Saudi Banking Sector

Transcription

December 2013
Sector Report
Please read Disclaimer on the back
Key Themes
Saudi Arabia’s banking industry continues to experience robust growth despite the global macroeconomic environment being
difficult. The government’s expansionary fiscal spending stance and high levels of liquidity helped boost credit to the domestic
private sector in 2012. The banking sector remains highly liquid, well capitalized, and profitable, although we expect slight
moderation in credit growth in 2013, following strong growth in 2012. The sector is on course to register record level of profits
in 2013 aided by growing fee-based income, declining cost, and improving asset quality.
Lending on robust upward growth trajectory
Bank lending in the Kingdom of Saudi Arabia (KSA) is on a strong upward trajectory. Aggregate bank credit to the private and
public sectors surged 16.7% year-on-year (YoY) in 2012, much higher than the 10.5% YoY growth in 2011. During the first nine
months of 2013, bank credit increased at 10.8% YTD to SAR 11 8bn. The strong improvement in lending is fueled by the rebound
in Saudi Arabia’s macroeconomic environment and banks’ focus on expanding their loan book following the cautious stance
in 2009 and 2010 due to asset-quality concerns. Saudi Arabia’s GDP growth bounced back to a robust average annual rate of
nearly 8% over 2010–12 from a lowly 1.8% in 2009, making it one of the fastest-growing economies in the recent past. High
fiscal spending and strong improvement in private sector activity were the prime factors fueling this remarkable growth in the
Kingdom’s GDP and the overall credit demand. Consequently, the ratio of credit multiplier to real GDP growth surged to 2.5x in
2012 from 0.7x in 2010 and is inching closer to the average of 3.2x recorded during the boom period of 2003–08.
Figure 1: Credit growth in Saudi vs. GDP growth
2, 000
1, 6 00
8 .4 %
9.0%
8 .5%
7.4 %
8 .0%
6 .8 %
7.0%
6 .0%
5.6 %
SAR bn
1, 200
3.6 %
1.8 %
8 00
4 00
0
2006
2007
2008
5.0%
4 .0%
737
775
8 57
2009
2010
2011
74 5
595
4 97
6 .0%
Cr e dit
1, 108
1, 000
3.0%
2.0%
1.0%
Re al G D P g r o w t h ( %
2012
9M
2013*
0.0%
Y o Y ) - RHS
Source: SAMA, IMF, AlJazira Capital; *Real GDP growth in 1H 2013 represents IMF 2013 growth estimates
Loan book to expand at 13.0% CAGR during 2012–17E
Owing to the favorable macroeconomic backdrop, we expect the loan book of Saudi banks to expand at a CAGR of 13.0% over
2012–17E. However, in the near to medium term, we expect.
the loan book of Saudi banks to grow at a slower pace of 13.6% YoY in 2013 and 11.9% YoY in 2014. The moderation, which
would be prominent in 2H 2013 and 2014, is likely to be a result of an expected slowdown in economic expansion and the banks’
cautious stance, particularly on the corporate lending side. Nonetheless, based on the GDP multiplier impact, we believe annual
loan book growth would recover to 12.5–13.5% over 2015–17.
Figure 2: Loan growth in Saudi
SAR t n
2.0
CAGR - 11.3%
34 .0%
CAGR -13.0%
1.6
26 .0%
1.2
18 .0%
0.8
0.4
0.0
0.6
2007
0.8
0.7
0.8
0.9
2008
2009
2010
2011
Ne t Lo ans - LHS
1.0
2012
1.3
1.1
1.4
1.9
1.6
10.0%
2.0%
2013E
Ne t Lo ans ( %
2014 E
Y o Y )
2015E
2016 E
Re al G D P ( %
2017E
- 6 .0%
Y o Y )
Source: Company Annual Reports, IMF, AlJazira Capital
AGM - Head of Research
Abdullah Alawi
1
1. All 12 banks, including 11 listed banks and National Commercial Bank
© All rights reserved
+966 12 6618275
a.alawi@aljaziracapital.com.sa
December 2013
Sector Report
•
Macroeconomic growth to remain strong:
Although falling crude oil demand and oil prices are putting downward pressure on the Kingdom’s economic output; GDP
growth is likely to remain robust at around 4.2% at constant prices over 2013E–17E due to the government’s expansionary fiscal
stance and resilient non-oil private sector. According to the IMF, Saudi Arabia’s crude oil production is expected to decline to
9.4mn bbl/day in 2013 from 9.8mn bbl/day in 2012 owing to slower demand and increasing shale-oil boom led supplies in the
US. The Brent crude oil export price is expected to average USD106.8 per bbl in 2013 and USD101.7 per bbl in 2014 as against
USD109.5 per bbl in 2012, according to US Energy Information Administration. While this puts downward pressure on business
activities in the oil sector, the non-oil economy’s growth is expected to remain strong driven by continued large fiscal spending,
supportive monetary policy, and improving private sector business activities. The Kingdom’s GDP is expected to grow 3.6% at
constant prices in 2013 and 4.4% in 2014, and thereafter at 4.3% during 2015E–17E.
Retail lending to accelerate; to increase at a CAGR of 18.4% over 2012–17E
The banks’ lending to consumers continues to be on a strong uptrend since 2009. While lower penetration levels—Saudi
Arabia’s retail loans as a percentage of GDP stands at nearly 12% as against the UAE’s 19% and Europe’s 55%—remain a strong
underlying driver, increased borrowing capacity of consumers following upward revisions in salaries of Saudi nationals and the
continuing Saudization drive are influencing the country’s banks to focus more on consumer lending. Consequently, the retail
lending contribution to Saudi banks’ loan book aggregated to 30.5% in 2012 from 21.1% in 2008.
Figure 3: Rising share of retail loans
Figure 4: Components of consumer loans
32.0%
1,000
30.0%
800
28.0%
600
26.0%
400
24.0%
200
22.0%
-
20.0%
SAR bn
1,200
2008
2009
Corporate performing loans
2010
2011
Retail performing loans
2012
Personal , 49%
Real Estate finance,
6%
Cars &
Equipment, 10%
Credit Cards,
8%
Others, 27%
Retail share (%) - RHS
Source: Company Annual Reports
Source: SAMA;2012 data
We believe retail lending would continue to grow strongly over 2013E–17E, outpacing corporate lending , due to favorable
demographics, growing per capita income, and increasingly accessible and customized retail products. Given the increased
proportion of younger population in KSA, demand for personal financing (cars, consumer durables, and mortgages) is expected
to grow robustly. Saudi banks’ lending to consumers is estimated to increase at a CAGR of 18.4% during 2012–17E.
Figure 5: Retail loan growth to remain strong
800
27.0 %
24.1 %
700
17.5 %
22.8 %
30.0%
25.0%
17.4 %
600
17.1 %
SAR bn
500
400
100
0
20.0%
11.7 %
300
200
17.2 %
721
7.5 %
4.1 %
164
176
2008
2009
197
244
310
2010
2012
2011
Retail performing loans
381
446
523
614
15.0%
10.0%
5.0%
2013E
2014E
2015E
2016E
Growth YoY (%) - RHS
2017E
0.0%
Source: Company Annual Reports, AlJazira Capital
•
2
Mortgage law boosts long-term outlook of retail lending: The long-awaited mortgage law was introduced in
July 2012 to address the deficiency in real estate financing. Although the law is expected to play a key role in boosting
the mortgage market over the long term, the short- to medium-term potential remains constrained due to uncertainty
about enforceability and lack of associated framework. Once all the five laws related to Saudi mortgage are passed and
banks have greater clarity and confidence on regulations, we expect demand for consumer loans to grow in tandem
with rising demand for houses. Mortgage financing segment holds tremendous potential in the Kingdom given KSA’s
low mortgage penetration levels vis-à-vis other countries. Mortgages constitute merely 2% of KSA’s GDP compared with
more than 70% in some other nations, including the UK and the US. Given the current shortage of homes amid the young
population and declining family size, the real estate finance segment holds significant potential and may account for a
significantly higher share in retail lending in the long term.
2. Corporate loans includes credit to private and public sector enterprises
December 2013
Sector Report
Figure 6: Housing loan as a % of GDP
20.0%
15.9 %
16.0%
15.5 %
15.0 %
12.0%
7.9 %
8.0%
4.0%
3.4 %
2.0 %
0.5 %
0.5
0.0%
Morocco
UAE
Kuwait
Jordan
Oman
KSA
Egypt
Source: World Bank
… while lending to corporations to grow 10.1% over 2012-17E
Saudi banks became extremely cautious about corporate lending following high-profile corporate defaults, significant
drop in economic activity, and cancellations and delays of projects in 2009. Thereafter, lending to corporations recovered
to around 14.5% YoY in 2012, but has been lagging behind growth in retail lending as the banks realigned their focus
towards this rapidly growing segment. We believe this trend would continue and hence corporate loans are expected to
increase at a healthy CAGR of 10.1% over 2012–17E albeit at a slower pace than retail loans. The growth would largely be
2.2–2.5x of real GDP growth during the period and would be primarily supported by growing government expenditure,
improving business activity in the non-oil private sector, and focus on lending to small and medium enterprises (SME).
Figure 7: Corporate lending growth
1,400
1,200
39.6
%
11.1
10.8
1,000
9.1 %
14.5
SAR bn
800
- 9.8 %
600
4.0 %
551
573
40.0%
30.0%
%
9.4 %
20.0%
7.7 %
400
611
%
10.3
%
%
617
707
773
844
931
1 , 031
1 ,146
10.0%
0.0%
200
-10.0%
0
-20.0%
2008
2009
2010
2011
Corporate Loans
2012
2013E
2014E
2015E
2016E
2017E
Growth YoY (%) - RHS
Source: World Bank
3. Corporate loans include credit to private and public sector enterprises
3
December 2013
Sector Report
Government fiscal expenditure and corporate capex trend: According to the 2013 budget, the Saudi Arabian
government stepped up the planned expenditure to SAR 820bn, nearly SAR 130bn higher than the budgeted figure
in 2012. Considering the government has been spending more than the budgeted amount in the recent past, actual
spending may well be higher than the planned expenditure in 2013. Public expenditure is, hence, likely to be strong
in both economic and social infrastructure, such as education, healthcare, transport & communication, and utilities.
Private sector capital expenditure plans are also likely to surge in 2013, benefiting from improving business sentiment
and high liquidity. According to recent Bloomberg estimates, capital expenditure plans of TASI-listed companies are
likely to aggregate to nearly SAR593.4bn in 2013E, 75.7% higher than the actual capital investments in 2012.
Figure 8: Fiscal expenditure trend
Figure 9: Rising corporate capex plans
800
600
540
380
410
SAR mn
SAR bn
612
593
600
580
475
500
400
750
690
700
300
475
431
450
300
293
302
2010
2011
310
200
150
100
0
2007
2008
2009
2010
2011
0
2012
Source: Ministry of Finance
•
2008
2009
2012
2013E
2014E
Source: Bloomberg, AlJazira Capital
Projects market stands strong: Saudi Arabia remains the GCC’s largest projects market by a huge margin. Of
the total USD 110bn worth of contracts awarded in 2012 among GCC countries, USD 50bn was awarded in Saudi
Arabia, according to Meed Saudi Arabia Projects Market 2013 report. Furthermore, nearly USD 30bn (over SAR
102bn) worth of contracts were awarded in first six of months of 2013. Consequently, the total value of projects in
the pipeline currently stands at USD 876.6bn. Saudi banks, with their stepped-up focus on the project financing
market, are likely to be amongst the major beneficiaries.
Figure 10: KSA projects pipeline
Number of projects
Project value (USD bn)
Alternative Energy
4
0.6
Industry
69
47.2
Infrastructure
436
262.4
Oil and Gas
84
84.6
Petrochemicals
72
68.6
Power and Water
637
92.9
Real Estate
567
320.3
1,869
876.6
Sector
Total
Source: Zawya Projects, AlJazira Capital
4
December 2013
Sector Report
Significant opportunity in SME lending segment
The SME segment has gained importance with the government’s shift in focus towards the non-oil economy. Apart
from diversification benefits, the SME sector aids in improving competitiveness, creating employment opportunities,
and raising the standard of living. KSA’s SME segment accounts for about 90% of businesses and 60% of employment.
However, the segment’s contribution to GDP is far below international standards. SMEs currently account for only
33% of KSA’s GDP (far below 57% in Japan, 64.3% in Spain, 56% in France, and 43% in Canada) and represents just
2% of lending by Saudi banks (below 15% in non-MENA countries).
The Saudi government has taken several initiatives to extend financing to SMEs. The Small and Medium Enterprises
Loan Guarantee Program managed by Saudi Industrial Development Fund encourages banks to finance SMEs
by offering guarantees to banks in order to minimize risks of lending to SMEs. We believe these initiatives would
encourage banks to provide lending to this segment, thereby driving growth in corporate lending in the coming
years.
Figure 11: SME sector as a % of GDP
65%
Figure 12: SME loans to total loans
30%
64%
57%
55%
25%
56%
20%
50%
44%
45%
24%
16%
15%
43%
15%
2%
2%
KSA
4%
Kuwait
4%
Syria
Tunisia
Lebanon
KSA
Canada
Austria
US
France
Spain
Source: The World bank
Morrocco
5%
0%
Japan
25%
33%
UAE
10%
35%
Source: The World Bank; The Union of Arab Banks
Deposits lagging behind loan book growth
Customer deposits increased at a CAGR of 11.9% during 2007–12 supported by rising per capita income and improving
savings rate. During 2013, the deposit base grew 6.8% YTD until September 2013. In the near term, we expect deposit
growth to be slower than levels registered in 2012 as decelerating economic growth is expected to keep interest rates
under pressure, thus increasing attractiveness of other investment options. Furthermore, the IMF expects the Saudi
population’s savings to decline in the coming years. We expect KSA banks to register a deposit growth of 10.8% YoY
in 2013 compared with the 15.5% YoY growth registered in 2012. After 2013, KSA’s deposits are expected to grow at
an average rate of 11.7% until 2017E.
5
December 2013
Sector Report
Figure 13: Growth in deposit base of KSA banks
2500
CAGR - 12.0%
CAGR -11.7%
2, 298
2, 033
2000
1, 799
SAR bn
1, 607
1, 468
1500
1, 324
1,147
1000
924
981
1, 036
751
500
0
2007
2008
2009
2010
2011
2012
2014E
2013E
2015E
2016E
2017E
•
Proportion of demand deposits rising: KSA banks have historically had a significantly high proportion of time
deposits in total deposits. While demand deposits grew at 20.4% during 2006–12, time deposits registered a mere 6.4%
growth as lower deposit rates resulted in individuals not preferring investments in time and savings deposits.
