Al Rajhi Bank (RJHI) - DirectFN
Al Rajhi Bank (RJHI) Recommendation Share Price Implied Upside
MARKET PERFORM SAR63.50 (7.1%)
Risk Rating Target Price
R-3 SAR59.00
Largest Retail Banking Franchise in KSA; Market Perform
Al Rajhi Bank dominates the retail banking space. The bank has a 16% market share in loans and deposits (2nd largest among domestic banks). RJHI commands the largest market share in retail lending (37%). Established in 1978, the bank’s strategy is to continue to dominate the retail space which is evidenced by the loan portfolio; retail loans as a portion of total loans increased from 53% in 2010 to 75% in 2015. Moreover, the retail segment of the loan book grew by a CAGR (2010-15) of 19.9% vs. a negative CAGR of 1.8% for the corporates. RJHI has been an outperformer on a YTD basis as the stock (total-return basis) appreciated by 25.9% vs. TASI’s 3.6% and flat performance from the TASI Banking & Financial Services Index. At current levels, we believe the stock is fairly valued and hence initiate coverage with a target price of SAR59.00.
Highlights
Current Market Price (SAR)
63.50
Dividend Yield (%)
2.2
Bloomberg Ticker
RJHI AB
ADR/GDR Ticker
N/A
Reuters Ticker
1120.SE
ISIN Sector*
SA0007879113 Banks & Financial Svcs.
52wk High/52wk Low (SAR) 3-m Average Volume (‘000) Mkt. Cap. ($ bn/SAR bn)
We expect strong performance in 2016 (given net profit grew by 17.3% YoY in 9M2016), a subdued 2017 followed by an improvement in 2018; we pencil in a bottomline CAGR of 14.0% in 2015-2020e. We estimate a 14.8% growth in net income to SAR8.19bn in 2016 mainly due to a 12.2% jump in net interest income and strong fees (+16.0%). We expect provisions to increase by 24.8% based on possible asset quality concerns resulting from a fragile macro-economic environment and specifically retail becoming problematic due to public sector employees’ salary cuts. It should be noted
that in a rising interest rate environment, RJHI’s NIM expands more than its peers’ as non-interest bearing deposits represents ~92% of total deposits. Moreover, we
Key Data
foresee 2017 to be a weak year. We expect net income to inch up by 1.0% to SAR8.26bn as a result of slower growth in total revenue (+5.0% vs. 12.8% in 2016e). We estimate net interest income to increase by only 6.6% to SAR11.92bn due to a soft growth in loans, despite FED rate hikes. Nonetheless, we expect 2018 to be an improved year. We forecast net income to increase by 8.2% driven by a recovery in non-interest income (+6.9% vs. flat 2017e) and slower provisions formation. We envision a solid 2019 as the economic situation improves. We pencil in a growth of 33.6% in net income (SAR11.95bn), driven by total revenue and a 25.6% drop in net provisions. Al Rajhi Bank is the largest retail banking franchise/brand with a 37% market share in this segment; we estimate an overall loan book CAGR of 10.7% during 2015-20e. RJHI is predominately a retail bank with its loan book split between the retail (71%) and corporate (29%) segments over the past four years (2012-2015). Al Rajhi Bank has always traded at rich multiples. The stock currently trades at a 25% and 12% discount to its 5-year average P/B and P/E ratios, respectively. On the other hand, the stock is also trading at a 55% premium to its peers on a P/B basis. We believe that the premium P/B valuation is due to KSA retail investors’ bias toward Shari’ah compliant stocks. We are of the view that this trend will not reverse in the medium term and the stock will continue to trade at a premium to its peers.
Shares Outstanding (mn) FOL Limit* (%)
65.00/44.70 254.3 27.5/103.2 1,625.0 49.00
Current FOL* (%)
1.27
1-Year Total Return (%)
32.3
Fiscal Year End
December 31
Source: Bloomberg (as of December 06, 2016), *Tadawul (as of December 06, 2016); Note:* Foreign Ownership Limit
Catalysts
Beyond a stabilization/recovery in oil prices, the following developments could be perceived positively by the market: 1) further clarity on long-term development initiatives in KSA and 2) further improvement in NIMs & spreads following rate hikes.
