Equity Analysis /
Saudi Arabia

Albilad: Initiation – Market share growth and efficiency gains drive return

    SNB Capital
    23 May 2019
    Published by

    We initiate coverage on Bank Albilad with a Neutral rating and a PT of SAR25.9. We forecast the bank to deliver a five-year earnings CAGR of 15.2% (one of the highest in our universe), driven by volume growth and a declining cost of risk. This would mitigate the impact of muted margin expansion given the bank low surplus deposits. We believe the strong earnings momentum is priced in at current levels and the stock is fairly valued at 2019f PB of 2.1x, given its higher than industry average ROE of 13.4%.

    Strong market share growth: The bank has been quick to fill the vacuum left by the conservatism of others. It primarily focuses on the retail segment (41% of loan book vs industry average of 30%) as it leverages on Saudi consumers’ preference for Islamic banking. We believe this has worked well for the bank, especially in the current environment where growth is muted in the corporate sector. The bank has recorded the fastest growth in assets with a five-year CAGR of 15.2% up to 2018. Going forward, we believe the bank is set to benefit from the Vision 2030 focus on affordable housing and the SME sector, and we expect a loan growth CAGR of 12.1% during 2019-23f. 

    Improving asset quality: We are also relatively comfortable with the bank’s asset quality. Although its focus on the retail segment has kept its NPL ratio and cost of risk high, encouragingly, it also has one of the highest coverage ratios of 235% in the industry. More importantly, its Stage 3 loan coverage is 101.8%, the highest in the industry. Hence we expect a gradual decline in cost of risk from 1.0% in 2018 to 0.7% during 2019-23f.

    High cost base weighs on profitability: Despite having the highest asset turnover in the sector, the bank’s ROA is one of the lowest among its peers. The bank enjoys above-average margins (due to its retail and SME focus), but higher operating costs dilutes this impact. Going forward, we expect ROE to be lifted by higher cost efficiency, attributable to economies of scale and higher utilization of existing infrastructure. We expect the cost to income ratio to decline from 53.1% in 2018 to 47.2% by 2023f, and ROE to grow from 13.0% in 2018 to 16.1% by 2023f. 

    Fairly valued at 2.1x PB: We initiate coverage on Bank Albilad with a Neutral rating and a PT of SAR25.9 (upside of 4.0%). Strong market share growth and efficiency gains are key stock drivers. However, we believe the stock is fairly valued at 2019f PB of 2.1x, higher than the peer group average of 1.9x, but justified given its above-average ROEs.