Equity Analysis /
Saudi Arabia

Banque Saudi Fransi: Rate hikes to drive asset yields

  • Rate hikes to support asset yields

  • Cost of Funds to rise as LIBOR-SAIBOR spread increase

  • Remain Neutral with a PT of SAR49.9

SNB Capital
27 March 2022
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We remain Neutral on BSFR with a PT of SAR49.9. We believe the bank is well positioned to benefit from the foreseen interest rate hikes given its corporate tilt. Moreover, we expect loan growth to remain strong at 14%-12% in 2022f-2023f vs 13% in 2021 driven by the expected acceleration on Mega projects. However, we highlight that the bank’s tight liquidity position may impact its cost of funds while its cost of risk is expected to remain elevated as it improves its coverage ratio. We expect the bank to deliver a 3-year earnings CAGR of 19%. The stock trades at 2022 P/B of 1.8x, c40% premium to its last 5 years average of 1.3x.

  • Rate hikes to support asset yields: The US Federal reserve recently hiked interest rates by 25bps and indicated six more hikes this year and at least three in 2023f. We believe BSFR is a key beneficiary from the rate hikes as more than 80% of its loans are corporate which are re-priced faster than consumer loans. We expect the yield on earning assets to rise above 4% in 2022f and surpass 5% in 2023f compared to 3.2% in 2021. We also highlight that the bank has significantly reduced its swap book (see Exhibit 4), which increased its sensitivity to interest rate movement.

  • Cost of Funds to rise as LIBOR-SAIBOR spread increase: We highlight that the bank’s tight liquidity position poses risk to its cost of funds (at least in the near term). LDR (Loan to deposit ratio) further increased to 104% in 2021 vs 102% in 2020 and 94% in 2019. Therefore, we expect the bank to increase its costlier time deposits to finance its loan book growth (loan growth of 14%-12% in 2022-2023f vs 13% in 2021). Moreover, we expect additional headwinds due to the sharp increase in SAIBOR, with LIBOR-SAIBOR spreads increasing to c110bps vs c70bps at the beginning of the year (see Exhibit 3). Accordingly, we estimate CoF to rise to 1.2% in 2022f and further 1.7% in 2023f vs 0.3% in 2021. We estimate NIMs to expand to 2.8% in 2022f vs 2.6% for 2021. For 2023f, we expect NIMs to reach 3.4%.

  • Cost of Risk to remain broadly stable as the bank improves coverage: We expect the cost of risk to increase to 0.9% in 2022f vs 0.7% in 2021, but will remain significantly lower than 2.1% in 2020. Although we expect the overall credit quality to remain stable (NPL ratio of 2.5% in 2022f, similar to 2021), higher CoR is primarily due to the improvement in coverage ratio. The bank’s coverage ratio stood at 122.7% in 2021 vs the industry average of 143%. We expect the coverage ratio to improve to 139% in 2022f and 144% in 2023f to be broadly in-line with the industry.

  • Remain Neutral with a PT of SAR49.9: We remain Neutral on BSFR with a revised PT of SAR49.9. The anticipated rate hikes are expected to be the main earnings driver for the bank while increasing competition, liquidity pressure and higher CoR are the main risks which we believe justify our neutral rating. The stock trades at 2022 P/B of 1.9x, c40% premium to its last 5 years average of 1.3x.