Recommendation, Valuation and Risks
Recommendation and valuation: We assign a Price Target of SAR59.00 and Market Perform rating. RJHI is trading at a 2017e P/B and P/E of 1.9x and 12.5x, respectively. Moreover the stock trades at a PEG of 1.0x based on a CAGR (2015-2020e) of 14.0%, which indicates that the stock is trading around its fair value. Risks: 1) Depressed oil prices remains the biggest risk for RJHI and the Saudi banking sector and 2) Greater-than-expected asset quality deterioration, especially given that RJHI is predominately a retail bank.
Key Financial Data and Estimates EPS (SAR) EPS Growth (%) P/E (x) BVPS (SAR) P/B (x) Dividend Yield (%)
FY2015 4.39 4.3 14.5 28.7 2.2 2.4
FY2016e 5.04 14.8 12.6 30.7 2.1 2.3
FY2017e 5.09 1.0 12.5 33.2 1.9 2.2
FY2018e 5.51 8.2 11.5 36.2 1.8 2.3
Shahan Keushgerian +974 4476 6509 [email protected] Saugata Sarkar +974 4476 6534 [email protected]
Source: Company data, QNBFS estimates; Note: All data based on current number of shares
Wednesday, 07 December 2016
1
Valuation We value RJHI using 4 variations of the Residual Income Model (RI); 1) Warranted Equity Valuation, 2) RI based on a fundamental P/B, 3) RI based on a persistence factor and 4) RI based on RoE converging to cost of equity:
e)
a)
We utilize a WEV technique derived from the Gordon Growth Model: P/B = (RoAE-g)/(Ke-g). This model uses sustainable return on average equity (RoAE) based on the mean forecast over the next seven years, cost of equity (Ke), expected long-term growth in earnings (g) and present value of interim dividends to arrive at a fair value for this stock. We consider this method best suited to arriving at an intrinsic valuation through the economic cycle.
b)
We derive RJHI's fair value by employing the RI valuation technique (based on a fundamental P/B), which is calculated based on the sum of its beginning book value, present value of interim residuals (net income minus equity charge) and the present value of the terminal value (we apply a fundamental P/B multiple based on the Gordon Growth Model to the ending book value at the end of our forecast horizon). We derive the P/B from the Gordon Growth Model: P/B = (RoAE-g)/(Ke-g). This model uses sustainable return on average equity (RoAE) based on the mean over our forecast period, cost of equity (Ke) and expected long-term growth in earnings (g) to arrive at fundamental/justified P/B. Based on this method we arrive at a fundamental P/B of 1.9x.
c)
The second variation of the RI that we use is based on a persistence factor. The persistence factor is applied on the terminal value. The maximum persistence factor is 1.0, which means that residual income does not decline and will continue indefinitely. The minimum persistence factor is 0, which means that residual income stops after the initial stage. Companies with stronger or stable market share will have higher persistence factors. High persistence factor is applicable when the firm has a low dividend payout and when the industry has been able to maintain RoEs above the cost of equity historically. Low persistence factor is applicable when RoE is extremely high and likely to decline and high levels of accruals & special items, such as nonrecurring items that will weigh down future RoE. In RJHI's case we use a persistence factor of 1.0 as it fits the above stated criteria.
d)
The third variation of the RI that we utilize is based on RI converging to cost of equity where the terminal value equated to zero. This method assumes that over time the industry becomes highly competitive and firms will not be able to generate economic profits. As such profits are not reinvested in the company, instead are paid out in the form of dividends to shareholders.
