We remain Neutral on BJAZ with a revised PT of SAR26.3. As the bank is adequately capitalized and have comfortable liquidity position, we believe BJAZ is well positioned to capture new opportunities through its strategy to improve product offerings to better suit its target market. Optimizing its cost base should also improve profitability, in our view. We remain conservative with our estimates and expect a 2021-24f earnings CAGR of 22.7%, resulting in ROE of 13.6% by 2024f. The bank trades at 2022 PB of 1.9x (vs sector average of 2.4x), substantially lower than other Sharia banks average of 4.0x.
Improved product offering to potentially lead to strong loan growth: BJAZ was amongst the first participants of the mortgage boom, but has recently lagged behind its peers. During Q1 22, the bank’s loan book grew by a modest 1.3% qoq (+14.7% yoy), underperforming the sector growth of 4.7% qoq (+14.8% yoy). As the bank is adequately capitalized (Q1 22 CAR: 23.5%) and have comfortable liquidity position (LDR of 80%), we believe BJAZ is well positioned to capture new opportunities through improving product offerings to better suit its target market (mid-size corporate/retail). Overall, we remain conservative in our assumptions and expect 12% loan growth in 2022f (lower than our industry assumption of 15% yoy).
Change in the asset mix can improve margins: The impact of higher interest rate is expected to be muted on BJAZ’s margin, given a relatively longer loan book duration. Mortgages contribute c24% of the total loans, which we believe will reduce NIMs sensitivity to rate changes. We expect NIMs to expand from 2.9% in 2021 to 3.0% in 2022f and further to 3.4% by 2024f. We highlight that improved asset turnover provides potential upside to our forecast. However, it depends on improved product offering (both for retail & mid-size corporate) and assets mix.
Superior asset quality: Although gross NPL ratio of 2.2% (in Q1 22) is marginally higher than sector average of 1.8%, BJAZ’s overall coverage of 191% is significantly higher than the sector average of 135%. Moreover, stage III coverage ratio of c60% is broadly in-line with industry avg (above Basel req. of 50%). We expect NPL and coverage ratio to remain at similar level throughout our forecast period, leading to moderation of cost of risk (CoR) from 3.0% and 1.2% in 2020 and 2021 to range between of 0.7%-0.8% between 2022-24f.
Remain Neutral with a PT of SAR26.3: We remain Neutral on BJAZ with a PT of SAR26.3. Improved asset turnover could potentially unlock value, but that is dependent on the ability to improve product offerings and the rationalization of C-I ratio. In our base case, we estimate ROE to gradually improve from 8.6% in 2021 to 13.6% in 2024f. Better performance of new product offerings is a key upside risk to our forecast. The stock trades at 2022 P/B of 1.8x (vs sector avg of 2.4x), substantially lower than Sharia banks average of 4.0x which we believe is justified given lower ROE.