- 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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The authors of this report hereby certify that the views expressed in this document accurately reflect their personal views regarding the securities and companies that are the subject of this document...