Figure 14: Aggregate deposits by type:
Figure 15: Aggregate deposits by type (2012)
2006
Time
deposit,
51.6%
Savings deposit,
1.3%
2012
Demand
deposit,
42.3%
Other deposits
4.8%
Time
deposit,
35.1%
Savings deposit,
1.2%
Demand
deposit,
60.5%
Other deposit,
3.3%
Source: SAMA
•
6
Loan–deposit ratio to remain comfortably below prescribed limits: Despite the high growth in loan book,
the sector’s loan–deposit ratio of 76.1% in 2012 is far below the regulatory limit of 85% and its regional peers’ average
of 86.1%. This rate is also lower than the past five years average of 77.0%. We expect loan growth (CAGR of 13.0%) to
be stronger than deposit growth (CAGR of 11.7%) during 2012–17E. Consequently, the loan–deposit ratio would rise to
80.7% by 2017E, but still remain below SAMA’s regulatory limit.
December 2013
Sector Report
Figure 16: Loan–Deposit ratio of KSA banks
Regulatory limit of 85%
85.0%
83.4%
82.0%
79.7%
79.0%
80.2%
80.4%
2015E
2016E
80.7%
78.6%
78.0%
76.1%
76.0%
74.4%
73.9%
74.5%
73.0%
70.0%
2007
2008
2009
2010
2011
2012
2013E
2014E
2017E
Top five banks to continue dominating loan book
The top five banks in terms of overall loan book commanded 65.6% of the market in 2012. Al Rajhi Bank leads the pack with
a market share of 17.1%, followed by NCB (16.2%), Riyad Bank (Riyad – 11.7%), Samba Financial Group (Samba – 10.4%), and
Banque Saudi Fransi (10.2%). Al Rajhi Bank’s lending portfolio expanded at a CAGR of 10.4% during 2007–12 to SAR 171.9bn
in 2012 driven by growth in retail lending. On the other hand, growth in NCB’s loan book was fairly distributed between
corporate and retail lending.
The retail loan book is fairly concentrated: Al Rajhi accounted for 38.3% of the market in 2012, followed by NCB (16.6%) and
Riyad (9.9%). Al Rajhi’s retail lending increased at a CAGR of 17.4% during 2007–12 to SAR 118.5bn in 2012.
Figure 17: Loans market share
Saudi Fransi,
10.2%
SAMBA,
10.4%
Others,
34.4%
Figure 18: Deposits market share
RIBL,
11.7%
RIBL, 11.0%
NCB,
16.2%
Al Rajhi,
17.1%
SAMBA, 11.2%
SABB,
9.1%
Others,
31.3%
Al Rajhi,
16.7%
NCB,
20.7%
Unlike the retail lending portfolio, the corporate loan book is fairly distributed as evidenced by the fact that NCB, which
garnered the largest share, accounted for 16.1% of the market. Most Saudi banks, except Al Rajhi Bank, focus on corporate
lending. Corporate loans comprised 68.9% of NCB’s loan mix in 2012.
The top five banks in terms of total customer deposits accounted for 68.7% of the market in 2012. NCB topped the list with a
20.7% share, followed by Al Rajhi (16.7%), Samba (11.2%), Riyad (11.0%), and Saudi British Bank (SABB – 9.1%). NCB’s customer
deposits increased at a CAGR of 13.9% during 2008–12 to SAR 273.5bn in 2012. The growth was driven by a 19.6% CAGR
growth in demand deposits during the period.
7
December 2013
Sector Report
Under-penetration of banks offers scope for expansion
Despite strong growth in credit and deposits as well as the large number of banks, the Kingdom’s banking sector remains
highly underpenetrated. In terms of loans, deposits, and assets as a share of GDP (36.6%, 46.2%, and 63.6%, respectively), KSA
ranked amongst the lowest across the GCC region during 2012. The GCC region averages 61.6% for loans-to-GDP, 74.7% for
deposits-to-GDP, and 126.1% for assets-to-GDP. Thus, the Kingdom’s banking sector still offers vast scope for expansion.
Figure 19: Loans to GDP - 2012
Figure 20: Deposits to GDP - 2012
Bahrain
Bahrain
83%
UAE
76%
Kuwait
56%
Oman
49%
Saudi
37%
0%
50%
89%
UAE
69%
Qatar
127%
Kuwait
69%
Qatar
69%
Oman
48%
Saudi
46%
0%
100%
50%
100%
Figure 21: Assets to GDP - 2012
Figure 22: Loans to Deposits - 2012
Bahrain
265%
136%
UAE
Qatar
8
81%
76%
Bahrain
100%
200%
300%
94%
Saudi
64%
0%
101%
Kuwait
71%
Saudi
111%
UAE
98%
Oman
Qatar
Oman
122%
Kuwait
150%
54%
20%
45%
70%
95%
120%
December 2013
Sector Report
Spreads unlikely to improve in the near term
Interest rates in KSA typically mirror monetary rates in the US as the Saudi riyal is pegged to the US dollar. Following the
credit crisis and the consequent economic slowdown and high unemployment levels prompted the US Federal Reserve to
continue loosening the monetary policy, and maintain a low interest rate environment in order to boost growth. Interest
rates in the US since then have remained at a record low level of around 0%. The level of unemployment in the US has
decreased significantly from its credit crisis peak of ~10% to 7.4% currently, while GDP growth improved from -3.1% in 2009
to 2.2% in 2012 and as per Moody’s it is expected to reach 3% in 2014. Due to this gradual improvement in the economy,
the central bank is likely to start winding down its current bond buying program (USD 85bn per month) from late 2014. The
Fed has indicated that it would continue with the accommodative monetary policy at least until the jobless rate falls in the
range of 6–6.6%. Hence, in all likelihood, the interest rate cycle in the US could start moving up 2015 onwards.
This would influence interest rates in Saudi Arabia as well. The Saudi central bank has kept its repo rate and reverse repo
rate low at 2.0% and 0.25%, respectively, since 2009. Accordingly, we expect rates in Saudi Arabia to start rising only after
2015.
The net interest margins (NIMs) of banks in KSA declined 69bps from 3.8% in 2008 to 3.1% in 2012, with the yield on loans
falling at a faster pace than cost of funds. Due to the high competition in the industry and ample liquidity in the system,
the yield on loans declined from 6.0% in 2008 to 3.6% in 2012. The cost of funds for Saudi banks decreased from 2.3% in
2008 to 0.5% in 2012 with the rise in the proportion of low cost demand deposits. While the low cost demand deposits in
the industry increased from 41.3% in 2008 to 60.5% in 2012, the overall customer deposits generally lagged behind the
expansion in loans in 2011 and 2012. This has been one of the key factors pushing up the cost of funds in 2012 even though
the reverse repo rate remains at low levels. We believe increasing competition in the industry would continue to pressurize
margins in the near term. Accordingly, we expect yields on earning assets to continue declining through 2014.
Figure 23: Spreads to stabilize to 3.5% in 2014 before inching upwards
8.0%
6.9 %
7.0%
6.0 %
6.0%
4.0%
3.0%
2.0%
4.5 %
4.5 %
5.0%
3.9 %
3.7 %
3.6 %
3.6 %
3.5 %
3.4 %
3.3 %
3.1 %
3.1 %
3.0 %
3.1 %
5.0 %
3.8 %
4.0 %
3.7 %
2.9 %
2.3 %
3.5 %
1.0 %
1.0%
0.5 %
0.4 %
0.5 %
0.5 %
0.5 %
0.7 %
2010
2011
2012
2013E
2014E
2015E
3.1 %
1.4 %
3.2 %
1.8 %
0.0%
2007
2008
2009
Spread (%)
Yield (%)
2016E
2017E
Cost of Funds (%)(RHS)
We expect NIMs to start rising from 2015, driven by the anticipated increase in interest rates and improvement in the
domestic as well as global economy. Furthermore, banks in the Kingdom are gradually increasing their focus on retail
lending—the share of retail loan book grew from 21.1% in 2008 to 30.5% in 2012. Hence, the shift in banks’ loan mix from
low-yield corporate assets to high-yield retail assets is expected to mitigate the downtrend in margins. Considering the
scenario, we expect the yield on earning assets to rise 125bps during 2015E–17E to 5.03%. On the other hand, we expect
growth in cost of funds to trail the growth in yields and (consequently) NIMs to expand 13bps from the forecasted low of
3.04% in 2014E to 3.20% in 2017E.
9
December 2013
Sector Report
Income mix improving with steady rise in non-interest income
Rising pressure on NIMs over the past few years has forced banks in the Kingdom to diversify their income mix by focusing
on non-interest income. Therefore, Saudi banks were able to increase the share of non-interest income to total income from
30.8% in 2007 to 34.1% by 2012. Non-interest income of banks typically comprises fee income, trading income, exchange
income, and others. Fee income, on an average, is the largest component; it represented about 69.2% of the total noninterest income in 2012.
Figure 24: Non-interest income composition and growth
SAR Bn
48
CAGR - 7.9%
30.0
CAGR - 12.6%
40
20.0
32
10.0
24
0.0
16
-10.0
8
-20.0
0
2007
2008
2009
2010
Other non special commission income
Trading Income
2011
2012
2013E
Exchange Income
Fees from Services, net
2014E
2015E
2016E
2017E
-30.0
Total Non Int Income-% YoY (RHS)
Fee-based income driving non-interest income push
Fee income growth is expected to remain strong as banks look forward to improve their funding profiles and drive banking
income from additional services provided to existing clients.
•
Broking: The boom in the Saudi economy is fuelling a surge in the stock market. and the TASI index returned 21 0%
gains for YTD (until December 3, 2013) and is at the highest level since September 2008. With new listings and higher
investor interest, the market is also deepening. Market turnover between 2010 and 2012 increased 2.6x. Since banks
are at the center stage of the country’s broking industry, they stand to benefit the most as broking income rises on
increasing volumes.
Figure 25: TASI market performance
Figure 26: TASI market performance
8,500
2,500
8,000
9.7% CAGR
1،932
2,000
7,500
1,500
7,000
1،082
6,500
1,000
748
6,000
500
5,500
5,000
0
Oct-10
July-11
Apr-12
Jan-13
Oct-13
Source: Bloomberg
10
2010
2011
2012
Source: Bloomberg
December 2013
Sector Report
•
Banks dominate asset management space: KSA’s asset management industry is the largest in GCC and is
booming, driven by a large and growing capital market and well-established fund regulations. According to Zawya,
the largest number of funds is domiciled in the country (228 funds with USD 22.8bn AUM). The asset management
industry is set to grow due to increasing sophistication of the Saudi capital market, rising investor participation, and
predominance of Saudi Arabia in the GCC fund management sector.
Saudi banks benefit from this trend as they dominate the KSA fund management space with an 83% market share,
according to data available from Zawya.
Figure 27: Asset under management for top 10 firms with funds domiciled in KSA
9,000
8,000
8.2
7,000
US$ bn
6,000
5.2
5,000
4.0
4,000
3.8
3,000
2.1
2,000
1.0
1,000
0
NCB
Capital
Samba
Capital
Riyad
Capital
Al Rajhi
Capital
HSBC KSA
Saudi
Fransi Cap.
0.8
ANB Invest
0.5
0.4
0.3
Saudi
Hollandi
Cap.
Aljazira
Capital
Al Bilad
Invest. Co.
Source: Zawya
•
Investment banking – a new frontier for Saudi banks: Investment banking in Saudi Arabia is on a strong growth
path driven by large-scale government investments, growth in non-oil sector and rising demand for project finance,
mergers and acquisitions, bond and sukuk issuance. While growing acceptance of Islamic finance instruments, longer
tenure financing, and low funding costs are driving sukuk issuance, restructuring of family-owned businesses and
cross-border business opportunities are leading to growth in the M&A market.
M&A prospects in the Middle East are driving up investment banking fee income. According to Thomson Reuters, fees
from Middle Eastern transactions reached USD 535.9mn during the first nine months of 2013, up 22% YoY. While foreign
banks play a key role in deal making, regional and Saudi banks are increasingly looking to gain a greater share of the
growing pie.
•
Growing trade finance amid rising international trade: As the country’s international trade rises, private
sectors’ trade financing via the banking sector has received a shot in the arm. According to SAMA, the value of letter of
credit settled and bills received is in an upward trend, aiding banks’ trade finance income growth.
11
December 2013
Sector Report
Figure 28: Private sector imports financed through commercial banks
300
260
16.2%
SAR bn
220
CAGR
180
254
225
189
140
162
100
2009
2010
2011
2012
Source: SAMA
AlBilad exhibited the highest diversification of income stream. Contribution of non-interest income as a percentage of the
bank’s banking income stood at 51.7% in 2012. On the other hand, contribution of non-interest income to Alinma Bank’s
banking income was the lowest at 16.9% in 2012. NCB and Al Rajhi bank accounted for 20.8% and 20.2%, respectively, of
total KSA banks’ non-interest income in 2012. NCB’s non-interest income is mainly concentrated towards fee income, which
accounted for 65.1% of non-interest income. NCB’s fee income increased at a CAGR of 8.6% during 2007–12 to SAR 3.0bn in
2012. Al Rajhi’s fee income constituted 68.9% of total non-interest income and increased at a CAGR of 25.8% to SAR 3.1bn
during 2007–12. These banks’ expanding credit portfolio could have largely contributed to growth in fee income.
Figure 29: KSA banks’ share of non-interest income in banking income (2012)
60.0%
51.7 %
50.0%
40.6%
40.0%
38.2 %
36.8 %
36.2 %
35.4 %
34.0 %
33.9 %
32.1%
31.5 %
30.0%
27.9 %
20.0%
16.9 %
Alinma
SIBC
Al Rajhi
NCB
Saudi
Fransi
RIBL
SAMBA
SABB
Saudi
Hollandi
BJAZ
AL Bilad
0.0%
Arab
National
10.0%
12
December 2013
Sector Report
Asset-quality on an improving trend
The Saudi banking sector’s asset quality consistently improved as evidenced by the NPL ratio improving to 1.9% in 2012
from the high of 3.4% in 2009 (due to global financial distress and the default by Saad Group and Ahmad Hamad Algosaibi
& Bros). Improvement in NPL ratio is likely to have been driven by the banking sector’s focus on cleaning bad loans and
growth in the Kingdom’s economy. Moreover, increased momentum in project finance and mortgage lending as well as
decline in past due loans were positive triggers.
The Kingdom’s expansionary fiscal policy due to high oil prices and the resultant activity in the private sector could also
have driven the quality of the loan book. Besides, close monitoring by Saudi Arabian Monetary Agency (SAMA) and
improving risk management practices reduced concerns of poor asset quality. Saudi Arabia’s NPL ratio is significantly below
the GCC average of 5.0%, underscoring the Kingdom’s superior credit quality.
•
NPL ratio: The NPL ratio is expected to hover at around 1.8% during 2013E–17E on expected continuance of largescale government spending, which could encourage disbursement of healthier loans. As a means of conservatism,
Saudi banks are increasing focus on retail lending; rising disposable income augurs well for the quality of the retail loan
book. Saudi Arabia also appears to be comparatively unaffected by the geopolitical risks arising from the Arab Spring.
