Equity Analysis /
Saudi Arabia

Bank AlJazira: High capitalisation to unlock growth potential

    SNB Capital
    28 November 2019
    Published bySNB Capital

    We upgrade Bank AlJazira (BJAZ) to Overweight with a PT of SAR16.2. BJAZ’s enhanced capitalisation is a key growth driver, which would allow the bank to improve the utilization of its existing franchise. We believe dividends growth is a key advantage of the bank, with yields increasing from 3.7% in 2018 to 5.1% in 2019f and reaching 8.4% by 2023f. The stock trades at an attractive 2020f P/B of 1.0x, lower than the peer average of 1.8x.

    Enhanced capital to unlock value in retail franchise: BJAZ has a strong retail focus with retail loans accounting for 47% of total loans. The bank also has a leading position in the brokerage and remittance business, which accounts for c40% of fee income. We believe these factors are key enablers for the bank to improve the utilisation of its asset base. In Q3 19, BJAZ’s loan book recorded a strong growth of 10.8% yoy driven by mortgage loans. This is higher than industry average of 3.4%. Furthermore, we believe improved capitalization, after last year’s rights issue, places the bank in a better position to benefit from the anticipated credit growth in 2020f, supported by the accelerated work on Mega projects. We expect loan book to grow +12.1% and +11.8% in 2019f and 2020f vs -5.5% and +3.3% in 2017 and 2018, respectively. 

    Cost base to remain elevated: We highlight that our estimates related to costs remain conservative. We have maintained cost of funds assumptions elevated as we believe the bank needs to capture additional deposits to funds its loan growth. Furthermore, we have factored in a cost of risk of 0.6% for 2020f vs 0.3% for 2018 and 2019f as the bank has relatively high stage 2 loans. Hence, we expect a decline in earnings in 2020f to SAR962mn (-5.2% yoy before a recovery in 2021f to SAR1.17bn. 

    Earnings outlook revised lower: We revised our estimates downward after factoring in the additional 25bp rate cut in October 2019. We expect NIM to decline to 2.9% in 2019f and further to 2.6% in 2020f from 3.1% in 2018. This compares with our earlier estimates of 3.0% and 2.9% in 2019f and 2020f, respectively. We revise downwards our net income forecast to a CAGR of 10.1% in 2018-23f vs 12.8% earlier. 

    Strong capitalisation supports higher dividend payout: Despite a downward revision in our estimates, we expect BJAZ to increase its dividend payout. We expect payout ratio to reach 56.6% in 2019f and reaching 62.5% by 2023f. This compares with our previous estimates of 39.4% in 2019f and 23.9% in 2023f. We believe the potential for higher dividend payout is supported by high capitalisation of the bank.

    Attractive valuation, upgrade to overweight: We upgrade BJAZ to Overweight with a PT of SAR16.2. We believe robust capitalisation and the focus on the retail segment are the key drivers for the stock. The stock trades at an attractive 2020f P/B of 1.0x, lower than peer average of 1.8x which we believe is not justified.