The RI model is suitable for the following reasons: 1) when the company does not pay dividends or the pattern of dividend payments is unpredictable; 2) the company is expected to generate negative free cash flows for the foreseeable future and 3) as the traditional free cash flow to equity (FCFE) formula does not apply to banks. A major advantage of RI in equity valuation is that a greater portion of the company's intrinsic value is recognized from the beginning BVPS as opposed to the terminal value (common in traditional FCFE methodology). We use KSA's 5 year swaps rate of 4.2% as the risk free rate and factor in an adjusted beta of 1.0 vs. 0.90 (actual from Bloomberg) as we believe banks are a direct proxy for the economy. Finally, we add a local equity risk premium of 7.5% to arrive at a Ke of 11.70%. Valuation Methodologies Fundamental P/B (WEV) Sustainable RoAE (%) Estimated Cost of Equity (%) Terminal Growth Rate (%) Fundamental P/B Intrinsic Value (SAR) Current Market Price (SAR) Upside/(Downside) Potential (%) Equity Value (SAR mn)
RI Based on Fundamental P/B 17.6 11.70 5.0 1.9x
Beginning BVPS (2017e) (SAR) Present Value of Interim Residuals (SAR) Present Value of Terminal Value (SAR) Fundamental P/B
62.00
Intrinsic Value (SAR)
63.50
Current Market Price (SAR)
(2.4%) 100,750
Upside/(Downside) Potential (%) Equity Value (SAR mn)
30.7 9.07 22.47 1.9x 62.00 63.50 (2.4%) 100,750
Source: Bloomberg, QNBFS estimates
RI Based on Persistence Factor Beginning BVPS (2017e) (SAR) Present Value of Interim Residuals (SAR) Present Value of Terminal Value (SAR)
RI Based on RoE Converging to Ke 30.7
Beginning BVPS (2017e) (SAR)
9.07
Present Value of Interim Residuals (SAR)
15.81
Less: Minority Interest
N/A
Persistence Factor
1.0x
Intrinsic Value (SAR) Current Market Price (SAR) Upside/(Downside) Potential (%) Equity Value (SAR mn)
30.7 22.43
Present Value of Terminal Value (SAR)
N/M
Less: Minority Interest
N/A
56.00
Intrinsic Value (SAR)
63.50
Current Market Price (SAR)
63.50
Upside/(Downside) Potential (%)
(15.0)
Equity Value (SAR mn)
87,750
(11.8%) 91,000
54.00
Source: Bloomberg, QNBFS estimates
Wednesday, 07 December 2016
2
Trading at a 26% discount to its Median P/B… 5.0
Historical Median – 2.8x 2016e P/B – 2.1x 2017e P/B – 1.9x 4.0
3.0
2.0
1.0 Nov-10
KSA Banks’ Median P/B – 1.8x
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Source: Bloomberg
Al Rajhi Bank has always traded at rich multiples. The stock currently trades at a 25% and 12% discount to its 5-year average P/B and P/E ratios, respectively. On the other hand, the stock is also trading at a 55% premium to its peers on a P/B basis. We believe that the
premium P/B valuation is due to KSA retail investors’ bias towards Shari’ah compliant stocks. We are of the view that this trend will not reverse in the medium term and the stock will continue to trade at a premium to its peers. …And a 12% discount to its Historical Median P/E 20.0 Historical Median - 14.4x 2016e P/E - 12.6x 2017e P/E - 12.5x
15.0
10.0
5.0 Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Source: Bloomberg
Wednesday, 07 December 2016
3
Key Forecasts Operating Performance We expect strong performance in 2016 (given net profit grew by 17.3% YoY in 9M2016) , subdued 2017 followed by an improvement in 2018; we pencil in a bottom-line CAGR of 14.0% in 2015-2020e. We estimate a 14.8% growth in net income to SAR8.19bn in 2016 mainly due to a 12.2% jump in net interest income and strong fees (+16.0%). We expect provisions to increase by 24.8% based on possible asset quality concerns resulting from a fragile macro-economic environment and specifically retail becoming problematic due to public sector employees’ salary cuts. As such, we pencil in a cost of risk (CoR) of 105bps (92bps in 2015) which leads provisions to increase to SAR2.4bn. On the other