"Nonetheless, we expect a bottoming out of margin contraction in 2013E and hence expect current valuations to improve. All our ratings are unchanged; we continue to prefer large-caps banks such as Al Rajhi, Samba and Riyad which trade at attractive levels and offer high dividend yield."
In the report, NCB Capital revises its estimates for profits for 2013E for the ten banks under its coverage 2.5% lower to SAR29.4bn due to a 16bps reduction in its estimate for NIMs. This leads to NCB Capital's expectation of profit growth of 6.8% YoY in 2013E compared to our earlier estimate of 9.5%. The change in asset mix towards consumer financing will limit the NIMs' decline to 9bps for 2013E compared to the 14bps decline in 2012.
"Our NIMs' estimates are more conservative than management guidance," notes Mahmood Akbar. "We believe our estimate for margin contraction is on the higher end of the management guidance range of 5-10 bps. We are concerned about the similarities of strategies between banks, particularly the focus on lending to the consumer segment. We believe this supports our estimate for loans yield spread over SAIBOR, which we forecast to decline by 31bps in 2013E.
"Despite the margin contraction, we continue to believe that valuations remain attractive with dividends limiting further downside risk on share prices. Indeed our forecasts do not incorporate the expected increase in global interest rates in 2016E. Hence, we only assume a marginal increase of 27bps in 2013-17E.
NCB Capital's valuation call is based on P/B expansion. The sector is trading at a 2013E P/B of 1.5x compared to its historic five year average of 2.3x. "We believe this discount is not justified as we expect a bottoming out of margins. Hence we expect valuation multiples to revert to its historic mean," stated Mahmood Akbar.
"We revise our estimates for net interest margins down for 2013E for banks under our coverage from 2.70% in 2012 (hence flat YoY) to 2.61% which represents a 9bps decline YoY," commented Mahmood Akbar. "We believe the combination of greater competition from banks for lending opportunities as well as abundant liquidity in the Saudi economy will put further pressure on NIMs in 2013E. However, the extent of the decline will be lower than in 2012 when margins contracted by 14bps.
"The decline in margins is the main contributor to the 2.5% downward revision in our estimates for 2013E profits to SR29.4bn. Nonetheless, we still see good profit growth of 6.8% in 2013E from 2012, although slightly lower than our previous growth estimate of 9.5%. Given the lower expected margins for 2013E, we expect the profit growth to be driven mostly due to a 12.5% expansion in loan books.
"Overall we expect net profit CAGR of 11.1% during 2012-16E which is slightly lower than our previous estimate of 12.7%. We expect this to be led by an 11.6% lending CAGR. We continue to be conservative with our estimates for margin, expecting only a 10bps improvement during the stated period."
NCB Capital notes that significant growth in money supply reflects abundant liquidity. With oil prices continuing to trade at elevated levels, coupled with the significant increase in budgeted government expenditure, liquidity in the Kingdom continues to be high. This supports the decline in yields while expanding the balance sheets of banks due to the increase in deposits. Overall, NCB Capital expects customer deposits to increase by 10.2% YoY in 2013 for banks under the report's coverage led by the aforementioned factors
AL RAJHI BANK
"We remain Overweight on Al Rajhi, with a revised PT of SR88.4," stated Mahmood Akbar. "We believe in Al Rajhi's strong fundamentals, ability to grow top-line and post good profits despite the higher cost of risk. Expectations of further selling by some of the inheritors has put downside pressure on the stock; however we believe this offers long-term investors a compelling opportunity to enter the stock."
SAMBA FINANCIAL GROUP
NCB Capital remains Overweight on SAMBA with a revised PT of SR57.7 and is positive on the bank's strategy to grow lending and increase its loan-to-customer deposit ratio. This is likely to enable YoY growth in NSCI that declined for past three years and keep its top-line growth strong. Overall NCB Capital expects profit growth of 8.8% for 2013E driven by a loan growth of 12%.
"We remain Overweight on RIBL with our revised PT at SAR33.8," said Mahmood Akbar. "The focus on improving NIMs through further penetration into the consumer lending segment is expected to continue to lead the growth in operating income. Our net income estimate is revised up by 1.8% for 2013E mostly due to the 4.3% upward revision in our forecast for net loans. Contraction in NIMs is a key risk for RIBL."
SAUDI HOLLANDI BANK
NCB Capital remains Overweight on SHB with revised PT of SR35.4 and is positive on the bank's strategy to focus on SMEs for loan growth. Although NCB Capital expects margins to remain under pressure in 2013E, it expects profit growth of 8.3% led by loan growth of 13.9%.
BANQUE SAUDI FRANSI
BSF's strategy is to target corporate clients to grow retail loans and increase term debt to support corporate lending. NCB Capital believes this is likely to grow net loans at a CAGR of 11% during 2012-17E. In addition, better asset quality and lower cost-to-income is expected to translate to higher profit growth compared to industry. "We remain Overweight on the bank's stock with PT of SR37.1," stated Mahmood Akbar.
NCB Capital maintains its Overweight rating on SABB with revised PT at SR41.0. SABB's strategy to grow loan volumes will enable the bank to increase its NSCI faster than other peers. This is likely to enable SABB to grow its net income in-line with the industry, despite the tight margins and higher provisions.
ARAB NATIONAL BANK
"We maintain our Overweight rating on ANB with a revised PT of SR32.3," said Mahmood Akbar. "We believe the current valuation does not incorporate the good profit CAGR of 13.3% expected in 2012-17E. Additionally, with highest NPL coverage ratio, we expect a small 1.8% increase in provision which should support its bottom-line growth. Higher cost of funds due to higher share of time deposits is a key risk to our assumptions for top-line growth."
NCB Capital remains Neutral on BJAZ with a revised PT of SR23.3. "We expect the bank's net income to grow 14.4% in 2013E due to an expected 14.6% loan growth," said Mahmoud Akbar. "Although we expect the bank's net income to grow faster than industry during 2012-17E, its ROE will remain below peers' aggregate during the forecast period due to the high cost-to-income ratio."
THE SAUDI INVESTMENT BANK
Improved asset quality and focus on retail segment is expected to translate into strong profit growth. However, margin contraction in short term is most likely due to high share of time deposits. NCB Capital believes SAIB's growth potential is priced-in and maintains its Neutral rating on the stock with revised PT at SR19.2.
"We maintain our Underweight rating on AlBilad with a revised PT at SR23.3," concluded Mahmood Akbar. "Although we believe growth stocks like AlBilad should be trading at a premium, we believe current valuations prices this growth at an excessive premium. Hence we maintain our Underweight rating on the stock."