bsf report

Please refer to the last page for important disclaime r www.ncbc.com Pressure on net interest margins is priced-in Due to increasing competition, we reduce our NIM estimate and expect a 9bps decline in margins from a previous estimate of flat NIM’s. As a result, we expect lower profit growth that is also due to reduced income from brokerage. 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. Estimates for profits are down for 2013E due to margin compression We revise our estimates for profits for 2013E for the ten banks under our coverage 2.5% lower to SR29.4bn due to a 16bps reduction in our estimate for NIM’s. This leads to our 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 NIM’s decline to 9bps for 2013E compared to the 14bps decline in 2012. Our NIM’s estimates are more conservative than management guidance 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. We believe the impact of NIM contraction on valuation is overstated 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. Our valuation call is based on P/B expansion; prefer large-caps 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. Our top-picks are the large banks: AlRajhi, Samba and Riyad which offer dividends that limit downside risk. From the small-caps, we prefer SHB given its solid asset quality and its innovative lending policies. Exhibit 1: Valuation summary Rating TP Mcap Stock perfr YTD P/E (x) 2013E P/BV (x) 2013E P/Adj BV 2013E DY (%) 2013E ROE (%) TTM Al Rajhi Overweight 88.4 96,750 (0.8) 12.8 2.8 2.6 6.1 22.8 SAMBA Overweight 57.7 41,130 2.2 9.5 1.2 1.2 4.3 14.4 RIBL Overweight 33.8 34,275 (0.7) 9.8 1.1 1.0 6.1 11.2 SHB Overweight 35.4 11,391 5.9 8.6 1.3 1.2 3.9 15.9 BSF Overweight 37.1 27,753 4.4 8.9 1.1 1.1 3.0 14.2 SABB Overweight 41.0 33,800 13.0 10.1 1.6 1.5 3.0 17.4 ANB Overweight 32.3 23,800 6.1 10.3 1.3 1.2 5.3 13.8 BJAZ Neutral 23.3 8,160 4.2 14.6 1.4 1.4 - 9.9 SAIB Neutral 19.2 10,120 1.7 10.1 1.1 1.0 4.5 10.2 Albilad Underweight 23.3 10,110 19.1 15.1 2.0 1.8 - 14.6 Source: NCBC Research Mahmood Akbar +966 2 690 7943 [email protected] BANKS MARCH 2013 SAUDI BANKING SECTOR SECTOR UPDATE

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