Besides, banks are expected to remain prudent in lending to avert the situation witnessed in 2009. Although mortgage
lending in Kingdom is still in its infancy, the new law may lower default risks and improve asset quality.
Figure 30: NPL and coverage
Figure 31: NPL of Saudi banks - 2012
150%
1.95%
145 %
5.0%
145%
4.0%
145%
3.9%
1.90%
140%
138%
3.3%
2.9%
3.0%
139 %
136 %
135%
2.2%
1.85%
1.80%
130%
2.0%
2.0%
134 %
1.7%
1.6%
1.6% 1.5%
1.3%
1.0%
1.0%
NPL ratio (%) - RHS
BSF
SIBC
ANB
0.0%
SHB
1.75%
SABB
2017E
RIBL
2016E
Alinma
Provision cover (%)
2015E
Al Rajhi
2014E
SAMBA
2013E
NCB
2012
BJAZ
125%
AL Bilad
0.3%
Alinma Bank had the best asset quality in the Saudi banking space with an NPL ratio of 0.3% in 2012 from 0.04% in 2011;
the bank’s superior asset quality is ascribed to the absence of legacy problem assets. Alinma was followed by Banque Saudi
Fransi, which reported an NPL ratio of 1.0% in 2012. The low figure was due to a decline in the number of loans that were
‘past due and not impaired’ for over 180 days in 2012. Moreover, the bank reported a decline in NPL during 2012. On the
other hand, AlBilad’s NPL ratio of 3.9% was the worst in 2012 which however has fallen from 5.5% in 2009. The decline is due
to the improved quality of the corporate loan book.
13
December 2013
Sector Report
•
Capitalization: KSA banks capitalization is strong led by conservative norms and well-drafted regulations of KSA’s
central bank. The banks average CAR of 18.7% is well above the CAR requirements of 8% under Basel II and 10.5%
under Basel III. While Alinma had the industry’s highest CAR at 32.8%, ANB and Bank Aljazira has the lowest CAR of at
14.8% and 15.7% respectively in 2012.
Figure 32: KSA banks’ CAR remains strong - 2012
35.0%
32.8 %
30.0%
25.0%
20.0 %
20.0%
19.8 %
18.5 %
17.7%
17.6%
17.6 %
17.5%
16.5%
15.7%
15.7%
15.0%
14.8 %
10.0%
Arab
National
BJAZ
SABB
Saudi
Fransi
NCB
Saudi
Hollandi
SIBC
RIBL
AL Bilad
Al Rajhi
SAMBA
0.0%
Alinma
5.0%
14
December 2013
Sector Report
Profitability of KSA banks to remain strong
Saudi banks, in all probability, are likely to post record aggregate net profits in 2013. Above all, this is likely to be facilitated
by a strong surge in banking income, drop in provisions following steady improvement in asset quality, and steadily
declining operating expenses.
•
Operating expenses on a downtrend: Saudi banks’ operating expenses are largely stabilizing since the large
spikes witnessed during 2007 and 2008. While we believe operating expenses would increase, primarily due to increase
in salary expenses and competition, the spurt is likely to generally lag behind the growth in banking income. Therefore,
we see the average cost-to-income ratio of Saudi banks declining to 34.4% in 2013E from 34.6% in 2012 and 36.0% in
2011. Furthermore, the cost-to-income ratio would gradually settle at around 33.0% in 2017E due to the strong pick up
in banking income.
Al Rajhi Bank had the best cost-to-income ratio of 27.0% in 2012, which could be ascribed to its low-cost funding base.
Bank Al-Jazira had the worst cost-to-income ratio of 58.0% in 2012, which could be due to the margin pressure in the core
banking business.
Figure 33: Cost-to-income ratio to decline (%)
Figure 34: Saudi banks’ cost/income - 2012
37.0%
70%
36%
58%
60%
36.0%
51% 51%
50%
35.0%
35%
34 %
40%
35%
34 %
34 %
34.0%
35 %
34%
38% 40%
37% 37%
31% 31% 31%
34 %
30%
33 %
27%
33 %
20%
33.0%
10%
32.0%
•
BJAZ
AL Bilad
ANB
SHB
NCB
SIBC
RIBL
BSF
SABB
Alinma
2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
SAMBA
31.0%
Al Rajhi
0%
Provision coverage ratio to peak in 2013: With improvement in the industry’s asset quality, the provisioning
ratio of Saudi banks is likely to peak at an aggregate of 145.5% in 2013E as against the past three years’ average
of 131.3%. Furthermore, with improving underlying macroeconomic fundamentals as well as stable business and
consumer sentiments, slippages in asset quality of new credit disbursals are likely to decline, resulting in lower
provisioning requirement. Hence, we expect provisioning cover to gradually decline to 134.0% by 2017E.
•
Net profits likely to increase at a CAGR of 11.5% over 2012–17E: Given the favorable movement in
underlying fundamentals, Saudi banks are likely to post record profits of SAR 38.3bn in 2013E, surpassing the peak
recorded in 2006. Overall, we expect banks’ aggregate net income to increase at a CAGR of 11.5% during 2012–17E.
15
December 2013
Sector Report
Figure 35: Net income growth
Figure 36: RoE to remain stable
20.0%
70
60
17%
60
53
16.0%
14%
47
50
15%
15 %
15%
15%
15%
16 %
15%
14%
42
38
SAR bn
40
12.0%
35
32
30
26
26
27
8.0%
20
4.0%
10
0
0.0%
2008
2009
2010
2011
2012
2013E 2014E 2015E 2016E 2017E
2008 2009
2010 2011 2012 2013E 2014E 2015E 2016E 2017E
•
Increasing dividend payments and higher yields: Healthy profitability of Saudi banks has led to strong
dividend payments. Amongst the listed stocks, Al Rajhi paid the highest average dividend over 2010-12 (SAR 4.7bn)
followed by SAR 2.0bn and SAR1.5bn paid by Riyad Bank and SAMBA, respectively. Aggregate dividend payment of
Saudi banks increased at a CAGR of 9.0% over 2010-12 to SAR 11.7bn. Furthermore, average dividend yields have
increased from 2.0% in 2010 to 3.6% in 2012. We expect dividend payments to remain strong over our forecast period.
Figure 37: Healthy dividend payments
Figure 38: Improving dividend yields
6,000
6.0%
5,000
5.0%
5.4%
4.4%
4,000
2.7%
2.3%
4.0%
3,000
3.0%
2,000
2.0%
1,000
1.0%
3.4%
2.3%
2.3%
BSF
SABB
3.3%
1.0%
0
RIBL
BJAZ
SIBC
SHB
2010
BSF
2011
SABB
ANB
SAMBA Al Rajhi
2012
16
0.0%
RIBL
BJAZ
SIBC
2010
SHB
2011
2012
ANB SAMBA Al Rajhi
Average (2010-12)
December 2013
Sector Report
Figure 39: Financial performance of industry
(Amounts in SAR bn, unless specified)
2011
2012
2013E
2014E
2015E
2016E
2017E
3,082
3,231
KSA GDP (nominal) – SAR bn
2,511
2,727
2,796
2,856
2,959
Growth (%)
27.1%
8.6%
2.5%
2.1%
3.6%
Net loans/ GDP
34.0%
36.9%
40.9%
44.8%
48.8%
53.0%
57.4%
855
1,008
1,144
1,281
1,443
1,634
1,855
11.6%
17.9%
13.6%
11.9%
12.7%
13.2%
13.5%
Cash and balances with SAMA
170
214
232
253
292
348
409
Due from banks
74
79
83
84
85
88
95
Loans and advances, net
Growth (%)
4.2%
4.8%
Banks* – Balance Sheet
Investments, net
354
364
375
382
402
423
446
Loans and advances, net
855
1,008
1,144
1,281
1,443
1,634
1,855
Fixed assets, net
15
16
17
18
18
19
21
Other assets, net
37
35
37
39
40
42
44
Total assets
1,505
1,715
1,888
2,056
2,280
2,555
2,870
Due to banks
81
78
80
80
80
85
1,147
1,324
1,468
1,607
1,799
42
48
49
50
51
Customers’ deposits
Other Liabilities
2,033
52
94
2,298
54
Term Funding
14
21
22
23
24
26
27
Shareholders’ equity
221
244
269
295
325
359
398
1,505
1,715
1,888
2,056
2,280
Total equity & liabilities
2,555
2,870
Banks* – P&L
Net interest income
40
43
47
51
56
64
73
Non-interest income
19
22
25
28
32
36
40
Total banking income
59
65
72
79
89
100
113
Total operating expenses
21
23
25
27
30
33
37
Pre-provision profits
38
43
47
52
57
64
71
Provisions
6
8
9
10
12
14
15
Net income
32
35
38
42
47
53
60
Banks* – Key Ratios
Loans & Advances, net/ Deposits
74.5%
76.1%
78.0%
79.7%
80.2%
80.4%
80.7%
Loans & Advances, net/ Funds
68.8%
70.8%
72.9%
74.9%
75.8%
76.2%
76.7%
Loans & Advances, net/ Assets
56.8%
58.7%
60.6%
62.3%
63.3%
63.9%
64.6%
Investments/Assets
23.5%
21.2%
19.8%
18.6%
17.6%
16.6%
15.6%
Asset quality ratios (%)
Asset quality ratios (%)
NPL ratio
Provisions coverage ratio
2.3%
1.9%
1.8%
1.9%
1.8%
1.8%
1.8%
133.2%
145.1%
145.5%
138.4%
139.2%
136.4%
134.0%
Profitability ratios (%)
Yield on Earning Assets
3.7%
3.6%
3.6%
3.5%
3.8%
4.5%
5.0%
Cost of Funds
0.4%
0.5%
0.5%
0.5%
0.7%
1.4%
1.8%
Total Spreads
3.3%
3.1%
3.1%
3.0%
3.1%
3.1%
3.2%
Cost-to-income
36.0%
34.6%
34.4%
34.0%
33.6%
33.3%
33.0%
Source: Company filings, IMF, AlJazira Capital
17
December 2013
Sector Report
Basel lll: How prepared are Saudi Banks?
Basel III norms were introduced in 2010 with the goal of improving the banking sector’s ability to absorb shocks arising
from financial and economic stress. The Basel III framework builds upon and enhances the regulatory framework set out
under Basel II and 2.5. The framework consists of three pillars:
•
Pillar 1 outlines the minimum capital requirements based on risk-weighted assets (RWA);
•
Pillar 2 sets out the supervisory review process including establishment of regulating tools and frameworks for dealing with
peripheral risks that faced by banks; and
•
Pillar 3 corresponds to market discipline involving increasing the mandatory disclosures to be provided by banks to increase
the transparency of their operations.
Basel III also introduced two liquidity ratios: liquidity coverage ratio and net stable funding ratio. Implementation of the
norms began in January 2013 and is expected to be completed in phases by 2019.
Figure 40: Basel III framework
B A S E L I I I F R A M E W
O R K
C a p it a l
L iq u id it y
P illa r 1
P illa r 2
M in im u m C a p it a l
R e q u ir e m e n t s
R is k m a n a g e m e n t
a n d s u p e r v is io n
P illa r 3
L iq u id it y c o v e r a g e
r a t io
N e t s t a b le f u n d in g
r a t io
§ L iq u id it y
C o v e r a g e R a t io
100%
§ N e t S t a b le
F u n d in g R a t io
100%
M a r k e t d is c ip lin e
R is k C o v e r a g e
C o n t a in in g le v e r a g e
§M i n i m u m
c o m m o n
4.5% o f
§ T ie r I c a
o f R W A
§In tr o d u c
a d d it io n a
b u f f e r s
§L e v e r a g
r e
e q
R W
p it
q t. f o r
u it y A
a l a t 6%
e
e d
l c a p it a l
r a t io
in g
o r k
w it
r a l
a c e
h
§ In c r
d is c
b a n
t o in
tr a n
b a n
t o o ls a n d
s f o r
r is k s t h a t
e a
lo s
k s
c r
s p
k s
s in
u r
m
e a
a r
g
e s
u s
s e
e n
th e
th a t
t p r o v id e
th e
c y o f
>
3%
T o b e
18
§ R e g u la t
f r a m e w
d e a lin g
p e r ip h e
b a n k s f
im
p le m
e n te d
in
p h a s e s
b y
2018
M in im u m
s t a n d a r d b y 2015
M in im u m
s ta n d a r d b y
2018
December 2013
Sector Report
Saudi Banks are well prepared in terms of capital requirements…
The conservative norms of KSA’s central bank has enabled the central bank to publish regulation for implementing Basel III
much before other developed economies, such as the UK, the US, France, and Germany. Under the new norms, banks would
be required to maintain their Tier 1 capital adequacy ratio at a minimum of 4.5% compared with 4.0% under Basel II norms.
Saudi banks appear to have efficiently weathered the financial turmoil as evident from their healthy capital ratios due to
effective regulations and management. Saudi banks’ Tier 1 capital is well above the guidelines. At the end of 2012, the
average Tier 1 ratio of KSA banks was 16.6% with SABB having the lowest ratio of 12.0% and Alinma having the highest ratio
of 32.4%. The total CAR of KSA banks stood at an average of 18.7% with ANB and Bank Aljazira at the lowest level at 14.8%
and 15.7%, respectively. We, therefore, believe that with SAMA’s conservative policy and well-drafted regulations, banks in
the Kingdom would enable smooth implementation of Basel III norms.
Given the nature of the Saudi banking system (higher long-term loans and short-term deposits), the new norms could limit
finance to long-term projects as banks need to hold more capital and higher liquidity.
Figure41: Phase-in-arrangement of capital requirements
12%
10%
8.00%
8.00%
8.00%
8.00%
4.0%
3.5%
2.5%
1.5%
4%
10.50%
1.3%
1.9%
2.5%
0.6%
2.0%
2.0%
2.0%
2.0%
2.0%
1.5%
1.5%
1.5%
1.5%
1.5%
8%
6%
8.63%
9.88%
9.25%
1.0%
2.0%
2%
3.5%
4.0%
4.5%
4.5%
4.5%
4.5%
4.5%
2013
2014
2015
2016
2017
2018
From 2019
2.0%
0%
Until 2012
Capital conservation buffer
Tier 2 capital
Additional Tier 1 capital
Tier 1 capital
Min. capital reqt + conservation buffer
….but the business-mix may see some alteration
Stringent capital norms may trigger alteration in the business mix as banks are expected to set aside more capital to lend
to riskier businesses. Emphasis on prudent lending practices may apply pressure on banks to expand their return on assets,
especially in the prevailing soft interest environment.
To comply with Basel III norms, it would be essential to implement robust data management systems as banks would be
required to efficiently handle high volumes of operational data to assess risks. Besides, better coordination between the risk
management team and the finance department, active engagement of credit personnel, and staff training are vital.
