Download - SHUAA Capital

Saudi Banks
Q2 14 preliminary results
Net income growth accelerated on operating income strength
NIMs surprised positively, provisions were mixed
15th July 2014
Coverage Universe
Al Rajhi
Recommendation
Target Price (LC)
HOLD
71.40
ANB
Recommendation
Target Price (LC)
HOLD
28.45
BSF
Recommendation
Target Price (LC)
HOLD
32.70
Riyad
Recommendation
Target Price (LC)
HOLD
17.30
SABB
Recommendation
Target Price (LC)
BUY
56.50
Samba
Recommendation
Target Price (LC)
BUY
47.60
SHB
Recommendation
Target Price (LC)
BUY
48.00
Q2 14 NET INCOME BEATS CONSENSUS BY 5% ON AGGREGATE
Saudi banks reported preliminary Q2 14 results over the past two weeks. For the seven banks we cover, net income was 5%
above consensus on aggregate. Net income growth accelerated to 7% YoY (vs 4% YoY in Q1 14) on the back of strong loan
book expansion, NIM resilience and double-digit non-interest income growth across the board (see below for details). SHB, one
of our top picks among Saudi banks, posted the highest net income growth at 28% YoY, followed by Riyad, BSF and SABB
posting YoY growth at mid-teens. Samba and ANB lagged them with single digit YoY growth, while Al Rajhi’s net income
dropped YoY for the fourth consecutive quarter.
NIM RESILIENCE SURPRISED POSITIVELY
We expected NIM pressures to persist this quarter on the back of low asset yields and limited room for improvement in cost of
funding. Q2 14 results surprised us positively as the banks’ NIMs (on average assets) were flat to +12bps QoQ. We note that YoY
trends were mixed (ranging from -11bps to +10bps YoY), yet still better than expected based on our discussions with major
banks’ CFOs in May. However, outperforming names were not surprising: 1) SABB, which had more stable NIMs vs peers over
the last two years, led the pack with 12bps QoQ improvement in Q2 14; 2) Samba, which preferred NIM resilience over NII
growth over the last two years, also delivered 10bps QoQ NIM improvement.
PROVISIONS WERE MIXED; SHB, SABB AND SAMBA SAW DECLINES YOY
In our June update, we highlighted that cost of risk would not ease off this year as we expected SAMA to retain its conservative
stance in terms of coverage, particularly on collective provisioning. ANB, Riyad and BSF, which held the lowest collective
provision coverage (as % of performing loans) at the end of 2013, reported c.30-45% YoY rise in estimated provisions which
were based on our individual C/I ratio assumptions. We believe they utilized their operating income strength (10-15% YoY rise)
to ramp up their collective provision coverage. On the other hand, SABB, Samba and SHB, our three BUY recommended stocks,
saw provisions decline YoY thanks to better underlying asset quality, in our view.
TOP PICKS SHB AND SABB DELIVERED SOLID RESULTS
SHB and SABB, our top picks among the seven banks we cover in Saudi Arabia, delivered 11% and 17% YoY operating income
growth, respectively (vs 10% for the seven banks on aggregate). Moreover, thanks to declines in estimated provisions YoY, their
net income growth in Q2 14 was among the top end of the peer range. Both stocks look attractive on valuation as they are
trading in line with Saudi peer average of 1.7x 15E P/B despite their superior returns (consensus 15E ROE of 17.8% and 17.0% for
SHB and SABB respectively vs Saudi peer average of 14.4%). Saudi banks are trading on 1.9x one year forward P/B (market cap.
weighted average for the seven banks we cover), versus their 5 year average of 2.0x and the highs of 2.5x in late 2010.
Q2 14
Results
Sector Coverage
Suha Urgan
+9714 3199 769
[email protected]
Taher Safieddine, CFA
+9714 3199 785
[email protected]
Loans
(QoQ)
Net interest
income (YoY)
Non-interest
income (YoY)
Provisions*
(YoY)
Net income
(YoY)
Net income
vs Consensus**
Al Rajhi
4%
5%
10%
45%
-8%
-1%
ANB
5%
8%
13%
30%
9%
7%
BSF
2%
17%
12%
46%
16%
9%
Riyad
3%
8%
29%
36%
17%
6%
SABB
3%
7%
16%
-51%
15%
8%
Samba
6%
1%
12%
-63%
7%
9%
SHB
6%
17%
17%
-29%
28%
12%
Aggregate
4%
7%
16%
19%
7%
5%
Source: SHUAA Capital
* SHUAA estimates based on bank specific C/I ratio assumptions
** Bloomberg consensus

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