hand, we expect NIMs to increase by 40bps to 4.06% given the FED's earlier rate hike. It should be noted that in a rising interest rate environment, RJHI’s NIM expands more than its peers’ as non-interest bearing deposits represents ~92% of total deposits. Moreover, we foresee 2017 to be a weak year. We expect net income to inch up by 1.0% to SAR8.26bn as a result of slower growth in total revenue (+5.0% vs. 12.8% in 2016e). We estimate net interest income to increase by only 6.6% to SAR11.92bn due to a soft growth in loans, despite FED rate hikes. Hence, we expect Al Rajhi’s NIM to increase to 4.18% (+12bps). In-line with our 2016 view, we estimate provisions to gain by 20.0% to SAR2.9bn (CoR 122bps). Nonetheless, we expect 2018 to be an improved year. We forecast net income to increase by 8.2% driven by a recovery in non-interest income (+6.9% vs. flat 2017e) and slower provisions formation. Net interest income is estimated to grow by 7.7% as we expect the bank to remain prudent with lending. Thus, we expect the bank to generate a NIM of 4.24%. We envision a solid 2019 as the economic situation improves. We pencil in a growth of 33.6% in net income (SAR11.95bn), driven by total revenue and a 25.6% drop in net provisions. We caution that our estimates could be revised downward if oil prices remain depressed longer than expected and if asset quality
deteriorates more than expected. Net Income (SAR mn) to Gradually Improve 8,946
9,000 7,885
8,187 7,438 6,836
7,130
20%
8,265
15%
6,000
10% 7%
8% 4% 1%
3,000
0%
-6%
-8%
0 2012
2013
2014
-10% 2015
2016e
Net Income (LHS)
2017e
2018e
Growth (RHS)
Source: Company data, QNBFS estimates
Net Operating Income (SAR mn) to Grow More than Total Revenue & Opex by a 3 Year CAGR of 9.9% vs. -3.2% (2012-2015) 12,500 17.0% 10,014 10,000
9,788 9,148
13.1%
9,088
11,198
12,051
20.0% 15.0%
10,631
10.0% 7.6%
7,500 5.3%
5.0% 5,000 0.0%
-2.3% -0.7% 2,500
-5.0%
-6.5% 0
-10.0% 2012
2013
2014 2015 Net Operating Income (LHS)
2016e 2017e Growth (RHS)
2018e
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
4
NIMs To Progressively Improve With Rate Hikes 8.0%
6.65% 6.0%
6.14% 5.79% 4.35%
5.06%
4.24%
4.0%
4.36% 4.03% 3.81% 2.64%
4.06% 3.79%
4.18%
3.66%
2.63% 2.40%
2.0%
2.24%
2.13%
1.79%
1.19%
1.42%
1.35%
0.0% 2008
2009
2010
2011
2012
2013
NIM
2014
2015
2016e
2017e
2018e
Spread
Source: Company data, QNBFS estimates
Net Interest Income (SAR mn) 14,000
15% 12,833 12% 11,175
12,000
10,000
9,341
9,649
9,817
11,915
9,959 10%
8,000
8% 7%
6,000 5% 4,000 3%
3% 2%
2,000
1%
0
0% 2012
2013
2014
Net Interest Income (LHS)
2015
2016e
2017e
2018e
Growth (RHS)
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
5
RoAE to Remain Under Pressure in 2017 & 2018 On the Back of Excessive Provisioning; To Lift Off from 2019 26.0%
5.0%
4.3% 22.8% 19.9%
20.0%
4.0%
3.7% 17.0% 3.1%
17.0% 16.1%
15.9% 3.2%
3.3%
3.1%
15.9% 3.3%
14.0%
3.0%
8.0%
2.0% 2012
2013
2014 RoAE (LHS)
2015
2016e 2017e RoRWA (RHS)
2018e
Source: Company data, QNBFS estimates
Profitability Dominated by Retail Banking Followed by Treasury; Corporate Banking Jumped 100% 12%
5%
6%
7%
19%
21%
22%
16%
14%
58%
57%
15% 75%
3% 7%
50%
66%
73%
25%
0% 2012 Retail Banking
2013 Corporate Banking
2014 Treasury
2015 Investment & Brokerage
Source: Company Data
Wednesday, 07 December 2016
6
Efficiency RJHI's cost-to-income ratio is at optimal levels given that the bank's operations are heavily skewed to retail. Al Rajhi Bank has done a good job of maintaining its cost-to-income ratio in the low 30%’s level given that it’s predominately a retail operation (cost intensive business) although opex grew by a CAGR (2010-2015) of 9.3% vs. only 3.6% in revenue. We believe this cost management is driven by the bank’s economies of scale. Going forward, we estimate the bank’s cost-to-income ratio to be within its historical range.