19
December 2013
Sector Report
Islamic banking gaining higher traction
The global Islamic finance industry remained resilient during the global financial crisis and has maintained a healthy
growth trajectory. A recent report by Ernst & Young (E&Y) reveals that total assets under Islamic finance grew 19% annually
in the last five years to USD 1.55tn in 2012. According to E&Y, the sector’s assets are estimated to cross USD 2tn by 2015.
Sukuk issuance has gained prominence over the past few years. During 2012, global Sukuk issuance grew 64.7% YoY to
USD 135.2bn from USD 82.1bn in 2011. Demand for Sukuk instruments is expected to grow, outpacing global supply
and thereby providing opportunities for banks to establish and grow their Islamic fixed-income platforms. Furthermore,
growing awareness of Shariah-compliant banking is driving demand for Islamic banking products.
Figure 42: Global Sukuk Issuance
Figure 43: KSA ranks 2nd in Sukuk market
699
160
529
U SD bn
120
750
600
Bahrain
1 .7
Turkey
2 .3
5 .5
Qatar
428
450
Indonesia
80
231
257
135
300
176
40
82
52
38
0
2007
150
20
33
2008
2009
Size of Issues
6 .1
6 .5
UAE
1 1 .1
KSA
Malaysia
2010
2011
2012
0
Number of Issues - RHS
98.8
0.00
10.00
20.00
USD bn
Highly concentrated industry
The Islamic banking industry is highly concentrated geographically with the top four markets accounting for 84% of
industry assets. Furthermore, the E&Y report states that the top 20 Islamic banks constitute 55% of total Islamic banking
assets and are concentrated across seven countries, including GCC nations, Malaysia, and Turkey. The growth outlook for the
sector continues to be positive; the sector grew 50% faster than the overall banking sector in several core markets.
20
December 2013
Sector Report
Figure 44: Islamic banking penetration
Saudi
60%
Size of bubble represents the relative size of Islamic
banking assets in 2011
40%
total assets
Islamic banking share of
50%
Kuwait
Bahrain
30%
M alaysia
UA E
I ndones ia
20%
Q atar
J ordan
10%
Bangladesh
T urkey
E gypt
P akistan
0%
30%
80%
130%
180%
Banking asset penetration (% of GDP)
230%
Source: E&Y (Approximate figures)
In Saudi Arabia, the market share of Islamic banking assets is now over 50% of total assets. The Saudi banking sector
comprises 11 commercial banks, of which four are Islamic banks – namely Al Rajhi Bank, Bank AlBilad, Alinma Bank and Bank
AlJazira. The market share of Islamic banks stood at about 25.5% in loans and around 24.0% in deposits in 2012. The Islamic
banking sector outperformed conventional banks in terms of loan growth and deposit growth during 2007–12; while the
loan book of conventional banks increased at a CAGR of 9.8% that of Islamic banks grew at 16.3% during the period. During
2012, Al Rajhi, the largest Islamic bank, commanded the highest market share in terms of loans (17.1%) and NCB led the
market share of deposits (20.7%), while Al Rajhi followed with a market share of 16.7%.
Figure 45: Loan growth CAGR – 2007–12
Figure 46: Deposit growth CAGR – 2007–12
20.0%
25.0%
20.0%
15.0%
15.0%
10.0%
1 6 .3%
5.0%
0.0%
9 .8 %
Conventional
5.0%
Islamic
2 1 .3%
10.0%
0.0%
9 .8 %
Conventional
Islamic
While loan growth of Islamic banks has surpassed the growth in conventional banks’ assets, Islamic banks’ NPL growth is
significantly lower than that of conventional banks. During 2007-12, loans of Islamic banks increased at a CAGR of 16.3%
(9.8% for conventional banks) and their NPLs rose at a 9.7% CAGR (14.8% for conventional banks). Growth in NPLs for Islamic
banks was limited, primarily on account of Al Rajhi.
4.E&Y Report – December 2012
21
December 2013
Sector Report
Figure 47: Assets growth CAGR – 2007–12
Figure 48 NPLs growth CAGR – 2007–12
25.0%
20.0%
20.0%
15.0%
15.0%
10.0%
1 9 .8 %
10.0%
1 4 .8 %
9 .7%
5.0%
5.0%
8 .5 %
0.0%
Conventional
0.0%
Islamic
Conventional
Islamic
Islamic banks in KSA enjoy higher spreads and favorable net interest margins
Islamic banks in KSA enjoy higher spreads and favorable net interest margins compared with conventional peers; Islamic
banks’ NIMs stand at 4.1% against 2.9% for conventional banks. At 0.3%, the cost of funds for Islamic banks was lower than
conventional peers’ cost of 0.6% in 2012. This is primarily due to their low-funding cost structure, which can be ascribed
to a higher proportion of demand deposits in the deposit mix. During 2012, nearly 76.9% of Islamic banks’ deposits were
demand deposits compared with conventional banks average of around 55.3%; this proportion stood at about 77.2% and
41.3%, respectively, in 2009. Islamic banks’ yield on assets is also higher at 4.3% vis-à-vis conventional banks’ 3.4% in 2012.
Al Rajhi’s yield is the highest in the industry due to its firm foothold in retail banking.
Figure 49: Islamic banks enjoy higher NIMs due to higher yield and low-cost demand deposits
9.0%
3.5%
8.0%
3.0%
With increasing
proportion of demand
deposits for conventional
banks the cost of funds
has declined.
2.5%
7.0%
2.0%
6.0%
1.5%
5.0%
1.0%
4.0%
3.0%
0.5%
2006
2007
2008
2009
Conventional
2010
2011
Islamic
2012
0.0%
2006
2007
2008
2009
Conventional
2010
2011
Islamic
2012
Strong capital to supplement loan growth in Islamic banks despite high loan–deposit
ratio
In terms of CAR, Islamic banks (overall CAR of 18.5%) are better positioned than conventional banks (overall CAR of 15.2%),
well above 8.0% and 10.5% limit under Basel II and III norms respectively. The high CAR of Islamic banks is expected to aid
in loan growth. However, in terms of loan to deposit (LTD), Islamic banks have a higher ratio (80.9%) vis-à-vis conventional
banks (74.6%) in 2012, primarily due to Alinma’s LTD ratio of 115.4% in 2012. Established in 2006, the bank’s deposit growth
is much lower than the loan growth due to its smaller branch network. However, we expect Alinma’s LTD ratio to fall to
90.8% by 2017E.
22
December 2013
Sector Report
Figure 50: CAR - 2012 (%)
Figure 51: LTD ratio - 2012
8 2%
20.0%
8 0%
15.0%
78 %
10.0%
76 %
1 8 .5 %
1 5 .2 %
74 %
5.0%
72%
0.0%
8 1 %
Co nv e nt io nal
70%
Is lamic
75 %
Co nv e nt io nal
Is lamic
Share price performance
Historically, the trend in Tadawul All Share Bank Index closely matched that of TASI due to the former’s significant share in
the latter. Comparison of the price data during January 2010– December 2012 reveals that the Tadawul All Share Bank Index
under performed the benchmark index TASI with TASI gaining 11.1% while Tadawul All Share Bank Index declined 6.6%.
Further 2013 YTD (till December 3, 2013) data reveals; the sectoral index gained 19.7% compared with the 21.0% increase in
TASI.
In 2013, market movement has so far been supported by positive sentiments across global economies, stable oil prices
coupled with positive domestic news flows, and healthy corporate earnings. Additionally, the revision in Fitch Ratings for
the Kingdom to ‘Positive’ from ‘Stable’ and a series of measures taken by the Capital Market Authority to reduce volatility of
shares boosted investor confidence. Furthermore, with the issuance of final regulations on the mortgage law, the banking
index experienced significant gains, driving the overall performance of TASI.
Figure 52: Price performance of bank index v/s TASI
B a n k In d e x
14 0
T A S I
130
120
110
100
90
80
J a n - 10
J u l - 10
F e b - 11
A u g - 11
M a r - 12
S e p - 12
A p r - 13
N o v - 13
Source: Bloomberg (Rebased to 100 as on January 1, 2010)
Historically, Islamic banks have outperformed conventional banks. During 2013, AlBilad was the best performer gaining
69.7% YTD followed by Saudi Investment (up 46.4%).
23
December 2013
Sector Report
Figure 53: Price performance of Islamic banks v/s conventional banks
130
Is la m ic b a n k s h a v e h is to r ic a lly o u tp e r fo r m e d th e B a n k in g
in d e x a n d c o n v e n tio n a l b a n k s
115
100
8 5
70
J a n - 10
J u l - 10
F e b - 11
A u g - 11
M a r - 12
B a n k In d e x
S e p - 12
T A S I
A p r - 13
N o v - 13
I s la m ic
Source: Bloomberg (Rebased to 100 as on January 1, 2010)
Figure 54: Price performance of all banks (%)
6 5.0%
2 0 1 2
2 0 1 3 Y T D
4 5.0%
25.0%
T A S I
B a n k
In d e x
F ra n s i
A l R a jh i
A ra b
N a tio n a l
S A M B A
S A B B
R iy a d
S a u d i
H o lla n d i
S IB C
A lin m a
A lB ila d
- 15.0%
B J A Z
5.0%
Source: Bloomberg
The Saudi banking sector’s valuation vis-à-vis the market signals relatively more upside for the sector as compared to the
market as a whole. During 2007–10, the sector traded at an average premium of 0.5x to the market on a P/B basis. However
YTD 2013, the sector traded at an average P/B of 1.7x while index traded at 2.0x.
24
December 2013
Sector Report
Figure 55: Banking sector valuation (P/B) vis-à-vis the market
2.5
2.3
2.1
1.9
1.7
1.5
J a n - 10
S e p - 10
J u n - 11
M
a r - 12
T A S I
D e c - 12
S e p - 13
B a n k In d e x
Source: Bloomberg
Historically, banks enjoyed a higher relative return on equity, which was eroded due to the global financial crisis. However,
credit growth and profitability has improved in Saudi Arabia. The valuation difference, when seen in conjunction with rising
profitability of the banking sector vis-à-vis the market, could bolster the potential of valuation re-rating opportunity for the
banks. Consequently, banking stocks could outperform the market, going forward.
Figure 56: Return on Equity of Banks v/s the Market
16
14
12
10
8
J a n - 10
J u l - 10
F e b - 11
A u g - 11
M a r - 12
T A S I
S e p - 12
A p r - 13
N o v - 13
B a n k In d e x
Source: Bloomberg
25
December 2013
Sector Report
Valuations
Given the strong growth prospects of Saudi banks, they trade at a higher valuation multiple than that of their developed
market peers. The average P/B ratio (TTM) for the Kingdom’s banks at 1.8x is 39 9% higher than that of their US counterparts.
Furthermore, the regional banks command a richer premium vis-à-vis banks of other developing markets and trade 16 8%
higher than them.
Figure 57: Valuations
4 .0
U S av e r ag e
- 1 .3 x
G
CC av e r ag e
- 1 .6 x
K SA av e r ag e
- 1 .8 x
D e v e lo p ing
P/ B r at io
mr k t s
av e r ag e
- 1 .5 x
3.0
2.0
1.0
A H B M K E q u ity
S B IN IN E q u ity
V T B R R M E q u ity
998 H K E q u i t y
A X S B IN E q u ity
H D F C B IN E q u ity
398 8 H K E q u i t y
A B E q u ity
B S F R
IC IC IB C IN E q u ity
A B E q u ity
S A M B A
6 01398 C H E q u i t y
A B E q u ity
A B E q u ity
R IB L
A A A L
A R N B
A B E q u ity
A B E q u ity
S A B B
A B E q u ity
R J H I A B E q u ity
S IB C
A B E q u ity
A L B I A B E q u ity
B JA Z
A D C B U H E q u ity
A L IN M A A B E q u ity
K F IN K K E q u ity
N B K K K E q u ity
F G B U H E q u ity
N B A D U H E q u ity
C IT U S E q u ity
Q N B K Q D E q u ity
R F U S E q u ity
K E Y U S E q u ity
M T B U S E q u ity
S T I U S E q u ity
F IT B U S E q u ity
B B T U S E q u ity
U S B U S E q u ity
P N C U S E q u ity
0.0
Source: Bloomberg
3.5%
Industry average 1.7x
3.0%
RoA - 2013
Al Rajhi
2.5%
Samba
SABB
RIBL
Industry average 1.9x
2.0%
SIBC
BSF
1.5%
Alinma
AlBilad
SHB
BJAZ
1.0%
1.1
1.5
1.9
2.3
P/B 2013
2.7
3.1
Source: Bloomberg
Among Saudi banks, Al Rajhi trades at a high P/B multiple of 3 0x on FY13E earnings due to its solid returns profile. The bank
benefits from the robust Islamic finance franchise—it is one of the largest Islamic banks worldwide—and its strong retail
banking, which has been growing rapidly. Further, the bank also enjoys higher profitability; it has the highest ROA (FY13E)
in the industry.
26
December 2013
Sector Report
Banks
Mcap
SAR
(bn)
2012
Al Rajhi
111.8
-6.5%
Samba
44.3
-4.1%
SABB
39.8
-2.0%
RIBL
42.3
BDF
29.7
ANB
25.3
Alinma
21.8
SHB
14.8
9.1%
SIBC
14.6
12.1%
AlBilad
14.4
42.6%
BJAZ
10.8
54.0%
Stock perf (%)
2012
YTD
P/E
P/BV
Curr
ROE (%)
13E
Curr
13E
ROA (%)
Curr
13E
Curr
13E
14.6%
14.3
13.7
3.0
3.0
21.8
22.0
3.0
2.9
10.1%
10.1
9.6
1.3
1.3
13.6
13.9
2.1
2.2
33.1%
11.0
11.0
1.8
1.8
17.6
17.2
2.2
2.2
-1.3%
22.6%
11.3
11.4
1.3
1.3
11.7
11.6
2.0
1.9
-12.7%
11.6%
10.1
10.0
1.3
1.2
12.9
13.0
1.8
1.8
-4.0%
12.9%
10.5
10.1
1.3
1.3
13.1
13.7
1.8
1.8
37.4%
13.2%
23.2
22.2
1.3
1.2
5.5
5.7
1.7
1.7
37.6%
10.1
10.6
1.6
1.6
17.2
16.1
2.0
1.9
46.4%
12.1
12.3
1.5
1.5
12.7
11.8
1.9
1.9
69.7%
21.5
21.2
3.0
2.9
14.8
14.5
2.1
2.0
38.3%
18.1
18.1
2.0
1.9
11.4
11.4
1.2
1.1
Source: Bloomberg; valuations as on December 3, 2013
Investment risks
(a) Macro-level risks
These include risks such as slower recovery in the global and regional economy, excessive reliance on oil, and political
instability
Slower-than-expected global economic recovery
IMF expects global economic growth to improve marginally to 3.3% in 2013, while Saudi real GDP is expected to slow
down to 4.4%. We believe slower-than-expected global and domestic economic growth coupled with aggravation of the
Eurozone debt crisis could adversely impact the sector’s credit growth.
