Equity Analysis /
Saudi Arabia

Saudi Banks: Rate reduction priced in

    SNB Capital
    9 September 2019
    Published by

    Post the first cut in rates in over a decade, the US Fed interest rate outlook has changed. Markets now expect at least another 25bps rate cut by the end of 2019. We expect rate cuts to create earnings headwinds for Saudi banks, but better than expected asset spreads should soften the impact. Nevertheless, considering the cost of risk adjustment, we lower our combined EPS estimates by 3-12% over 2019-23f.

    Fed adjusts rates to new reality: The Fed lowered its key benchmark rate by 25bps in July 2019, but more importantly, showed willingness to provide further support as required. We have adjusted our interest rate assumption to incorporate a 50bps reduction in 2019f and no change in 2020.

    NIM reduction to be gradual rather than immediate: We expect the impact of lower interest rates would be gradual as better margins on mortgages are keeping asset spreads elevated. We increase 2019f NIM estimates by 15bps on better Q2 19 realised margins, but lower our NIM estimates by 1-25bps over 2020-23f. We expect retail focused banks to fare better than their corporate focused peers as the formers have longer duration loan books.

    Combined EPS reduced by 3-12% over 2019-2023f: We lower our earnings estimates by 3-12% over 2019-23f. The near-term earnings revision is more a function of increased cost of risk (particularly for Samba) rather than NIM reductions. We now expect our banking coverage universe to deliver earnings growth of 8.5% and 7.5% in 2019 and 20f (previously 12.3% and 11.8%), respectively, leading to 5-year earnings CAGR of 8.4%. 

    Balance sheet assumptions broadly unchanged: We marginally increase our loan growth assumption to 5.1% for 2019f from 4.3%, largely driven higher loan growth assumption for AlRajhi. Mortgages would remain the major loan growth driver. However, work on the Mega projects remains a potential catalyst. Accelerating work on NEOM, Red Sea and other projects may potentially reignite loan demand from construction related sectors.

    Prevailing valuations reflect new earnings estimates: Based on our revised earnings, the sector trades at 2019f PB of 1.9x, a significant premium to the 5-year average of 1.5x. However, the inflated valuation is largely due to AlRajhi and Albilad. Other stocks such as Samba, BSFR, Alinma and BJAZ have largely reverted back to their 5-year mean, following the stock price corrections post the MSCI EM inclusion.

    Our target price changes:

    • Al Rajhi Bank: We lower our TP to SAR62.0 (from SAR73.6).
    • Samba: We lower our TP to SAR29.5 (from SAR37.3).
    • Banque Saudi Fransi: We upgrade to Neutral but lower our TP to SAR33.1 (from SAR35.0).
    • Bank Al-Jazira: We lower our TP to SAR15.4 (from SAR17.1).
    • Alinma Bank: We lower our TP to SAR24.1 (from SAR28.8).
    • Bank Albilad: We raise our TP to SAR26.9 (from SAR25.9).