Operating Efficiency to Remain Robust 40% 33.1% 29.3%
33.2%
33.9%
33.8% 31.5%
29.8%
31.7%
31.2%
31.4%
31.3%
31.2%
20%
0% 2013
2014 2015 Cost-to-Income (Headline)
2016e 2017e Cost-to-Income (Core)
2018e
Source: Company data, QNBFS estimates
Asset Quality While RJHI enjoys healthy asset quality despite its tilt towards retail, this could worsen by 2017 and 2018. So far in 3Q2016, Al Rajhi has not experienced any stress in its asset quality; NPLs receded by 1.9% YTD and the NPL ratio dropped to 1.38% vs. 1.51% in 2015. We do not assume any deterioration in asset quality for 2016. However, we expect deterioration in asset quality in 2017 and 2018 as is likely during periods of economic softness. Thus, we estimate an increase in the NPL ratio to 1.58% and 1.65% in 2017 and 2018, respectively. It should be noted that although we expect the NPL ratio to increase, the increase in the ratio still implies NPLs to remain lower than the medium-term historical levels. Prior to 2009 and 2010, the NPL ratio was on average 2.59% (2005-2008). However, during the global financial crisis, this ratio moved up to 3.32%. As a result, management has been reducing this ratio through write-offs. Furthermore, we also expect elevated coverage ratios, which should safeguard the bank in case loans are impaired more than estimated. It is important to note here that SAMA has asked banks to put aside more provisions (general provisions) by applying 1% to performing loans. As such, this should keep coverage ratios elevated and dampen ROEs. On a another note, SAMA may scrap the 1% rule as IFRS 9 is implemented in 2018.
Healthy Asset Quality but Could Worsen in 2016 ; NPL Ratio Expected to Remain below Historical Levels 4%
300%
245% 229%
3%
215%
196% 2.2% 2.0% 2% 136%
1.7% 148%
137%
200% 177%
144% 1.6%
1.5% 1.3%
1.6%
1.7%
1.4% 100%
1%
0%
0% 2010
2011
2012
2013 NPL Ratio (LHS)
2014
2015
2016e
2017e
2018e
Coverage Ratio (RHS)
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
7
Cost of Risk to Remain High Amid Economic Uncertainty 30.0%
160 143 25.3% 121
22.9% 115
19.7%
20.0%
22.2%
21.5%
26.2%
25.8%
122
122 120
105
18.2% 92
105
80
10.0% 40
0.0%
0 2011
2012
2013
2014
2015
2016e
Provisions to PPP (LHS)
2017e
2018e
CoR (RHS)
Source: Company data, QNBFS estimates
Loan Portfolio Al Rajhi Bank is the largest retail banking franchise/brand with a 37% market share in this segment; we estimate an overall loan book CAGR of 10.7% during 2015-20e. RJHI is predominately a retail bank with its loan book split between the retail (71%) and corporate (29%) segments over the past four years (2012-2015). We are of the view that the bank’s strategy is to continue to dominate the retail space which is evidenced by the loan portfolio; retail loans as a portion of total loans increased from 53% in 2010 to 75% in 2015. Moreover, The retail segment of the loan book grew by a CAGR (2010-15) of 19.9% vs. a negative CAGR of 1.8% for the corporates. Furthermore, in 3Q2016 RJHI’s assets from retail expanded by 7.5% YTD (loans by segment are not available on a quarterly basis). So far on a YTD basis, net loans grew by 7.4% vs. 5.0% for the total sector. As such we expect net loans to gain by 8.2% in 2016 followed by a small increase of 4.5% in 2017 and 6.0% in 2018 (as a result of adverse macro-economic conditions). On the other hand, we grow the loan book by 20.5% and 15.3% in 2019 and 2020, respectively. We expect the loan book to grow to SAR349.8bn in 2020e from SAR210.2bn in 2015.
