Saudi banks have maintained relatively high profitability for 2012 despite high provisioning, NCB Capital says in its latest report.
NCB Capital is described as the GCC’s major wealth manager and the Kingdom’s largest asset manager.
“We revise our profit CAGR for 2011-16 down from 14.5 percent to 12.1 percent due to our expectations of tighter margins, lower fee income and increased provisions,” said Mahmood Akbar, equity research analyst at NCB Capital.
“This has reduced our PTs slightly. We continue to be positive on the sector, which is trading at compelling valuations. Our preference continues to be the large-cap banks, such as Al-Rajhi, Riyad and Samba,” said the analyst.
Akbar added: “Given our downward revision in fee income and margins, coupled with higher-than-expected provisioning in Q3 2012, we revise our PT’s down by an average of 1.8 percent with SABB and BSF seeing the biggest declines at 7.5 percent and 4.5 percent respectively. Nonetheless, we continue to believe that banks are trading at compelling valuations. Our ratings for all banks remain the same with Al-Rajhi, Riyad and Samba our top picks due to their attractive valuations, good growth potential, and ability to absorb potential credit losses.”
The report states that asset quality remains intact despite increased provisions, noting that, despite the Al-Mojil Group (MMG) exposure, which was less than 0.15 percent of the total loan book of the exposed banks, Saudi banks post relatively low NPL ratios. Management feedback indicates that concerns over cash flow problems were limited to a small number of contracting companies with this easing recently.
Therefore, it says the provisioning charges reflect conservative banking regulations rather than expectations of deterioration in asset quality.
Commenting on medium- and long-term lending to partially offset margin contraction, Akbar said: “Saudi banks have increased their time deposit base and LT debt issues in 2012 and we believe that this is to support the ‘chase’ for higher yielding medium and long-term loans. We expect NIMs in 2013 to remain at 2.77 percent, in line with the 2012 level.”
He added: “There continues to be counter-consensus with preference for large caps. Despite the recent declines in banking sector stocks, we believe the market is underestimating the growth potential and overestimating the impact of provisioning. We believe Q4 2012 earnings will be a catalyst for upside returns.”
Overall, for the 10 banks under the report’s coverage, NCB Capital expects net income to grow 12.9 percent YoY and 1.5 percent QoQ in Q4 2012.
The 1.5 percent QoQ growth in Q4 2012 net income is expected to be mostly driven by lower provisioning. Adjusting for the spike in Q3 2012 provisioning, the report expects pre-provision profits for Q4 2012 to decline 4.2 percent QoQ due to a 2.1 percent QoQ decline in total operating income. Lower fee income is expected from reduced loan volumes growth and capital market activities to affect non-interest income, while a 4bps QoQ contracting in NIMs will keep NSCI flat on QoQ.
“Our estimates remain conservative compared to other analysts,” said Akbar.
“While our estimate for 2012 net profit is 0.8 percent higher than consensus, our 2013 and 2014 forecasts are 5.3 percent and 6.1 percent lower than consensus respectively for the 10 banks under our coverage. We believe this reflects our conservative assumptions for margins and loan growth.”
Akbar said: “In this update we remain Overweight on seven of the banks under coverage — Al-Rajhi Bank, Samba Financial Group, Riyad Bank, Saudi Hollandi Bank, Banque Saudi Fransi, SABB and Arab National Bank. We retain our Neutral rating for Bank AlJazira and Saudi Investment Bank, and maintain our Underweight rating for Bank AlBilad.”
Summary of bank-specific ratings:
NCB Capital remains Overweight on Al-Rajhi with a PT of SR 89.4. We believe the bank’s NSCI will be driven by credit volume in the short-term and by increased margins in the long term. Furthermore, ability to increase top-line income leaves limited impact of growing provisions on the net income growth.
Samba Financial Group
NCB Capital remains Overweight on SAMBA with our PT of SR59.7. Samba’s focus on growing lending has increased its loan-to-customer deposit ratio to 68.5 percent, the highest in three years. Its improved asset quality is likely to reduce its provision charges in the near-term. We expect this to partially offset the lower non-interest income and reduce the negative impact on net earnings.
Riyad Bank (RIBL)
NCB Capital remains overweight on RIBL with our PT declining marginally by 0.6 percent to SR 33.4. RIBL’s focus on improving NIMs has enabled it to grow total operating income, despite lower loan growth. In addition, improved cost efficiency has improved its pre-provision profits. However, due to its lower NPL coverage ratio we expect provision charges to remain high in the short term limiting its profit growth.
Saudi Hollandi Bank (SHB)
NCB Capital remains Overweight on SHB with a revised PT of SR33.0. In the backdrop of strong 9M12 performance and focus on growth strategy, we revise SHB’s loan, top-line and profit forecasts upward by 3.6 percent, 2.6 percent and 6.9 percent respectively for 2012.
Banque Saudi Fransi (BSF)
NCB Capital remains Overweight on BSF. High provisioning has limited BSF’s short term net income growth which reduced our TP 4.5 percent lower to SR 37.1. Nonetheless, we expect it to post better net income growth than the industry growth during 2012-2016. We expect the recently raised LT debt to support its loan book expansion while lower C/I ratio is expected to translate to higher ROE. We remain Overweight with its current valuations very attractive.
NCB Capital remains Overweight on SABB. The bank continues with its strategy to grow loan volumes. We believe SABB’s ability to increase its loans faster than sector growth will increase its net income in-line with industry (given the tight margins) and generate one of the better returns over equity. We maintain our Overweight rating on the stock with our PT revised 7.5 percent lower to SR 39.1 percent.
Arab National Bank (ANB)
NCB Capital remains Overweight on ANB. We expect ANB will need to increase its capital base to grow its loan books at an estimated CAGR of 13.2 percent in 2011-16. Its ability to maintain NIMs and strong asset quality will enable it to grow its net income at a CAGR of 13.2 percent in 2011-16. Hence we remain Overweight on ANB with a revised PT of SR 34.0.
Bank AlJazira (BJAZ)
NCB Capital remains Neutral on BJAZ with a revised PT of SR 21.1. We believe the bank will need to increase its capital base in medium- to long-term in order to maintain the strong growth momentum. Despite significant net income growth for the last seven quarters, BJAZ’s ROE remains lower than the sector average. In addition, lower volumes on Tadawul in 2013 will limit profit growth.
The Saudi Investment Bank (SAIB)
NCB Capital remains Neutral on SAIB. Good loan growth and hence improved NSCI are likely to keep the bank’s top-line growth strong going forward. However, SAIB’s profitability (ROE) is weak when compared to peers. Any decline in its cost-to-income ratio will positively add to its ROE. We retain our Neutral rating on the stock.
NCB Capital remains Underweight on Bank AlBilad. We maintain our ‘underweight’ rating on AlBilad due to expensive valuations. The bank’s growing loans and ability to maintain margins are expected to translate into higher net income growth going forward. However, we expect the bank to increase its provisions to improve its coverage ratio.