equity base of the bank showed marginal YTD drop of 0.8%, it recorded YoY rise of 13.8% closing at SR10.3bn in 1Q08.
After the relatively dampened market activity at Tadawul in 2007, going forward we expect a rising trend in the Saudi stock market activity. For banks in particular, the optimism is linked to the growth in Saudi economy on the back of all time high oil prices and the boost in public expenditure on mega infrastructure projects (oil and non-oil related). SABB is well placed to derive maximum benefit by expanding its lending activities as the mega-infrastructure projects activity picks up in the Kingdom.