Loans to Exhibit 10.7% CAGR (SAR mn) vs. 11.9% (2010-15) 349,785
360,000
11% CAGR
324,000
Loans Dominated by Retail 100%
75% 251,945 237,634 227,362 205,940 210,218
216,000
8%
7%
15%
12%
13%
5%
5%
68%
69%
17% 303,469
288,000 252,000
7%
186,813
20%
5%
5%
12%
10%
6%
5%
11%
10% 50%
180,000 144,000
73%
75%
59% 108,000
25%
53%
72,000 36,000 0%
2013
2014
2015 2016e 2017e 2018e 2019e 2020e
2010 Retail
2011 2012 2013 2014 Building & Construction Commerce
2015 Others
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
8
Deposit Book Al Rajhi Bank has the highest non-interest bearing deposits as a portion of total deposits vs. other KSA banks; this should bode well in a rising interest rate environment. RJHI has a 37% market share in deposits, 2nd among domestic banks; we estimate deposits to grow by a CAGR of 9.3% during 2015-20e. The bank has effectively managed to maintain on average ~90% total deposits in non-interest bearing form. Given the previous Fed rate hike and the anticipation of further hikes in December 2016 and 2017, we believe RJHI will have to raise interestbearing deposits in order to keep its LDR in check. However, we are of the view that interest bearing deposits as a percentage of total deposits will be in-line with historical trends. Thus, we estimate a modest decline in non-interest bearing deposits. The bank’s non-interest bearing deposits grew at a CAGR of 13.1% (2010-2015) vs. interest bearing deposits, which only grew by 1.7% only. On the other hand a we forecast a reversal in this trend with interest bearing deposits growing by a CAGR (2015-20e) of 45.7%. Further, we expect deposits to
grow by 6.7% in 2016, tick up only by 2.2% and 4.5% in 2017 and 2018, respectively as the economic outlook still remains uncertain. However, we expect deposits to expand by 20.0% and 14.0 in 2019 and 2020, respectively as the economy revives. Non-Interest Bearing Deposits have Reached Non-Sustainable Levels; A Gradual Drop is Imminent 100%
75%
50%
87%
93%
97%
7%
3% 2011
91%
91%
9%
9%
2013
2014
92%
90%
87%
96%
9%
10%
13%
4% 2015
2016e
2017e
2018e
25%
0%
13%
2010
2012
Interest Bearing
Non-Interest Bearing
Source: Company data, QNBFS estimates
LDR (Loans to stable sources of funds) always remained below SAMA's 90% limit. Given RJHI's conservative nature, we do not assume any pressure on the LDR. SAMA’s 90% Limit
100.0%
77.7%
80.7%
80.4%
2013
2014
81.5%
82.6%
84.5%
2015
2016e
2017e
85.8%
75.0%
50.0%
25.0%
0.0% 2012
2018e
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
9
Capitalization Robust capitalization levels. RJHI has always maintained strong capitalization levels through strong profitability and retention rate. Moreover, we do not expect this trend to reverse.
Capitalization Levels Remain Robust 25.0% 20.8% 20.0%
19.6%
19.7%
19.6% 18.5%
18.5%
21.1%
20.9%
20.0%
20.0%
19.8%
18.9%
15.0%
10.0%
5.0%
0.0% 2013
2014
2015 CAR
2016e
2017e
2018e
Tier 1
Source: Company data, QNBFS estimates
Company Description As of 3Q2016, Al Rajhi Bank had a 16% market share in loans and deposits (2nd largest among domestic banks). Moreover, RJHI commands the largest market share in retail lending (37%) and is the largest Islamic bank globally. Established in 1978, Al Rajhi Bank is a commercial bank offering Shari'ah compliant services to retail customers and corporates, brokerage and asset management. The bank has a network of 537 branches and over 4,300 ATMs.
Major Shareholders Shareholders
Investor Type
Country
Awqaf Suleiman Bin Abdulaziz Al Rajhi Holding Co.
Share (%)
Institutional
KSA
14.79
General Organization for Social Insurance (GOSI)
Government
KSA
10.19
Mohammed Abdulaziz Al Rajhi & Sons Investment Co.
Institutional
KSA
2.05
Total
27.03
Source: Tadawul
Subsidiaries/Associates Company
Country
Share (%)
Al Rajhi Capital
KSA
Al Rajhi Takaful Agency
KSA
99
Al Rajhi Development Company Ltd.
KSA
100
AL Rajhi for Administrative Services Company
KSA
100
Al Rajhi Banking & Investment Corp.