Lack of diversification – high dependency on oil
KSA is highly dependent on oil, which accounts for over 90% of the government’s revenues. We believe that any
unanticipated fall in oil prices could severely dent business and market sentiment, derailing the potential economic growth
Geo-political tensions
Political tension in the region could negatively impact investor sentiment and, in turn, the banking sector’s performance.
(b) Sector-specific risks
These risks are more relevant to the sector, but they are broadly linked to macro-level risks.
Delay in implementation or cancellation of government projects
Corporate loan growth is primarily dependent on government expenditure and business activities of corporations.
However, any slowdown in the business activities, postponement in capex plans of large corporations, or cancellation of
government projects could impact KSA banks’ loan growth.
Rising competition
Rising competition in the KSA banking space has already resulted in pressurizing margins for the current players, which
has led to a decline in the banks’ yields. Thus, growing competition from domestic or foreign banks may adversely impact
profitability of domestic banks.
27
December 2013
Sector Report
Unanticipated rise in NPLs
Saudi banks’ asset quality has improved significantly with NPLs declining from their high of 3.4% in 2009. With strong
loan growth and higher lending to SMEs, any slowdown in domestic and global economic activity could lead to an
unanticipated rise in NPLs, thereby impacting banks’ asset quality.
Interest rate pressures
We expect the pressure on interest rates to ease from 2014 onwards, with interest rates expected to rise from 2015.
However, a slowdown in global economic recovery could delay the turn of the interest rates cycle, impacting banks’
profitability..
Deterioration in stock market activity could affect fee-based income
Currently, banks are focusing on non-interest income to mitigate the pressure from lower interest rates. However, any
unforeseen deterioration in stock market activity could affect the Kingdom’s fee-based income adversely and increase
pressure on profitability.
28
Al Rajhi Bank
December 2013
Coverage Initiation | KSA | Company Reports
Al Rajhi Bank: Banking on strong retail foothold
• NIMs likely to come under pressure but remain healthy: High exposure to retail
loan helps Al Rajhi command premium yield, while the high share of demand
deposits keeps cost of funds low. As a result, the bank has the highest NIM in the
industry. However, due to an expected decline in the share of demand deposits, Al
Rajhi’s cost of funds would increase, thereby resulting in lower NIMs. Nevertheless,
the bank’s NIM is expected to remain healthy at an average of 3.8% and higher
than conventional and Islamic banks’ average of 3.1% over 2013E–17E.
Neutral
Recommendation
12-month price target;
SAR 73.7
Current Price:
SAR 74.5
Upside / (downside):
-1.1%
• Strong retail network to support credit growth: Al Rajhi Bank, due to its large
retail network and international presence, has a wide consumer lending coverage. Price Chart
The bank’s enhanced retail reach, backed by solid growth in deposits, is expected
to drive retail performing loan growth by 23.2% over 2012–17E, thereby resulting
in an 18.4% rise in the gross loan book during the same period. Mortgage law
would further boost growth in the retail loan portfolio.
105
90
75
• Valuations: We arrived at the target price using the residual income methodology
that captures the value created for shareholders after considering the book costs
of the bank. Given the bank’s expansive retail foothold, dominant market position,
strong fundamentals, and healthy growth potential the stock has always traded
at a high valuation. At the current price we find the stock adequately valued and
initiate our coverage on Al Rajhi with a “neutral” stance based on our 12-month
target price of SAR 73.7 per share.
6 0
Key information
Reuters code:
Bloomberg code:
Country:
Sector:
Primary Listing:
M-Cap:
52 Weeks H/L (SAR):
1120.SE
RJHI AB
Saudi Arabia
Banking
TASI
SAR 111.8bn
81.3/64. 0
Company Snapshot
SAR Millions
Net Income
YoY Growth (%)
EPS (SAR)
PB (x)
PE (x)
Dividend Yield (%)
ROE (%)
ROA (%)
NPL Ratio (%)
NPL Cov. Ratio (%)
29
2011
2012
2013 E
2014 E
2015 E
7,378.3
9.0%
4.9
3.4
13.7
4.8%
25.9%
3.6%
1.7%
151.8%
7,884.7
6.9%
5.3
3.1
12.9
4.8%
25.3%
3.2%
2.0%
136.9%
8,286.9
5.1%
5.5
3.1
13.6
2.9%
23.9%
2.9%
1.9%
159.8%
9,570.7
15.5%
6.4
2.7
11.8
3.5%
24.5%
2.9%
1.7%
173.3%
10,623.4
11.0%
7.1
2.4
10.6
4.0%
24.2%
2.8%
1.8%
170.9%
2016 E
12,037.3
13.3%
8.0
2.2
9.3
4.6%
24.4%
2.7%
2.0%
160.8%
2017 E
14,007.8
16.4%
9.3
1.9
8.0
5.4%
25.2%
2.6%
2.2%
139.7%
N o v - 13
a r - 13
M
J u l - 12
N o v - 11
a r - 11
M
A u g - 10
D e c - 09
A u g - 08
30
A p r - 09
4 5
J a n - 08
• Strong asset quality to boost profitability: The bank’s asset quality is expected
to remain strong, with NPLs averaging 1.9% over 2013E–17E. Thus, with a low costto-income ratio, healthy asset quality, and adequate provisioning, net margin is
expected to remain at 56.1% and RoE is likely to remain steady at 25.2% in 2017E.
Al Rajhi Bank
December 2013
Valuation
We arrived at Al Rajhi Bank’s 12-month price target using residual income (RI) methodology. This yielded a fair value of SAR 73.7
per share, 1 1% below the closing price of SAR 74 5 as on December 3, 2013. The Company’s RI valuation is presented in the
figure below.
Our RI valuation is based on a cost of equity of 12.9%, terminal return on average equity (RoaE) of 20% and terminal growth rate
of 3.0%. The derived cost of equity is based on beta (5 year monthly raw beta) of 0.99, risk-free rate of 2.7% and risk premium of
10.4%. We have assumed that the bank’s long term RoaE will taper down to 20% from average 22.5% over 2013-22E.
Residual income Valuation
Residual income (SAR mn)
Beginning book value
Net income (excl .Zakat)
Dividends & Zakat
Ending book value
Cost of equity
Residual income
Beginning book value invested (a)
PV of Residual Income (b)
PV Terminal Residual Income (c)
Total equity value (a + b + c)
Number of shares o/s
Fair value per share
Current price
Upside/(downside)
2013
36,469
8,287
(1,949)
42,806
4,714
3,573
2014
42,806
9,571
(2,648)
49,729
5,533
4,038
2015
49,729
10,623
(2,865)
57,488
6,428
4,196
2016
57,488
12,037
(3,655)
65,870
7,431
4,607
2017
65,870
14,008
(4,538)
75,340
8,514
5,494
2018
2019
2020
2021
2022
75,340 86,910 100,332 115,901 133,961
16,529 19,174 22,242 25,800 29,670
(4,959) (5,752) (6,673) (7,740) (8,901)
86,910 100,332 115,901 133,961 154,730
9,738
11,233 12,968 14,981 17,315
6,791
7,940
9,273
10,820 12,355
36,469
36,387
37,682
110,537
1,500
73.69
74.50
-1.09%
Sensitivity of residual income methodology value to key assumptions
Along with the terminal RoaE, cost of equity has a significant impact on the RI fair value. Sensitivity analysis indicates that a
change of +/- 0.5% in cost of equity and +/- 1.0% in terminal RoE yields a fair value of SAR57 1-95.6 per share.
Price-to-book
value
Sensitivity of residual income methodology analysis
Terminal value
Under the relative valuation methodology, we valued Al Rajhi using the price/book value (P/BV) multiple. We believe the bank’s
dominant position in KSA’s banking industry, its extensive retail reach, robust
quality, stable dividend payouts, and strong
Cost asset
of Equity
growth outlook gives it an advantage over its competitors. Thus, we assigned a multiple of 3.5x to Al Rajhi’s 2014E book value
12.4%
12.9%of 9.6% from 13.4%
and obtained a fair equity value of SAR11.9%
131.5bn or SAR 87.7
per share, an upside
its closing of SAR 80 13.9%
as on August
18.0%
78.4
72.2
66.6
61.6
57.1
21, 2013.
30
19.0%
20.0%
21.0%
22.0%
82.7
87.0
91.3
95.6
76.1
80.0
83.8
87.7
70.1
73.7
77.2
80.8
64.9
68.1
71.3
74.6
60.1
63.1
66.1
69.0
Al Rajhi Bank
December 2013
Key Investment Arguments
Banking income expansion driven by commission and non-commission income
Al Rajhi’s banking income increased at a CAGR of 8.4% over 2007–12, primarily due to robust growth in non-commission income.
Non-commission income, which accounted for about 22.8% of banking income during 2007–12, expanded at a CAGR of 22.9%;
however, this was offset by subdued growth in net special commission income (CAGR of 4.2% over 2007–12). The low growth in
net special commission income, despite a 10.4% CAGR in loans, is largely ascribed to lower NIMs.
Over 2013E–17E, a strong growth in Al Rajhi’s net special commission income and non-commission income is expected to result
in a 12.3% rise in the bank’s banking income. An expected 18.3% increase in the bank’s net loans and marginally lower but stable
NIMs at 3.8% would help net special commission income to increase at a CAGR of 13.7%. Moreover, healthy credit growth would
result in a 10.7% rise in fees and commission income, thereby supporting a 9.0% growth in non-commission income.
Figure 60: Strong growth in banking income
30
C A G R – 8 .4 %
25
C A G R – 12.3%
S A R b n
20
15
10
5
0
4
2
2
3
3
4
8
8
9
9
9
10
10
2007
2008
2009
2010
2011
2012
2013E
2
Net ﬁnancing & investment income
5
5
6
12
13
16
2014 E
2015E
2016 E
Non-commission income
7
18
2017E
Source: Company, AlJazira Capital
Highest NIM among conventional and Islamic banks
The higher contribution of retail loans in Al Rajhi’s loan book and the bank’s low cost of funds due to a significant share of
demand deposits in customers’ deposits helped the bank gain higher-than-industry average NIMs. The bank earned 5.6% NIMs
over 2007–12 as against the 3.6% average of conventional and Islamic banks. As these trends are likely to sustain, we expect the
bank’s NIMs to average 3.8% over 2013E–17E
There is increased competition and ample liquidity in the system, which is putting pressure on interest rates; however, continued
high growth in retail performing loans and its rising share in the bank’s loan portfolio is expected to provide support to NIMs.
Furthermore, higher share of demand deposits in the total deposits is likely to keep the cost of funds low at an average of 0.2%
over 2013E–17E. Over 2007-12 89.6% of the bank’s customers’ deposits comprised demand deposits and its contribution is likely
to remain high though with slight upward pressure as the contribution share declines gradually.
31
Al Rajhi Bank
December 2013
Figure 61: NIMs higher than industry (conventional + Islamic)
8 .0%
7.2 %
7.0%
6 .0%
6 .1 %
5.8 %
5.7 %
5.0%
4 .7 %
4 .2 %
4 .1 %
3.8 %
4 .0%
3.6 %
3.5 %
3.3 %
2.0%
2007
2008
2009
2010
2011
2012
Indu
Al Rajhi Bank
3.1 %
3.1%
3.0%
2013E
2014 E
3.2 %
3.1 %
3.1%
3.0 %
4 .0 %
4 .0 %
4 .1 %
3.6 %
3.7 %
2015E
2016 E
2017E
s t r y
Industry’s lowest cost of funds to support profitability
In addition to strong banking income and low cost of funds, the bank has low operating expenses due to operating efficiencies
led by its established presence, extensive distribution network, and customer loyalty. We expect the bank’s cost-to-income
ratio to range from 27.3–28.1% over 2013E–17E. Over 2007–12, the bank’s cost-to-income ratio averaged 26.5% compared
with conventional and Islamic banks’ average of 34.1%.
We expect Al Rajhi’s net margin to average 56.8% over 2013E–17E, while RoE is expected to remain at an average of 24.4%
amid low cost-to-income ratio. It is to be noted that Al Rajhi earned higher profit margins of 60.5% and RoE of 27.1% over
2007–12 as against conventional and Islamic banks’ margins of 51.8% and RoE of 16.4%.
Figure 62: Improving cost-to-income ratio
Figure 63: Strong profitability
28.5%
75.0%
27.5%
27%
26%
26.0%
70.0%
28%
27%
27%
26%
6 5.0%
26 .0%
23.0%
2008
2009
2010
2011
2012
2013E 2014E 2015E 2016E 2017E
N e t M a r g in - L H S
2017E
2016 E
2015E
2014 E
2013E
2012
2011
2010
2009
2008
50.0%
24.5%
2007
55.0%
25.0%
32
29.0%
6 0.0%
26%
25.5%
24.0%
2007
32.0%
28%
27%
27.0%
26.5%
28%
28%
28.0%
20.0%
R o E - R H S
Al Rajhi Bank
December 2013
Healthy credit growth driven by retail lending and strong CAR
Barring 2009, Al Rajhi Bank has historically witnessed credit growth higher than the average growth of conventional and Islamic
banks in the Kingdom. While loans of conventional and Islamic banks in the KSA increased at a CAGR of 11.3%, Al Rajhi witnessed
a credit growth of 15.3% over 2009–12. We expect this trend to continue, driven by the bank’s large retail network and healthy
capital adequacy. Net loans during the forecast period are expected to expand at a CAGR of 18.3%.
Al Rajhi witnessed a growth of 17.4% in retail performing loans compared with 14.5% registered by conventional and Islamic
banks over 2007–12. We expect the bank’s retail performing loans to grow 23.2% annually during 2012–17E, thereby increasing
its share in performing loans from 68.4% in 2012 to 83.6% by 2017E.
Figure 64: Healthy loan growth to continue
500
399
300
112
120
14 0
172
236
198
28 3
335
30.0%
20.0%
10.0%
0.0%
- 10.0%
L e n d in g , n e t
%
2017E
2016 E
2015E
2014 E
- 30.0%
2013E
2012
2011
- 20.0%
2010
0
14 1
2009
100
105
2008
200
2007
S A R b n
4 00
4 0.0%
g ro w th - R H S
Al Rajhi’s strong CAR of 19.8% provides sufficient flexibility to increase lending. With the current capital base, we believe the
bank has scope to increase its lending by ~2.5 times under Basel II norms and by ~1.9 times under Basel III norms. Moreover,
the bank has scope for further loan expansion, as its loan-to-deposit ratio of 77.7% in 2012 was much lower than the SAMA’s
specified limit. However, we expect the bank’s LD ratio rise above the SAMA limit to range from 78–82% during the forecast
period, given that the bank’s loan growth is higher than the deposit growth. Furthermore, the bank’s plans to expand its range
of financial products and services would provide a further boost to credit growth.
