Banking sector

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Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Saudi Banks Sector Banks –Finance 6 April 2017 income generally have moved along with net financing growth. Given that total financing growth has slowed (YTD down marginally), and trading volume on the Tadawul has remained weak in Q1 2017, we believe total commission and fees income may come under pressure. Figure 2 Commission and fees depends mostly on financing given SAR mn 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 SAR mn 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) (30,000) (40,000) Sequential change in loans (RHS) Commission and Fees Source: SAMA, Company data, Al Rajhi Capital Asset yields may not rise as much as expected: After rising sharply in H2 2016, we believe Q1 asset yields may not have risen as much as previously expected due to the fall in SAIBOR towards the end of the quarter. Assuming financing rates for corporates are reset every 6 months, total corporate book may re-price only after 6 months. Hence change in asset yields are likely to be more gradual as compared to change in SAIBOR. We note that average SAIBOR in Q1 (average of each day for the past 180 days) is slightly lower than in Q4 2016, which may lower asset yields on q-o-q basis contrary to estimates at the start of the quarter. Given different financing and deposit structure of banks, impact on banks are likely to vary with banks with higher corporate exposure likely to see re-pricing sooner as compared to banks with higher retail exposure. As a result, after healthy profits in 2 months, provisioning could weaken Q1 earnings further: As per SAMA’s monthly data, cumulative profit for months of January and February grew at a moderate pace of 3.5% y-o-y. We believe this may be attributable to an expansion in NIMs, helped by lower cost of deposits. However, as mentioned above, a potential increase in provisions could impact profitability for the quarter. In the past, banks have booked higher provisions in the third month of the quarter. We also observe that some banks have seen a sharp increase in past dues but not impaired financing. Liquidity squeeze is unlikely: SAMA has changed the calculation regulation for SAIBOR. The inter-bank exchange rate would now be calculated by Thomson Reuters, which our checks suggest is likely to reduce volatility. We believe there is unlikely to be a liquidity squeeze which could result in SAIBOR levels rising as we saw in 2H 2016. a) Financing growth, which remains correlated to gross capital spending is expected to remain moderate. As companies look to deleverage to save on financing costs, loan to deposit ratio may moderate. Moreover, if the government pays off its dues soon, it could further improve the liquidity situation. b) Additionally Saudi Arabia's government decided to suspend its monthly issue of domestic bonds in March (source: Maal). Even otherwise there is ample scope for SAMA to mitigate an unexpected liquidity squeeze. For example, even when Saudi Govt issued domestic bonds in the past, banks were able to purchase these bonds by selling SAMA bills held by them (See figure 18). So in-turn this resulted in shift from SAMA to Govt through two different instruments. Moreover, the liquidity with banks has improved over the last few quarters. The banking sector’s deposit with SAMA (including holding of SAMA bills) as a % of total deposits stood at c14%, up from a low of 11% in June 2016, while they are only required to hold 7% of Disclosures Please refer to the important disclosures at the back of this report. 2
Saudi Banks Sector Banks –Finance 6 April 2017 demand deposits and 4% of time deposits. Thus, even if the Saudi government issues domestic bonds, the banking system would have the ability to absorb it without squeezing liquidity. c) Moreover, Banks have sufficient liquid assets (in the form of investments) over and above the required 20% of deposits they are required to maintain. Valuation and risks: After moving up sharply in Q4 2016 on news of Govt payment of dues, the banking sector has thereafter declined in Q1 2017, (down 4.1% sequentially). In terms of valuations, the sector is currently trading at 1.2x FY2016 book value. However, if the government starts to pay its outstanding dues to companies, it could lead to repayment to banks, which may result in reversal of provisions and act as a catalyst for the banking sector stocks. Figure 3 Performance of Bank sector vs. TASI Figure 4 ROE (avg. last 4 quarters) vs. P/B (12m forward) 110.0 105.0 100.0 95.0 18.0% 16.0% Title: Source: NCB Al Rajhi Please fill in the values above to have them entered in your report 90.0 85.0 80.0 75.0 14.0% 12.0% SABB ANB BSF Samba Aljazira Albilad 70.0 65.0 60.0 10.0% 8.0% SIB Riyad Alawwal Alinma Banks TASI 6.0% 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 Source: Bloomberg, Al Rajhi Capital Source: Bloomberg, Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 3
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