Malaysia
100
Al Rajhi Bank - Kuwait
Kuwait
100
Al Rajhi Bank - Jordan
Jordan
100
Al Rajhi Comp. for Cooperative Insurance
KSA
22.5
100
Source: Company data
Wednesday, 07 December 2016
10
Detailed Financial Statements Ratios
FY2015
FY2016e
FY2017e
FY2018e
RoAE
16.1
17.0
15.9
15.9
RoAA
2.3
2.5
2.4
2.5
Profitability (%)
RoRWA
3.1
3.3
3.2
3.3
NIM (% of IEAs)
3.66
4.06
4.18
4.24
NIM (% of RWAs)
4.30
4.55
4.60
4.67
NIM (% of AAs)
3.20
3.44
3.49
3.58
2.1
1.2
1.4
1.4
Cost-to-Income (Headline)
33.9
31.5
31.2
31.2
Cost-to-Income (Core)
33.8
31.7
31.4
31.3
LDR
81.5
82.6
84.5
85.8
Loans/Assets
66.6
68.0
68.0
68.3
Cash & Interbank Loans-to-Total Assets
17.1
17.4
16.7
16.5
Deposits to Assets
81.7
82.3
80.5
79.7
2.2
1.0
3.2
3.5
1909.1
1096.3
844.7
684.2
NPL Ratio
1.5
1.4
1.6
1.7
NPLs to Shareholder's Equity
7.0
6.5
7.2
7.4
NPLs to Tier 1 Capital
7.0
6.8
7.4
7.6
Spread Efficiency (%)
Liquidity (%)
Wholesale Funding to Loans IEAs to IBLs Asset Quality (%)
Coverage Ratio
176.7
214.5
228.5
245.1
ALL/Average Loans
2.7
3.1
3.7
4.2
Cost of Risk
92
105
122
122
Tier 1 Ratio
19.7
18.9
19.8
20.0
CAR
20.8
20.0
20.9
21.1
Tier 1 Capital to Assets
14.8
14.4
15.0
15.5
Tier 1 Capital to Loans
22.2
21.2
22.0
22.7
Tier 1 Capital to Deposits
18.1
17.5
18.6
19.5
6.8
6.7
6.5
6.3
Net Interest Income
1.4
12.2
6.6
7.7
Non-Interest income
Capitalization (%)
Leverage (x) Growth (%)
-1.6
14.4
0.9
6.9
Total Revenue
0.6
12.8
5.0
7.5
Opex
3.1
4.7
4.3
7.2
-0.7
17.0
5.3
7.6
-15.3
24.8
20.0
5.9
Net Income
4.3
14.8
1.0
8.2
Loans
2.1
8.2
4.5
6.0
Deposits
0.7
6.7
2.2
4.5
Assets
2.6
5.9
4.5
5.5
RWAs
4.2
7.8
3.6
8.1
Net Operating Income Net Provisions & Impairments
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
11
Income Statement (In SAR mn)
FY2015
FY2016e
FY2017e
FY2018e
Net Interest Income
9,959
11,175
11,915
12,833
Fees & Commissions
2,704
3,137
3,231
3,392
FX Income
980
931
940
1,053
Other Income
103
266
201
228
Non-Interest Income Total Revenue Operating Expenses Net Operating Income
3,787
4,333
4,372
4,673
13,746
15,508
16,287
17,506
(4,658)
(4,878)
(5,089)
(5,455)
9,088
10,631
11,198
12,051
(1,958)
(2,444)
(2,933)
(3,106)
7,130
8,187
8,265
8,946
FY2015
FY2016e
FY2017e
FY2018e
Cash & Balances with Central Bank
27,054
41,264
39,361
38,194
Interbank Loans
26,911
17,052
19,011
22,675
Net Investments
39,877
35,323
39,642
41,316
210,218
227,362
237,634
251,945
Other Assets
5,981
7,019
7,276
7,886
Net PP&E
5,579
6,281
6,349
6,636
315,620
334,303
349,273
368,651
Interbank Deposits
4,558
2,246
7,720
8,726
Customer Deposits
257,822
275,096
281,148
293,799
6,601
7,152
6,466
7,345
268,981
284,494
295,334
309,870
46,639
49,809
53,939
58,781
315,620
334,303
349,273
368,651
Net Provisions & Investment Impairments Net Profit Source: Company data, QNBFS estimates
Balance Sheet (In SAR mn) Assets
Net Loans
Total Assets Liabilities
