We downgrade Alinma to Neutral with a revised PT of SAR38.2. We believe the bank is well positioned to benefit from the hawkish interest rate environment given its corporate tilt. Additionally, the bank’s new strategy to grow the retail segment (HNWI), capitalizing on the corporate segment’s capabilities and advantageous cost structure, is expected to support growth. Accordingly, we expect earnings to record a 2021-2024f CAGR of c28.1%. However, the stock rallied by c56% since our last update and we believe the current stock price reflects these positives. The stock is trading at 2023f P/B of 2.3x, higher than the sector average of 2.0x.
Rate hikes to underpin asset yields and NIMs: Since the beginning of the year, the US Fed hiked interest rates in five consecutive meetings to 3.00%-3.25% with another hike of 125-150bps expected in the coming few months. We believe Alinma is relatively well placed to benefit from the rising interest rate environment due to its corporate tilt (c76% of the loan book is corporate). However, increasing competition is expected to impact credit spreads. We expect asset yields to expand by 30bps and 164bps in 2022f and 2023f, respectively. We also remain mindful that the tight liquidity in the banking system will amplify the impact of higher interest rates on cost of funds. Overall, we expect the impact on higher interest rate to remain muted on NIMs in 2022f (flat yoy at 3.4%), and to expand to 4.1% in 2023f.
Corporate lending to drive loan growth: Alinma’s strong corporate loan book and its expertise in project financing makes it one of the beneficiaries of Mega projects related lending. Accordingly, we expect the bank to grow its loan book at a CAGR of c9.5% over 2021-24f to SAR166bn. The management expects loan book to increase by low-teens in 2022f vs 10% growth in H1 22, largely driven by strong growth in the mid-corporates and SME segments. The retail segment is also expected to show robust growth, but its contribution remains limited. However, we highlight that Mega project related loan growth may potentially reduce credit spread.
Sound asset quality metrics: NPL ratio declined to 1.9% in Q2 22 from 2.01% in Q1 22 while cost of risk reached 0.7% in H1 22 from 1.1% in 2021. However, coverage ratio declined to 150.1% as of Q2 22 from 177.1% in Q4 21. Stage 3 coverage declined in Q2 22 due to migration of some accounts from stage 2. Going forward, we believe Mega projects related lending will reduce asset quality risk. Nevertheless, the management aims to maintain the coverage ratio in-line with the industry average. Subsequently, we expect coverage ratio to gradually increase to 158% in 2024f, which will keep cost of risk at c0.6% for 2023f-2024f.
Downgrade to Neutral with a PT of SAR38.2: We downgrade Alinma’s to Neutral with a PT to SAR38.2. The stock rallied by more than c56% since our last update in December 2021. We believe the foreseen interest rate hikes and the bank’s new strategy will be the key earning drivers. However, we believe these positives are priced-in at the current levels with the stock trading at 2023f P/B of 2.3x, higher than the peer group average of 2.0x.