Equity Analysis /
Saudi Arabia

Saudi banking sector: Volumes supersede margins

    SNB Capital
    2 May 2019
    Published by

    Growth-orientated banks to outperformAs the US Fed suspends its plan to raise interest rates further this year, we believe SAMA may follow suit and earnings growth would be driven by volumes and cost efficiencies. This scenario favors relatively smaller banks with a retail focus such as Alinma, as loan growth in the corporate sector is expected to remain muted. We expect overall loan growth to remain moderate, but slightly higher than last year (4.3% in 2019 vs 2.4% in 2018). Mortgage financing is expected to be the key driver for loan growth, given the government’s increased focus on this area. Furthermore, we believe commencement of work on the Vision 2030 related Mega projects would also be a catalyst for loan growth towards the later part of the year.

    Remain watchful on asset quality: We remain mindful of the drop in asset quality with the NPL ratio inching up to 1.9% in Q4 18 and coverage dropping to 158.3%. There is some stress in the system, which may keep cost of risk elevated. However, we are comfortable with Samba as it has the lowest Stage 2 loans (i.e. lower migration risk to Stage 3). We expect AlRajhi, BSFR and Alinma’s cost of risk to remain elevated, given lower Stage 3 coverage. Furthermore, BSFR and Alinma have relatively higher Stage 2 loans as well. 

    Managing the cost base remains a key for profit margins: Margins remain a function of controlling the cost base. The sector’s cautious lending approach and competitive pressures are constraining factors on asset spreads which have come down to 1.8% in Q4 18 (vs 2.4% in Q4 17). Furthermore, a shift towards time deposits, given attractive interest rates, continues to push funding costs upwards. However, we believe banks with a strong retail deposit base should be able to control their costs and see some margin expansion. We expect sector NIMs to expand by an average 12bps to 3.8% in 2019 vs 21bps in 2018.