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BJAZ: Mortgage to drive growth, CoR is a key concern

  • BJAZ net income grew by 77.1% yoy to SAR322mn in Q1 21 while NIMs improved from 2.6% in Q1 20 to 3.0%
  • Despite a provision of SAR1.57bn in 2020 (CoR 3.0%), NPL ratio remains high (2.2% in 2020 and 2.5% in Q1 21)
  • We maintain our Neutral rating on BJAZ with a PT of SAR20.6

We maintain our Neutral rating on Bank Aljazira (BJAZ) with a PT of SAR20.6. The bank is amongst the main beneficiaries of the on-going mortgage growth given its retail tilt. However, credit quality may keep cost of risk elevated in the near-term which we believe is a key concern. We estimate the bank to deliver earnings CAGR of c17% during 2021-2025f, driven by better asset utilization and gradual ROE improvement from 9.8% in 2021f to 14.2% in 2025f. The stock trades at 2021f PB of 1.2x vs the 5-year average of 0.9x, but at 33% discount to peer group average.

·         A promising start to 2021f: BJAZ net income grew by 77.1% yoy to SAR322mn in Q1 21 while NIMs improved from 2.6% in Q1 20 to 3.0% as the impact of lower asset yields was offset by declining cost of funds. Despite a healthy gross loan growth of c8% yoy, asset quality remains a concern. NPL ratio increased to 2.5% in Q1 21 vs 2.2% in Q4 20 and coverage declined from 176% in Q4 20 to 159% in Q1 21. We expect strong earnings rebound in 2021f to SAR1.15bn from SAR34mn in 2020.

·         Gradual improvement in the asset utilization: Following the 2018 right issue, capital underutilization was a key issue. However, we believe BJAZ addressed it by efficiently utilizing its retail franchise to benefit from the on-going mortgage boom. Gross loans increased by c34% to SAR56.1bn in 2020 (vs the industry growth of c24%) in the past 2 years, increasing the mortgages contribution to c25% of the total loan book. As mortgage momentum continues, we expect BJAZ’s to grow its gross loans by c12% in 2021f to SAR62.9bn and deliver a 5-year CAGR of c8%. We expect NIMs to improve from 2.9% in 2020 to 3.1% in 2025f. Hence, better asset utilization is expected to lead to gradual improvement in ROE from 9.8% in 2021f to 14.2% by 2025f.

·         Improvement in coverage to keep CoR elevated: Despite a provision of SAR1.57bn in 2020 (CoR 3.0%), NPL ratio remains high (2.2% in 2020 and 2.5% in Q1 21). More specifically, BJAZ’s portion of Stage 3 loans is significantly higher than the sector (c6% in 2020 vs sector avg of 2.3%). Hence, BJAZ is expected to increase its coverage to 161% by 2021f (current 159%) to improve Stage 3 cover. Hence, CoR is expected to remain elevated at 1.0% in 2021f, higher than an avg of 0.4% during 2015-18. Going forward, we expect CoR to gradually decline to reach 0.4% by 2025f. Deviation from our assessment of asset quality is a major risk to our valuation.

·         Neutral with a PT of SAR20.6: We maintain our Neutral rating on BJAZ with a PT of SAR20.6. The stock trades at 2021f PB of 1.2x, higher than last 5 year average of 0.9x but at discount of 33% to the sector. 


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