We remain Neutral on Al Rajhi with a PT of SAR94.3. The bank succeeded in growing market share (particularly in mortgages) and consistently exceeded its own guidance over the past two years. This, along with robust growth in fee & commission income, cost optimization and limited NPLs translated into best-in-class return profile. Going forward, we expect loan growth to remain strong but the impact of the foreseen interest rate hikes on NIMs is expected to be muted due to longer loan book duration and tightening liquidity. We expect the bank to deliver 2021-2024f earnings CAGR of 21%, translating into an average ROE of c24%. The stock trades at 2022f P/B of 4.6x vs peer group average of 2.2x. We believe the premium valuation is justified due to higher ROE.
Loan growth momentum to continue in 2022f: Al Rajhi’s loan book growth has been strong for the last two years as it was the prime beneficiary of the mortgage boom. The growth was significantly higher than the sector (Exhibit 1) and exceeded the management’s initial growth guidance (Exhibit 2). The loan book’s market share increased from c16% in 2019 to 22% in 2021 as Al Rajhi was able to capture c29% and c50% of new loans in 2020 and 2021, respectively. Recently, the bank improved its corporate offering to complement its strong retail franchise. Therefore, we expect 2022f to be another year of strong loan growth (+22% yoy vs +15% yoy for the sector). Going forward, we expect Al Rajhi’s loan growth to slow down (due to deaccelerating mortgage growth) but to continue to outpace the sector.
Superior asset quality and improved macro to maintain CoR: Despite a robust loan growth, asset quality remained strong (salary backed nature of retail loans). NPL ratio was 0.6% in Q1 22 (the lowest in the sector), with coverage ratio of 308% (one of the highest in the sector). Moreover, stage III coverage is at 76% (the second highest after AlBilad). This, along with improved macro environment (a key input for ECL model), is expected to keep the CoR low. We estimate CoR to be in range of 0.5%-0.6% over our investment horizon vs 0.8% and 0.7% in 2020 and 2021, respectively.
Loan growth and lower margins: We expect the strong loan growth to put pressure on margins, as we project Al Rajhi’s NIMs to compress from 4.2% in 2021 to c3.9% in 2022f. Mortgages contributed c39% of the total loan book in Q1 22, which we believe will reduce yields sensitivity to the increase in interest rates. Furthermore, rapid loan growth tightened the bank’s liquidity, which we believe will increase cost of funds going forward. We highlight that Al Rajhi is expected to be the only bank under coverage to record margin compression in 2022f.
Remain Neutral with a PT of SAR94.3: We maintain our Neutral rating on Al Rajhi with a revised PT of SAR94.3 (from SAR70.1). Stronger than expected loan growth, cost optimization measures and superior asset quality are key stock drivers. However, lower margins is the key negative. The stock is trading at 2022f P/B of 4.6x vs the peers group average of 2.2x. We believe the premium is justified given best-in class return profile.