33
Al Rajhi Bank
December 2013
Figure 65: Adequate CAR
Figure 66: Loan-to-deposit below SAMA’s limit
30%
14 0%
25%
24 .4
%
120%
21.4
%
20.6
19.3 %
20%
%
20.0 %
19.8
100%
%
S A M A
8 5%
8 0%
'S
L IM IT
15%
6 0%
B a s e l III
10%
4 0%
B a s e l II
5%
0%
20%
2007
2008
2009
2010
2011
0%
2012
2007
2008
2009
2010
2012
2011
2013E
2014 E
2015E
2016 E
2017E
Source: Company
Strong balance sheet and high dividend payout boost confidence
While Al Rajhi’s asset quality has improved, with NPL ratio declining from 2.9% in 2007 to 2.0% in 2012, the bank’s provision
cover has averaged 130.8%. We expect the bank’s NPL ratio to decline from its long-term average of 2.3% over the last four years
to 1.9% during 2013E–14E; this ratio is expected to increase gradually as the bank’s lending to SMEs increases. However, the
bank is likely to maintain an adequate provision cover, averaging 160.9% over 2013E–17E.
Figure 67: Asset quality to remain healthy
3.5%
3.0%
170%
3.3%
2.9%
16 0%
2.5%
1.9%
2.0%
2.2%
1.7%
1.5%
2.0%
1.9%
1.7%
1.8 %
2.2%
2.0%
150%
14 0%
130%
1.0%
120%
0.5%
110%
0.0%
2007
2008
2009
2010
2011
2012
2013E
2014E
NPL/ G r o s s lo ans
2015E
NPL Co v e r ag e - RHS
2016E
2017E
100%
Well-placed to benefit from rising international potential
Al Rajhi has a strong international presence, with operations in Kuwait, Jordan, and Malaysia. We believe Al Rajhi’s international
presence and its focus on high-net-worth customers in these countries positions the bank to benefit from the gradual acceptance
and rising significance of Islamic banking in other countries. Consequently, this would provide additional stimulus to the bank’s
loan growth.
34
Al Rajhi Bank
December 2013
Key financial data
Income Statement
(SAR Millions)
Net special commission income
Growth YoY (%)
Fee income from banking services, net
Exchange income, net
Other banking income
Non-special commission income
Growth YoY (%)
Operating expenses
Banking income before provisions
Impairment charge for financing & other (Provisions)
Net Income
Growth YoY (%)
2011
2012
2013 E
2014 E
2015 E
9,069.9
-0.6%
2,298.4
798.8
334.9
3,432.2
35.2%
12,502.1
(3,478.7)
9,023.4
(1,645.1)
7,378.3
9.0%
9,501.0
4.8%
3,086.2
897.9
497.9
4,482.0
30.6%
13,983.0
(3,779.1)
10,203.9
(2,319.2)
7,884.7
6.9%
10,164.0
7.0%
2,917.7
942.8
473.1
4,333.6
-3.3%
14,497.6
(4,071.7)
10,425.9
(2,139.0)
8,286.9
5.1%
11,623.5
14.4%
3,274.2
990.0
502.0
4,766.2
10.0%
16,389.7
(4,578.8)
11,810.8
(2,240.1)
9,570.7
15.5%
13,405.1
15.3%
3,740.5
1,039.5
535.2
5,315.2
11.5%
18,720.3
(5,181.3)
13,539.0
(2,915.6)
10,623.4
11.0%
15,573.2
16.2%
4,386.8
1,091.4
573.3
6,051.6
13.9%
21,624.7
(5,936.5)
15,688.2
(3,650.9)
12,037.3
13.3%
18,068.4
16.0%
5,134.2
1,146.0
616.9
6,897.2
14.0%
24,965.6
(6,804.8)
18,160.8
(4,153.0)
14,007.8
16.4%
Balance Sheet (SAR Millions)
Cash & balances with SAMA
Due from banks & other financial institutions
Financing, net
Mutajara
Investments
Customer debit current accounts, net
Property & equipment, net
Other assets, net
Total assets
Due to banks & other financial institutions
Customer deposits
Other liabilities
Total Liabilities
Total liabilities and shareholders' equity
20,419.5
1,285.5
140,313.3
13,314.3
38,802.5
375.9
3,623.5
2,596.6
220,731.1
2,717.3
177,733.0
6,792.1
187,242.4
33,488.7
220,731.1
30,804.1
1,779.8
171,941.5
14,777.4
40,880.1
292.1
3,818.0
3,089.6
267,382.6
2,234.9
221,342.9
7,336.0
230,913.8
36,468.7
267,382.6
38,875.6
2,224.8
197,608.2
16,253.4
43,273.3
176.7
4,156.5
3,336.8
305,905.2
2,458.4
254,544.4
7,996.8
264,999.6
40,905.6
305,905.2
37,126.8
2,692.0
235,718.8
17,876.8
46,022.9
173.1
4,545.8
3,968.9
348,125.2
2,655.1
292,726.0
8,717.1
304,098.2
44,027.0
348,125.2
44,001.1
3,122.7
283,193.0
19,483.7
49,177.5
169.7
4,812.5
4,720.8
408,681.0
2,920.6
346,880.3
9,502.3
359,303.2
49,377.7
408,681.0
60,361.8
3,559.9
335,220.5
21,235.0
52,794.1
166.3
5,094.8
5,615.2
484,047.5
3,241.9
414,522.0
10,358.2
428,122.1
55,925.5
484,047.5
80,726.2
3,987.1
398,893.3
23,143.7
56,940.6
163.0
5,393.7
6,678.9
575,926.5
3,630.9
497,426.4
11,291.3
512,348.5
63,577.9
575,926.5
4.92
3.25
5.26
3.25
5.52
2.21
6.38
2.62
7.08
2.97
8.02
3.45
9.34
4.02
Balance sheet mix
Loans to Deposits
Loans to Assets
Assets to Equity
(Cash+Net interbank)/Assets
78.9%
63.6%
6.6
9.8%
77.7%
64.3%
7.3
12.2%
77.6%
64.6%
7.5
13.4%
80.5%
67.7%
7.9
11.4%
81.6%
69.3%
8.3
11.5%
80.9%
69.3%
8.7
13.2%
80.2%
69.3%
9.1
14.7%
Asset quality
NPL ratio
NPL coverage ratio
1.7%
151.8%
2.0%
136.9%
1.9%
159.8%
1.7%
173.3%
1.8%
170.9%
2.0%
160.8%
2.2%
139.7%
Profitability
RoAE
RoAA
NIM
Cost to income
25.9%
3.6%
4.7%
27.8%
25.3%
3.2%
4.1%
27.0%
23.9%
2.9%
3.9%
28.1%
24.5%
2.9%
3.8%
27.9%
24.2%
2.8%
3.8%
27.7%
24.4%
2.7%
3.8%
27.5%
25.2%
2.6%
3.7%
27.3%
Per share data (SAR)
EPS
DPS
35
2016 E
2017 E
Bank Al Bilad
December 2013
Bank AlBilad: Asset Quality Concerns Persist
• Strong fee income led by remittances: Fee income increased at a CAGR
of 29.5% over 2007–12, driven by strong performance of the money remittance
services business. In 2012, remittance fees accounted for 24.4% of the total
banking income. With AlBilad’s continued focus on increasing the number of Enjaz
(remittance) Centers, we expect the share of remittances in banking income to
remain high. In 2012, fee income contributed 37.1% to AlBilad’s total banking
income.
U nde r w e ig ht
Recommendation
SAR 30.3
Current Price:
SAR 36٫1
-15.9%
• Low cost of funds to support NIM: AlBilad incurred the industry’s lowest
cost of funds, averaging 0.3% over 2008–12, primarily due to a significant share Price Chart
of low-cost demand deposits (71.5%) in its total deposits. Despite the pressure on
margins due to high competition, high liquidity and low interest rates, the bank’s
low cost of funds is expected to help sustain NIM at 3.2% over 2013E–17E.
35
30
25
20
15
• Poorest asset quality in industry, but adequately covered: : At 3.9% of
gross loans in 2012, AlBilad’s had one of the highest NPLs in the industry. However,
these were adequately covered with a provision cover of 145.4%. We expect the
Key information
bank’s asset quality to improve, with NPL ratio declining to 3.5% by 2015; however,
Reuters code:
this is likely to increase thereafter due to higher SME loans. Provisioning is expected
Bloomberg code:
to adequately cover NPLs during the forecast period.
• Valuations: We initiate our coverage on AlBilad with an “Underweight” rating
based on our 12-month target price of SAR 30.3 per share. Despite aggressive
expansion plans of the bank, high costs and poor asset quality remain a concern.
Further, the recent run up in share price (up ~69.7%YTD) increases the downside
risk.
1140.SE
ALBI AB
Saudi Arabia
Banking
TASI
SAR 14.4bn
37.6/19.2
Country:
Sector:
Primary Listing:
M-Cap:
52 Weeks H/L (SAR):
Key financial indicators
SAR Millions
Net Income
Growth YoY (%)
EPS (SAR)
PB (x)
PE (x)
Dividend Yield (%)
ROE (%)
ROA (%)
NPL Ratio (%)
NPL Coverage Ratio (%)
36
2011
2012
2013 E
2014 E
2015 E
329.6
257.0%
1.1
1.2
12.8
NA
10.1%
1.3%
4.7%
129.0%
941.8
185.7%
1.9
1.4
6.5
NA
14.6%
2.0%
3.9%
145.4%
741.6
-21.3%
1.9
2.4
16.8
NA
15.7%
2.2%
3.4%
147.6%
896.7
20.9%
2.2
2.1
13.9
NA
16.2%
2.1%
3.1%
145.6%
1,064.7
18.7%
2.7
1.8
11.7
NA
16.4%
2.0%
3.0%
139.3%
2016 E
1,280.3
20.2%
3.2
1.5
9.7
NA
16.8%
1.9%
3.2%
129.1%
2017 E
1,494.3
16.7%
3.7
1.3
8.4
NA
16.6%
1.8%
3.5%
116.9%
N o v - 13
M a r - 13
J u l - 12
N o v - 11
M a r - 11
A u g - 10
D e c - 09
A p r - 09
A u g - 08
10
J a n - 08
• Aggressive expansion plans to drive loan growth: AlBilad’s loan book is
expected to grow an average 27.6% over 2012–17E, led by enhanced geographical
reach. Retail performing loans are expected to rise at a CAGR of 24.9% on increased
number of branches, while corporate performing loans are estimated to expand at
a CAGR of 28.9% driven by higher credit to SMEs.
Bank Al Bilad
December 2013
Valuation
We arrived at AlBilad’s 12-month price target using RI methodology. This yielded a fair value of SAR 30.3 per share, 15.9% below
the closing price of SAR 36.1 as on December 3, 2013. The Company’s RI valuation is presented in the figure below.
Our RI valuation is based on a cost of equity of 11.0%, terminal RoaE of 15% and terminal growth rate of 3.0%. The derived cost
of equity is based on beta of 0.79 (5 year monthly raw beta), risk-free rate of 2.7% and risk premium of 10.4%. We have assumed
that that the bank’s long term RoaE will taper down to 15% from average 16.3% over 2013-22E.
Ending book value
Cost of equity
Residual income
Current price
Upside/(downside)
2013
4,371
742
5,112
479
263
2014
5,096
897
5,992
558
338
2015
5,972
1,065
7,037
654
410
2016
7,012
1,280
8,293
768
512
2017
8,264
1,494
9,758
905
589
2018
9,758
1,763
11,521
1,069
694
2019
11,521
2,081
13,602
1,262
818
2020
13,602
2,414
16,015
1,490
923
2021
16,015
2,776
18,791
1,755
1,021
2022
18,791
3,192
21,983
2,059
1,133
3,985
3,819
4,336
12,140
400
30.35
36.10
-15.93%
change of +/- 0.5% in cost of equity and +/- 1.0% in terminal RoaE yields a fair value of SAR19.8-45.2 per share.
Price-to-book
value
Terminal value
Cost asset
of Equity
10.5%
11.0%of 9.6% from 11.5%
131.5bn or SAR 87.7
as on August
12.9%
31.5
27.9
24.8
22.1
19.8
21, 2013.
13.9%
14.9%
15.9%
16.9%
34.9
38.3
41.8
45.2
31.0
34.0
37.1
40.2
27.6
30.3
33.1
35.9
24.6
27.1
29.6
32.1
22.1
24.3
26.6
28.9
Non-commission income to continue to drive banking income
AlBilad’s banking income is driven by non-commission income. Over 2007–12, the bank’s total banking income increased at
a CAGR of 17.4%, while its non-commission income rose 29.8%. Consequently, the share of non-commission income in the
total banking income rose to 51.7% in 2012 from 31.4% in 2007.
The significant growth in non-commission income is ascribed to the bank’s increased focus on its Enjaz division, which
provides international and domestic money remittance services. The number of exchange and remittance centers increased
to 144 in 2012 from 104 in 2010. We expect fee income to increase at a CAGR of 12.7% over 2012–17E as the bank further
expands its geographical coverage. We estimate the share of fee income in the bank’s total banking income to be 35.8% in
2017E from 37.1% in 2012.
37
Bank Al Bilad
December 2013
Figure 68: Non-commission income driven by fee income
2.0
1.5
S A R bn
1.0
0.5
0.0
2007
2008
2009
F e e in c o m e
2010
2011
E x c h a n g e in c o m e
2012
2013E
2014 E
2015E
O th e r n o n - c o m is s io n in c o m e
2016 E
2017E
AlBilad’s special commission income is expected to increase at a CAGR of 21.9% over 2012–17E, led by strong growth in the
bank’s lending and higher net interest margin. Consequently, AlBilad’s banking income is expected to rise at a CAGR of 17.0%
during the same period.
NIM better than industry average due to lowest cost of funds
AlBilad has historically generated higher NIM than conventional and Islamic banks, despite earning lower yields, due to its low
cost of funds. During 2007–12, the bank earned an average yield of 3.4% (conventional and Islamic banks averaged 4.8%) while
incurring an average cost of funds of 0.5% (against conventional and Islamic banks’ 1.3%). We expect the yield to decline further
(averaging 3.2% over the forecast period) on increased competition, higher liquidity in the system, and downward pressure on
interest rates. The cost of funds is expected to remain low, averaging 0.1%, given that the share of low-cost demand deposits in
total deposits would remain high during the forecast period. Demand deposits contributed 71.5% to the bank’s total deposits
during 2008–12.
Figure 69: Yields lower than industry
Figure 70: Costs lower than industry
8 .0%
3.5%
7.0%
3.0%
2.5%
6 .0%
2.0%
5.0%
1.5%
4 .0%
1.0%
3.0%
2.0%
0.5%
2007
2008
2009
2010
2011
Bank
2012
Albilad
2013E
2014 E
2015E
2016 E
2017E
0.0%
2007
2008
2009
2010
Co nv e nt io nal + Is lamic
2011
Bank
2012
Albilad
2013E
2014E
2015E
2016E
2017E
Co nv e nt io nal + Is lamic
We expect AlBilad’s NIM to remain higher than conventional and Islamic banks’ average due to its low cost of funds. During
2013E–17E, AlBilad is expected to earn NIM of 3.3% vis-à-vis the average of 3.2% for conventional and Islamic banks.
