We remain Neutral on AlRajhi with a PT of SAR112.2. AlRajhi’s asset quality remains robust with a comfortable liquidity position. Therefore, we expect loans growth to remain strong (+36% yoy) despite the mortgages slowdown. Moreover, we expect the cost optimization measures to provide support to profitability. We expect earnings to grow at a CAGR of 20% during 2020-23f, leading to ROE expansion from c19% in 2020 to 25% in 2023f. The stock trades at 2021f PB of 4.7x, 85% higher than the historical average which fully reflects all the positives.
Mortgages to drive strong loan growth: Loan book grew by 10% qoq (+42% yoy) in Q2 21 to SAR390bn, taking the ytd growth to 24% and exceeded our previous 2021f estimate of 18%. Although mortgages decelerated in Q2 21, it was mitigated by strong growth in non-mortgage retail and corporate lending, which grew by 30% yoy (+9% qoq) and 18% yoy (+8% qoq) respectively. In terms of origination, mortgages contributed c41% in Q2 21 (52% in Q1 21). Subsequently, we have revised our loan growth forecast to 36% yoy in 2021f.
Asset growth to keep Tier-1 under pressure and funding costs high: AlRajhi management increased its CET1 guidance for 2021f, despite the strong growth foreseen in RWAs. To be more conservative, we expect CET1 ratios to decline to 15.9% in 2021f from 16.9% in Q2 21. Additionally, AlRajhi has been funding its loan growth mainly through savings/time deposits, which reduced demand deposits/total deposit from 94% in Q2 20 to 80% in Q2 21.
Higher loan growth to increase CoR: The bank’s superior asset quality (87% L/D, 0.7% NPL, 318% coverage) remains intact and we expect it to lead to a relatively low CoR of 0.63% in 2021f (3-yr avg of 0.72%). Given the high loan growth, we have increased our CoR assumption to 0.81% in 2022f.
NIM declines offset by improved operating metrics: NIMs stood at 4.3% in Q2 21, lower than 4.4% in Q1 21 and 4.6% in 2020. We believe the decline in NIM is due to lower mortgage origination and lower rates. We expect NIMs to reach 4.2% in 2022f from 4.4% in 2021f. On the other hand, AlRajhi’s cost/income ratio declined to 27.3% in Q2 21 vs c33% over 2015-20 due to the successful completion of 70 cost-saving initiatives. We expect the ratio to reach c25% by 2023f.
Remain Neutral with a PT of SAR112.2: We maintain our Neutral rating on AlRajhi with a revised PT of SAR112.2 (from SAR84.2). The PT adjustment is due to 1) stronger than expected loan growth and 2) the implementation of cost optimization measures. These factors are expected to increase the next 5-year median ROE to 25% vs 16% in the past 5 years. However, the stock trades at 2021f PB of 4.7x, which we believe is pricing in all the positives.