Strategy Note /
Saudi Arabia

Al Rajhi Q3 22 earnings call notes

  • AlRajhi reported an in-line set of Q3 22 results, with net income increasing by 14.8% yoy

  • Mortgage grew 40% yoy and represents 38% of the total loan book and 50% of the retail book.

  • NPL ratio declined further to 55bps in Q3 22 compared to 67bps in Q3 21 and 57bps in Q2 22

SNB Capital
16 November 2022
Published bySNB Capital

Overview of Q3 22 results

  • AlRajhi reported an in-line set of Q3 22 results, with net income increasing by 14.8% yoy (+2.3% qoq) to SAR4.35bn.

  • The growth in net income was primarily driven by higher net special commission income (+9.1% yoy and +2.2% qoq) and supported by a decline in cost-to-income ratio to 25.8% in Q3 22 vs 26.7% in Q3 21.

  • Adjusted for Tier 1, net profit stood at SAR4.32bn, up 13.7% yoy (+2.9% qoq).

  • NIMs declined c56bps to 3.1% in Q3 22, in-line with our estimates. The yoy decline in NIMs can be attributed to flat asset yields yoy at 4.6%, coupled with an increase in funding costs by c89bps yoy to 1.2%.

  • NIM stood at 366bps in 9M 22 (vs 432 bps in 9M 21). The driver of contraction is mainly the retail book. However, lately the bank has been looking to re-price its assets. Increase in cost of funds has also contributed to NIM contraction (due to increase in SAIBOR).

  • Opex for Q3 22 was SAR1.9bn, up 6.1% yoy. For 9M 22, opex grew 6.1% yoy to SAR5.45bn.

  • There is a pressure on cost of funds, and this has already been factored in the bank’s forecast for FY22. Increase in interest rates is also leading to improvement in the gross yield.

  • The bank’s reported a strong loan book growth of 32.4% yoy (+7.3% qoq) to SAR557bn in Q3 22 and is the strongest growth reported from the all the banks reported so far in Q3 22 (only BSFR is yet to report). Deposits increased 16.2% yoy (+0.5% qoq) to SAR556bn.

  • The bank’s L/D ratio increase to 100.3% in Q3 22 vs 88.0% in Q3 21 and 94.0% in Q2 22. Adjusted for Tier 1 sukuk offering, LDR ratio remains high at 99% in Q3 22 vs 93% in Q2 22.

  • In terms of regulatory LDR, it increased to 88.4% in Q3 22 vs 83.8% in Q2 22 and regulatory ceiling of 90%.

  • LCR is at 121.2% and NSFR is at 110.2% as of Q3 22. Both are comfortably within the regulatory requirement.

Financing

  • Net financing increased 32.4% yoy (23.1% ytd) to SAR557bn in Q3 22.

  • The retail portfolio grew by 24.8% yoy (16.3% ytd) to SAR425.2bn in Q3 22 and represent c76% of the total financing book.

  • Mortgage grew 40% yoy and represents 38% of the total loan book and 50% of the retail book.

  • The non-retail portfolio (including corporate, SME, financial institutions) increased by 64.5% yoy to SAR132.3bn in Q3 22. 

  • The focus of corporate strategy is around Vision 2030, mainly SME business and government related project finance. The growth in corporate book is across all segments.

  • The financing portfolio of Emkan has reached SAR6.6bn as of Q3 22.

Asset Quality

  • Provisioning expenses declined sharply both yoy and qoq to SAR490mn in Q3 22. This resulted in a decline in cost of risk to 0.4% in Q3 22 vs 0.6% in Q3 21.

  • NPL ratio declined further to 55bps in Q3 22 compared to 67bps in Q3 21 and 57bps in Q2 22. NPL ratio of the retail book stood at 0.38%, while non-retail book NPL stood at 1.10%.

  • Coverage ratio came in at 272% as of Q3 22 (vs. 307.5% in Q3 21). However, the management highlighted that NPL coverage is not the main priority,  rather the main focus is to maintain a healthy stage coverage.

  • We highlight stage 3 coverage declined to 66.1% in Q3 22 vs 75.6% in Q4 21 and 71.7% in Q3 21. Furthermore, stage 2 coverage also declined from 27.8% in Q3 21 and 24.3% in Q4 21 to 19.8%.

Funding

  • Customer deposits increased by SAR44bn YTD to reach SAR556bn. CASA as a percentage of total deposits stood at c70%.

  • The bank has also raised SAR54bn interbank borrowing including SAR4.4bn ESG syndicated loan.

  • Through the Tier 1 sukuk issuance in January, the bank raised SAR6.5bn.

  • We highlight that the bank has issued additional sukuk  of SAR4.0bn on 30 October 2022 at 5.50% per annum fixed rate payable quarterly.

Cost to income

  • Cost to income ratio declined to 25.8% in Q3 22 vs 26.7% in Q3 21.

  • Several strategic initiatives supported by cost efficiency measures led to cost to income ratio of 25.6% at the end of 9M 22, an improvement of c1.6% yoy.

Capitalization

  • RWA stands at SAR479.2bn as of Q3 22 (vs. SAR395.8bn in Q3 21). Total capital (including Tier 2) stands at SAR93.8bn as of Q3 22 (vs. SAR71.0bn in Q3 21).

  • Tier 1 capital ratio stood at 18.4% in Q3 22 (vs 17.9% in Q2 22 and 16.8% in Q3 21). Total capital ratio is 19.6% vs 17.9% in Q3 21.

Outlook and Guidance

  • The bank is positive on the outlook of Saudi economy taking into considerations the 2023 initiatives.

  • The bank expects the Fed to hike by 75 bps in the coming meeting and 50 bps by December. This will add pressure to the cost of funds. Nevertheless, the bank continues to re-price its retail assets taking into consideration the ex-mortgage retail book.

  • SRC has revised up the mortgage subsidies cap rate in early October for the third time this year and extended the benchmark tenor to 30 years. The current mortgage origination rate is in the range of 6.0-6.5%.

  • The bank revised the financing portfolio guidance for FY22 to high twenties (earlier low twenties).

  • NIM guidance remains unchanged -55bps to -65bps.

  • Cost to income ratio guidance is revised to be below 26.0%.

  • ROE guidance is revised down to be in the range of 22.5% – 23.5%. The management will preserve the capital as it sees an opportunity to grow.

  • No change in cost of risk guidance (range of 0.40% - 0.50%).

  • Tier 1 capital ratio guidance also remains unchanged at 17% - 18%.