Higher profitability on rising banking income and cost control
AlBilad’s costs declined due to stabilization of operations and cost-control measures; this improved the cost-to-income ratio
and, in turn, profit margin. AlBilad’s cost-to-income ratio fell sharply to 51.4% in 2012 from 82.3% in 2007. Sustained effort to
control cost is expected to further improve the ratio to 46.7% by 2017E. Meanwhile, the profit margin is expected to expand by
647bps to 39.2% by 2017E.
38
Bank Al Bilad
December 2013
Figure 71: Decline in cost-to-income ratio
Figure 72: Resultant rise in income and margin
50%
2.0
100%
4 0%
8 0%
20%
S A R b n
6 0%
1.0
10%
0%
4 0%
0.5
20%
0%
30%
1.5
0.0
- 10%
- 20%
2007
2008
2010
2011
2012
2013E 2014E
2015E 2016E
2009
2007
2008
2009
2010
2011
2012
2013E
2014 E
2015E
2016 E
2017E
- 0.5
Ne t Inc o me - LHS
Pr o f it M ar g in
Ro E
2017E
- 30%
- 4 0%
Net income is expected to rise at a CAGR of 21.3% over 2012–17E, led by increased efficiency and healthy growth in banking
income. This, in turn, is expected to improve the profitability ratio. The bank’s RoE is expected to remain strong at 16.3% over
2013E–17E, while RoA is forecasted to remain at an average of 2.0% over the same period.
Strong expansion plans and high CAR to accelerate loan growth
AlBilad’s loan book increased an average 24.1% over 2007–12, led by growth in both retail and corporate lending. Retail
performing loans, which have a lower share in total performing loans, rose at a CAGR of 60.6%, while corporate performing
loans increased at a CAGR of 14.9%. The share of retail loans in the bank’s total performing loans increased to 41.3% in 2012 from
11.7% in 2007. Meanwhile, the number of bank branches rose to 88 in 2012 from 75 in 2010.
AlBilad’s focus on geographical expansion makes it well placed to benefit from the loan growth expected in the Kingdom; we
believe this growth would be driven by higher government expenditure on infrastructure and increased SME and mortgage
lending. Furthermore, gradual implementation of the mortgage law is expected to drive house purchases in the Kingdom and,
in turn, boost retail lending.
AlBilad’s comfortable capital adequacy ratio (CAR) provides headroom to pursue growth opportunities. At the current CAR of
18.5%, the bank has the flexibility to more than double its risk weighted assets according to the Basel II limit of 8.0%. Moreover,
the bank is in a strong position to meet Basel III requirements, as the current CAR is relatively higher than the minimum
requirement of 10.5%.
39
Bank Al Bilad
December 2013
Figure 73: Growth in performing loans
Figure 74 Strong CAR to push loan growth
35%
70
6 0
S A R b n
50
24 %
25%
4 0
20%
30
20
15%
10
10%
0
33 %
30%
18 %
18
17 %
%
19 %
Bas e l II
Bas e l I
2007
2008
2009
2010
2011
2012 2013E
R e ta il
2014 E
2015E
2016 E
5%
2017E
C o rp o ra te
0%
2007
2008
2010
2009
2012
2011
During 2012–17E, we expect AlBilad’s retail performing loans to increase at a CAGR of 24.9% and corporate performing loans at
a CAGR of 28.9%. During the same period, the bank’s net loans are expected to grow 27.6%, driven by strong expansion plans
and a healthy CAR.
Asset quality a near-term concern, but NPLs are adequately covered
AlBilad’s NPLs, as a percentage of gross loans, declined to 3.9% in 2012 from 5.5% in 2009; however, it had the highest NPL rate
in KSA’s banking space in 2012. Nevertheless, the bank is adequately covered for NPLs, with a high provision cover of 145.4%.
We expect AlBilad’s asset quality to improve during 2013E–15E, but rise thereafter due to increased loans to the SME sector.
However, we believe the bank would maintain an adequate provision cover during our forecast period. We estimate an average
provision cover of 135.7% over 2013E–17E.
Figure 75: NPLs to decline while provision cover remains strong)
6 .0%
5.5%
18 0.0%
5.5%
5.0%
150.0%
4 .7%
3.9%
4 .0%
120.0%
3.2%
3.0%
2.0%
2.8 %
2.8 %
2.9%
3.1%
90.0%
6 0.0%
1.7%
1.2%
1.0%
0.0%
30.0%
2007
2008
2009
2010
2011
N P L (% )
2012
2013E
2014 E
2015E
2016 E
2017E
0.0%
P r o v is io n c o v e r - R H S
40
Bank Al Bilad
December 2013
Key financial data
Income Statement
(SAR Millions)
2011
2012
2013 E
2014 E
2015 E
2016 E
2017 E
Growth YoY (%)
Growth YoY (%)
Operating expenses
Adjusted Net Income
Non-Banking income
Net Income
Growth YoY (%)
703.0
12.5%
458.3
189.4
22.8
670.5
41.3%
1,373.5
(791.6)
581.9
(252.2)
329.6
329.6
257.0%
839.5
19.4%
645.3
234.0
18.6
897.9
33.9%
1,737.4
(893.5)
843.9
(275.2)
568.6
373.2
941.8
185.7%
996.8
18.7%
716.5
242.3
48.1
1,006.9
12.1%
2,003.7
(1,015.0)
988.7
(247.1)
741.6
741.6
-21.3%
1,220.2
22.4%
830.1
250.8
70.6
1,151.6
14.4%
2,371.8
(1,159.3)
1,212.5
(315.8)
896.7
896.7
20.9%
1,540.0
26.2%
944.5
260.9
81.2
1,286.6
11.7%
2,826.6
(1,352.5)
1,474.2
(409.4)
1,064.7
1,064.7
18.7%
1,896.4
23.1%
1,055.6
272.7
93.4
1,421.7
10.5%
3,318.1
(1,557.5)
1,760.6
(480.3)
1,280.3
1,280.3
20.2%
2,248.2
18.5%
1,171.8
285.1
107.4
1,564.3
10.0%
3,812.5
(1,780.0)
2,032.5
(538.2)
1,494.3
1,494.3
16.7%
Financing, net
Investments
Other assets, net
Total assets
Customer deposits
Other liabilities
Total Liabilities
5,835
6,454
13,780
951
328
378
27,727
422
23,038
851
24,311
3,416
27,727
2,932
6,575
18,256
1,537
336
141
29,778
571
23,742
1,094
25,407
4,371
29,778
2,582
5,918
24,464
3,305
344
157
36,771
772
29,677
1,226
31,675
5,096
36,771
3,710
6,214
32,600
3,801
353
176
46,854
929
38,580
1,373
40,882
5,972
46,854
6,311
6,711
41,819
4,371
363
197
59,773
1,069
50,154
1,537
52,760
7,012
59,773
9,303
7,382
51,601
5,027
374
221
73,907
1,229
62,693
1,722
65,644
8,264
73,907
15,298
7,973
61,747
5,781
385
248
91,432
1,414
78,366
1,928
81,708
9,724
91,432
1.10
NA
1.90
NA
1.85
NA
2.24
NA
2.66
NA
3.20
NA
3.74
NA
Balance sheet mix
Loans to Deposits
Loans to Assets
Assets to Equity
59.8%
49.7%
8.1
44.3%
76.9%
61.3%
6.8
31.9%
82.4%
66.5%
7.2
23.1%
84.5%
69.6%
7.8
21.2%
83.4%
70.0%
8.5
21.8%
82.3%
69.8%
8.9
22.6%
78.8%
67.5%
9.4
25.5%
Asset quality
NPL ratio
NPL coverage ratio
4.7%
129.0%
3.9%
145.4%
3.4%
147.6%
3.1%
145.6%
3.0%
139.3%
3.2%
129.1%
3.5%
116.9%
Profitability
RoAE
RoAA
NIM
Cost to income
10.1%
1.3%
3.6%
57.6%
14.6%
2.0%
3.5%
51.4%
15.7%
2.2%
3.3%
50.7%
16.2%
2.1%
3.2%
48.9%
16.4%
2.0%
3.2%
47.8%
16.8%
1.9%
3.2%
46.9%
16.6%
1.8%
3.2%
46.7%
Adjusted EPS
DPS
41
Alinma Bank
December 2013
Alinma Bank: On a high growth trajectory
• Higher yields support NIMs: Although Alinma’s high exposure to long-term
loans, which command higher yields, is likely to support its strong yields, the bank’s
significant share of demand deposits in total deposits is expected to keep the cost
of funds low. This would help Alinma maintain an average NIM of 3.5%, which is
higher than conventional and Islamic banks’ average of 3.1% over 2013E–17E.
Recommendation
Neutral
SAR 15٫0
Current Price:
SAR 14.6
• Cost stabilization and strong asset quality to drive profitability: The
bank’s cost-to-income ratio is expected to improve as its operations embark on
a more mature phase. The ratio is expected to decline to 40.9% in FY17E (2012:
50.7%). Improving efficiency and growing banking income are expected to drive Price Chart
growth in net income. Over 2012–17E, we expect net income to increase at a CAGR 22
20
of 37.2% and profit margin to improve from 40.1% to 47.5%.
18
16
14
12
potential: Alinma has the highest capital adequacy ratio compared to its
peers in the Kingdom at 32.8% vis-à-vis its peer average of 18.8%. This
narrows the bank’s scope to deploy its funds in investments and other Key information
revenue generating sources as majority of its finances are limited in Reuters code:
provisions or risk management. Further Alinma is currently trading at a PE Bloomberg code:
Country:
multiple of 23 2x highest in the peer group – indicating that the valuation
Sector:
is rich.
Primary Listing:
1150.SE
ALINMA AB
Saudi Arabia
Banking
TASI
SAR 21.8bn
15.2/12.5
M-Cap:
• Valuations: We initiate our coverage on Alinma with a “Neutral” rating based on
52 Weeks H/L (SAR):
our 12-month target price of SAR 15.0 per share.
Key financial indicators
SAR Millions
Net Income
(%) Growth YoY
EPS (SAR)
PB (x)
PE (x)
Dividend yield (%)
ROE (%)
ROA (%)
NPL ratio
NPL coverage ratio
42
2011
2012
2013 E
2014 E
2015 E
431.3
2737.7%
0.3
0.9
33.9
NA
2.7%
1.4%
0.0%
1260.4%
733.2
70.0%
0.5
1.2
26.4
NA
4.5%
1.6%
0.3%
230.5%
1,042.4
42.2%
0.7
1.2
20.5
NA
6.1%
1.6%
0.5%
184.8%
1,438.6
38.0%
1.0
1.1
14.9
NA
7.8%
1.6%
0.7%
175.2%
1,984.6
38.0%
1.3
1.0
10.8
NA
9.9%
1.7%
0.8%
184.5%
2016 E
2,690.3
35.6%
1.8
0.9
7.9
NA
12.0%
1.7%
0.9%
189.9%
2017 E
3,570.4
32.7%
2.4
0.8
6.0
NA
13.9%
1.8%
0.9%
200.1%
N o v - 13
M a r - 13
J u n - 12
O c t - 11
J u n - 10
F e b - 11
• High capital adequacy and expensive valuations limits upside
O c t - 09
8
F e b - 09
10
J u n - 08
• Strong loan growth to continue on low base: Alinma’s aggressive
expansion plans, high capital base, and strong increase in deposits are expected
to drive growth in loan portfolio. Loan growth is expected in the corporate and
retail segments; corporate is likely to remain the dominant segment in the bank’s
loan book. We expect a loan growth of 35.9% during 2012–17E.
2.8%
Alinma Bank
December 2013
Valuation
We arrived at Alinma’s 12-month price target using RI methodology. This yielded a fair value of SAR 15.0 per share, 2.8% above
the closing price of SAR 14.6 as on December 3, 2013. The Company’s RI valuation is presented in the figure below.
Our RI valuation is based on a cost of equity of 11.4%, terminal RoaE of 12% and terminal growth rate of 3.0%. The derived cost
of equity is based on beta (5 year monthly raw beta) of 0.83, risk-free rate of 2.7% and risk premium of 10.4%. We have assumed
that the bank’s long term RoaE will taper down to 12% from average 12.7% over 2013-22E.
Ending book value
Cost of equity
Residual income
Current price
Upside/(downside)
2013
16,627
1,042
17,670
1,889
(847)
2014
17,670
1,439
19,108
2,008
(569)
2015
19,108
1,985
21,093
2,171
(187)
2016
21,093
2,690
23,783
2,397
293
2017
23,783
3,570
27,354
2,703
868
2018
27,354
4,641
31,995
3,108
1,533
2019
31,995
5,802
37,797
3,636
2,166
2020
37,797
6,672
44,469
4,295
2,377
2021
44,469
7,339
51,808
5,053
2,286
2022
51,808
7,706
59,515
5,887
1,819
16,627
4,041
1,747
22,425
1,500
14.95
14.55
2.75%
change of +/- 0.5% in cost of equity and +/- 1.0% in terminal RoaE yields a fair value of SAR8.9-23.4 per share.
Price-to-book
value
Terminal value
Cost asset
of Equity
10.9%
11.4%of 9.6% from 11.9%
131.5bn or SAR 87.7
as on August
10.0%
14.3
12.7
11.3
10.0
8.9
21, 2013.
11.0%
12.0%
13.0%
14.0%
16.6
18.9
21.1
23.4
14.7
16.8
18.8
20.8
13.1
15.0
16.8
18.6
11.7
13.4
15.0
16.7
10.4
12.0
13.5
15.0
Banking income to increase at 32.7% CAGR over 2012–17E
Strong growth in special commission income and non-commission income is expected to result in Alinma’s banking income
increasing at a CAGR of 32.7% over 2012–17E. While the bank’s high NIMs (average: 3.5%) and strong loan growth of 35.9%
are expected to drive net special commission income, robust growth in fee income is expected to boost the bank’s noncommission income over 2012-17E. Net special commission income is expected to grow at an average of 31.2% to SAR 5.9bn
over 2012–17E. Meanwhile, the bank’s non-commission income would increase at a CAGR of 39.4% led by rising fee income,
dividend income, and other non-commission income.
In 2012, Alinma’s non-commission income accounted for only 16.9% of the bank’s total banking income. However, the
expected growth in the bank’s net fee income would increase the share to 21.6% by 2017E.
43
Alinma Bank
December 2013
Figure 76: Banking income to increase at 22.1% CAGR over 2012–17E
6
CAGR - 24.2%
CAGR - 32 7%
5
SAR bn
4
3
2
1
0
2009
2011
2010
2012
2013E
2014 E
2015E
2016 E
2017E
No n- c o mmis s io n inc o me
Ne t f inanc ing & inv e s t me nt inc o me
Benefits from higher-than-industry NIMs
Alinma has historically earned higher NIMs than the average of conventional and Islamic banks, mainly due to higher yields
and lower cost of funds. The bank earned average NIMs of 3.8% in 2011 and 2012, whereas those of the KSA banking industry,
including Islamic and conventional banks, averaged 3.2%. We believe the bank’s yields are better than those of the industry due
to higher exposure to long-tenure loans. In 2012, 60.3% of the bank’s net loans had maturity tenure of 1–5 years, while 18.5%
had tenure of more than five years. We expect the yields to remain high at an average of 3.7% over 2013E–17E as the bank’s loan
book is likely to be supported by long-term loans. The trend is further supported by its lower-than-industry cost of funds due to
demand deposits’ higher contribution in the bank’s total deposits. Over 2013E–17E, we expect Alinma to incur average cost of
funds of 0.4%, while the industry would incur 1.0%.
Figure 77: Higher-than-industry yields
Figure 78: Lower-than-industry costs
6 .0%
2.0%
5.0%
1.6 %
4 .0%
1.2%
3.0%
0.8 %
2.0%
1.0%
0.0%
0.4 %
2009
2010
2011
2012
A lin m a
2013E
2014 E
2015E
2016 E
2017E
C o n v e n tio n a l + I s la m ic
0.0%
2009
2010
2011
2012
Alinma
2013E
2014 E
2015E
2016 E
2017E
Conventional + Islamic
Profitability to improve as cost stabilizes
Alinma’s average cost-to-income ratio of 55.3% over 2011–12 was substantially higher than conventional and Islamic banks’
average of 35.3%. It is relatively a new bank and thus incurs higher cost as compared to its still developing income base. However,
we believe the costs will taper as the bank’s operations stabilize; consequently, the cost-to-income ratio would decline to 40.9%
in FY17E (2012: 50.7%), thereby improving overall profitability.
44
Alinma Bank
December 2013
Figure 79: Operating expenses to ease
Figure 80: Leading to margin expansion
8
110.0%
75.0%
15.0%
90.0%
6 0.0%
12.0%
4 5.0%
9.0%
30.0%
6 .0%
15.0%
3.0%
7
S A R b n
6
5
4
70.0%
3
50.0%
2
1
-
2009
2010
2011
B a n k in g in c o m e
2012
2013E
2014 E
O p e r a t in g e x p e n s e s
2015E
2016 E
2017E
30.0%
C o s t t o in c o m e r a tio - R H S
0.0%
2009
2010
2011
2012
2013E
Net proﬁt margin - LHS
2014 E
R o E
2015E
2016 E
2017E
0.0%
R o A Company, AlJazira Capital
Source:
Thus, decline in cost amid rising income is expected to result in the bank’s bottom line improving. During 2012–17E, Alinma’s
net income is expected to increase at a CAGR of 37.2%, while profit margin is expected to improve by 737bps to 47.5% in 2017E.
Higher margins and better-than-average growth in net income are expected to improve the bank’s profitability. Return on
equity is expected to increase from 4.5% in 2012 to 13.9% in 2017E, whereas return on assets is expected to expand from 1.6%
to 1.8% during the same period.
Loans to be driven by geographical expansion, high CAR, and strong deposit growth
Over 2009–12, the growth in the bank’s loan book has been much higher than the average growth of conventional (8.3% CAGR)
and Islamic banks (22.4% CAGR) due to its low base as well as rapid expansion of the bank’s operations, branch network, and
e-channels. The trend is expected to continue with the bank’s loan book registering an average growth of 35.9% over 2012–17E.
Currently, the bank is not only expanding its geographical reach but also improving its credit portfolio through funding
infrastructure, industrial and commercial projects, and housing projects. Furthermore, to increase its retail exposure, the bank
is continually looking at establishment of new business activities and introduction of new products. The bank has also been
recognized for having the best-performing Visa debit card portfolio in the Kingdom. Although the share of corporate loans
in the bank’s gross loans declined from 94.9% in 2009 to 83.1% in 2012, it remains a major constituent of the bank’s loan
book. Expansion in the bank’s geographical coverage and implementation of the new mortgage law would boost retail lending.
However, we expect corporate lending to constitute a major share of the bank’s loan book during the forecast period.
45
Alinma Bank
December 2013
Figure 81: Strong growth in performing loans to continue
200
CAGR - 222.2%
CAGR -36 1%
S A R bn
16 0
120
148
80
114
84
40
-
1
2009
61
14
21
2010
2011
31
2012
R e ta il lo a n s
44
2013E
2014 E
2015E
2016 E
2017E
C o r p o r a te lo a n s
The bank was established with a high capital base of SAR 15bn, and its CAR is the highest among conventional and Islamic
banks. We believe that Alinma, with a CAR of 32.8% and combined tier I and tier II capital of SAR 16.8bn in 2012, has enough
flexibility to increase its risk-weighted assets by more than three times and more than four times according to Basel III and Basel
II limits, respectively.
High loan-to-deposit ratio a concern in near term
Alinma’s high loan-to-deposit ratio poses a risk to the bank’s credit growth. Although its loan-to-deposit ratio declined from
187.5% in 2010 to 115.4% in 2012, it remains the highest amongst KSA banks and above SAMA’s upper limit of 85%. Thus, the
bank would be required to increase its deposits tremendously to maintain loan growth. We expect strong deposit growth to
facilitate growth in loans over the forecast period.
We believe Alinma’s focus on expanding its geographical presence and introduction of new products and services, such as
round-the-clock automated safe deposit boxes and internet services, would help expand its deposit base at a rate higher than
the industry average. We expect the bank’s deposits to rise at a CAGR of 42.6% over 2012–17E, while its loans would increase
at a CAGR of 35.9% over the same period. Thus, higher growth in the bank’s deposits would result in the loan-to-deposit ratio
gradually declining to 90.8% by 2017E.
46
Alinma Bank
December 2013
Figure 82: Loan-to-deposit to decline as deposits increase more than loans
210
200.0%
18 0
16 0.0%
120
R
b
n
150
S
A
120.0%
90
SAM A' s limit ,
8 5 .0 %
6 0
8 0.0%
30
-
2009
2010
2011
2012
Lo an
2013E
2014 E
D e p o s it
2015E
2016 E
2017E
4 0.0%
Lo an t o D e p o s it - RHS
Source: Company annual reports, & Aljazira Capital
Healthy asset quality and adequate coverage
Alinma, with its relatively new banking license, had only 0.3% of its gross loans under non-performing loans compared with
conventional banks’ 1.9% and Islamic banks’ 2.1% in 2012. Thus, Alinma’s strong asset quality coupled with a high provision
cover of 230.5% boosts confidence in the bank’s ability to drive loan growth without impacting the bank’s profits. With an
increase in the bank’s loans and higher loan exposure to SMEs, we expect NPLs’ share in gross loans to increase to 0.9% by 2017E.
However, the provision cover is expected to remain adequate at an average of 186.9% over 2013E–17E.
Figure 83: Strong asset quality and adequate provisioning
1.0%
0.9%
231%
250%
0.9%
0.8%
0.8%
185%
225%
200%
0.7%
190%
200%
0.6%
0.5%
175%
0.4%
0.3%
185%
150%
175%
0.2%
125%
0.0%
2012
2013E
NPL' s / G r o s s lo ans
2014E
2015E
2016E
2017E
100%
NPL Co v e r ag e - RHS
Source: Company annual reports, & Aljazira Capital
47
Alinma Bank
December 2013
High capital adequacy and expensive valuations
Alinma has the highest capital adequacy ratio compared to its peers in the Kingdom. During 2012, its CAR stood at 32.8% vis-àvis its peer average of 18.8%. This has impacted the bank’s RoaE, which stood at 4.5% in 2012 against the peer average of 13.8%.
While we believe that the bank is in the initial stage of expansion with strong deposit and lending growth potential, its low RoaE
translates into considerable economic losses over the short term.
Figure 84: High CAR and expensive valuation
3.5
Al Rajhi
3.0
AlBilad
PB
2.5
SHB
2.0
BJAZ
SABB
Alinma
1.5
1.0
0.5
Samba
SIBC
BSF
ANB
9.0
RIBL
11.0
13.0
15.0
17.0
PE
19.0
21.0
23.0
25.0
Source: Company, AlJazira Capital Size of bubble refers to CAR during 2012
In addition, the company’s high valuation makes it an unsuitable investment opportunity at present. In terms of TTM PB
valuation, the stock currently trades at 1.3x vis-à-vis the peer average of 1.8x. However, this is primarily owing to the large equity
base of the company because in terms of TTM PE, the bank trades at 23.2x compared to the industry average of 13.8x indicating
that the valuation is expensive. We believe these factors would restrict the upside potential for the stock and hence, we initiate
coverage with a “Neutral” rating based on our 12-month target price of SAR 15.0 per share.
48
Alinma Bank
December 2013
Key financial data
Income Statement
(SAR Millions)
2011
2012
2013 E
2014 E
2015 E
2016 E
2017 E
Growth YoY (%)
Growth YoY (%)
Operating expenses
Share of loss from associate
Net Income
Growth YoY (%)
1,111.6
111.7%
256.6
11.7
8.3
276.7
101.9%
1,388.3
(832.2)
556.1
(124.7)
431.3
2737.7%
1,517.1
36.5%
242.9
21.4
44.7
308.9
11.6%
1,826.1
(925.0)
901.0
(154.4)
(13.5)
733.2
70.0%
1,934.3
27.5%
360.5
32.1
97.8
490.4
58.8%
2,424.7
(1,130.2)
1,294.4
(252.1)
1,042.4
42.2%
2,553.0
32.0%
504.9
46.6
162.0
713.4
45.5%
3,266.4
(1,474.8)
1,791.6
(353.0)
1,438.6
38.0%
3,433.9
34.5%
699.6
65.2
192.6
957.4
34.2%
4,391.3
(1,917.6)
2,473.7
(489.1)
1,984.6
38.0%
4,537.8
32.1%
949.5
88.0
225.2
1,262.7
31.9%
5,800.6
(2,446.5)
3,354.1
(663.8)
2,690.3
35.6%
5,890.0
29.8%
1,248.3
114.5
261.2
1,624.0
28.6%
7,514.0
(3,070.9)
4,443.1
(872.7)
3,570.4
32.7%
Financing, net
Investments
Other assets, net
Total assets
Customer deposits
Other liabilities
Total Liabilities
1,412.8
4,003.3
25,259.9
3,428.3
1,379.2
1,299.8
36,783.4
2,442.9
17,776.3
670.2
20,889.3
15,894.0
36,783.4
2,765.0
9,007.8
37,186.5
1,960.2
1,447.8
1,647.1
54,014.5
2,414.5
32,213.6
2,722.1
37,350.3
16,664.2
54,014.5
8,362.5
4,053.5
52,050.5
5,978.7
1,596.7
2,251.9
74,293.8
1,207.3
51,541.8
3,838.2
56,587.2
17,706.6
74,293.8
15,268.2
2,634.8
72,658.8
7,174.5
1,760.9
2,702.3
102,199.5
905.4
77,312.7
4,836.1
83,054.2
19,145.2
102,199.5
20,652.3
1,976.1
99,764.0
8,465.9
1,941.9
3,188.7
135,988.9
769.6
108,237.7
5,851.7
114,859.1
21,129.9
135,988.9
26,593.3
1,679.7
133,712.5
9,820.4
2,141.6
3,746.7
177,694.3
731.2
146,120.9
7,022.0
153,874.1
23,820.1
177,694.3
34,329.4
1,595.7
172,460.8
11,391.7
2,361.8
4,402.4
226,541.9
767.7
189,957.2
8,426.4
199,151.4
27,390.5
226,541.9
0.29
NA
0.49
NA
0.69
NA
0.96
NA
1.32
NA
1.79
NA
2.38
NA
Balance sheet mix
Loans to Deposits
Loans to Assets
Assets to Equity
142.1%
68.7%
2.3
14.7%
115.4%
68.8%
3.2
21.8%
101.0%
70.1%
4.2
16.7%
94.0%
71.1%
5.3
17.5%
92.2%
73.4%
6.4
16.6%
91.5%
75.2%
7.5
15.9%
90.8%
76.1%
8.3
15.9%
Asset quality
NPL ratio
NPL coverage ratio
0.0%
1260.4%
0.3%
230.5%
0.5%
184.8%
0.7%
175.2%
0.8%
184.5%
0.9%
189.9%
0.9%
200.1%
2.7%
1.4%
3.9%
59.9%
4.5%
1.6%
3.8%
50.7%
6.1%
1.6%
3.5%
46.6%
7.8%
1.6%
3.5%
45.2%
9.9%
1.7%
3.6%
43.7%
12.0%
1.7%
3.6%
42.2%
13.9%
1.8%
3.6%
40.9%
EPS
DPS
Profitability
RoAE
RoAA
NIM
Cost to income
49
RESEARCH DIVISION
BROKERAGE AND INVESTMENT
CENTERS DIVISION
RESEARCH
DIVISION
Senior Analyst
Abdullah Alawi
Syed Taimure Akhtar
+966 12 6618275
a.alawi@aljaziracapital.com.sa
+966 12 6618271
s.akhtar@aljaziracapital.com.sa
Senior Analyst
Analyst
Analyst
Talha Nazar
Saleh Al-Quati
Jassim Al-Jubran
+966 12 6618603
t.nazar@aljaziracapital.com.sa
+966 12 6618253
s.alquati@aljaziracapital.com.sa
+966 12 6618602
j.aljabran@aljaziracapital.com.sa
General Manager - Brokerage Division
Ala’a Al-Yousef
AGM-Head of international
Regional Manager - West and South Regions
and institutional brokerage
Abdullah Al-Misbahi
+966 11 2256000
a.yousef@aljaziracapital.com.sa
Luay Jawad Al-Motawa
+966 12 6618404
a.almisbahi@aljaziracapital.com.sa
+966 11 2256277
lalmutawa@aljaziracapital.com.sa
Sales And Investment Centers Central Region
Area Manager - Qassim & Eastern Province
Manger
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547
aalrahit@aljaziracapital.com.sa
+966 11 2256364
s.almutawa@aljaziracapital.com.sa
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and
operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct
securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory,
and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied
the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira
Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and
International markets, as well as offering a full suite of securities business.
1.
RATING
TERMINOLOGY
AGM - Head of Research
2.
3.
4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target.
Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels
over next twelve months.
Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target.
Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve
months.
Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks
rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve
months.
Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further
analysis of a material change in the fundamentals of the company.
Disclaimer
The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for
any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation
to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake
risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on
his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or
microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face
some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by
Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be
condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness
or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or
otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price
targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might
increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might
get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special
circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees
in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the
time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities
mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research
Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except
for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by
Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more
of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting
or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or
executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies.
No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report
should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management
Brokerage
Corporate Finance
،
Custody
Advisory
،

Saudi Banking Sector

Transcription

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