Other Liabilities Total Liabilities Shareholders’ Equity Total Liabilities & Shareholders’ Equity Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
12
KSA Banking Landscape
Wednesday, 07 December 2016
13
Loans/GDP: KSA Underbanked
Young Population: Favorable for Retail Banking 124%
125%
3%
109% 100%
92% 87%
86% 75%
85%
29%
24%
68% 63% 56%
50%
45%
25% 44%
0% KSA
Oman
Kuwait
2014
UAE
Qatar 0-14
2015
15-40
40-65
65+
Source: Respective Central Banks, IMF, UN
RJHI Claims Largest Branch Network
RJHI - Large Cap Stock (SAR bn)
600
120 537 103.2
500
100 83.8
400
80
355 334 300
60 46.0 40
200 151 120 100
84 83 78 72 70 61
31.6 21.1 21.6
20 48 14
0
36.3 33.9
14.7
11.9 10.4
5.4
0
Source: SAMA, Bloomberg
Wednesday, 07 December 2016
14
2015 Loans Market Share: NCB is the Incumbent BAJ Al Bilad Alinma 3% 3% 4% SAIB 4%
3Q2016: RJHI Marginally Increased its Market Share BAJ Alinma 3% 4% SAIB 5%
Al Bilad 3%
NCB 18%
NCB 18% SHB 5%
SHB 6% ARNB 8%
RJHI 15%
SABB 9%
ANB 8%
RJHI 16%
SABB 9% BSFR 9%
RIBL 11%
BSFR 9%
SAMBA 10%
RIBL 11% SAMBA 9%
Source: Company financials
2015 Corporate Loans Share: NCB Followed by BSFR
BAJ Alinma 3% 5% SAIB 5%
SAIB BSFR 3% Al Bilad 2% 3% Alinma SHB 3% 3%
Al Bilad 2%
NCB 18%
BAJ 4%
SHB 6% BSFR 12%
RJHI 6% ARNB 9%
SAMBA 12% SABB 11%
RIBL 11%
2015 Retail Loans: RJHI Dominates Retail
RJHI 37%
SAMBA 5% ARNB 6% SABB 6% RIBL 10%
NCB 19%
Source: Company financials
Wednesday, 07 December 2016
15
2015 Conventional Loans Share: RIBL Followed by SAMBA
2015 Shari’ah Loans: RJHI & NCB at Stiff Competition Al Bilad SHB SAIB 4% 4% 3%
SABB 8%
BAJ 4%
SAIB 8%
RIBL 22%
SHB 11%
RJHI 21%
Alinma 6% ARNB 7%
SAMBA 17%
ARNB 13% NCB 5%
BSFR 7% RIBL 7%
BSFR 16%
NCB 20%
SAMBA 7%
SABB 10%
Source: Company financials
Corporate Loans Dominate as is the Case in the GCC
Conventional Loans vs. Shari’ah Loans: Shari’ah Favored by Saudis
Retail Loans 32%
Convention al Loans 25% Corporate Loans 68%
Shari'ah Compliant Loans 75%
Source: Company financials
Wednesday, 07 December 2016
16
2015 Deposits: NCB & RJHI Dominate
3Q2016 Deposits: RJHI Gained Market Share While NCB Lost
BAJ Al Bilad 3% Alinma 3% 4%
Alinma 5%
BAJ SAIB 3% 4%
Al Bilad 2%
NCB 19%
NCB 20%
SAIB 4% SHB 5%
SHB 5%
ARNB 9%
ANB 8% RJHI 16%
RJHI 15%
SABB 9% BSFR 9%
SAMBA 10%
SABB 9%
RIBL 10%
BSFR 9%
RIBL 10%
SAMBA 10%
Source: Company financials
RJHI's LDR (headline/simple LDR) On The Lower End 100%
83%
84%
RJHI
NCB
91%
92%
92%
88%
90%
86%
87%
90%
86%
BAJ
Average
SABB
Al Bilad
Alinma
ANB
BSFR
SHB
SAIB
75% 75%
50%
25%
0% SAMBA Source: Company financials
Wednesday, 07 December 2016
17
Recommendations
Risk Ratings
Based on the range for the upside / downside offered by the 12 month target price of a stock versus the current market price
Reflecting historic and expected price volatility versus the local market average and qualitative risk analysis of fundamentals
OUTPERFORM
Greater than +20%
R -1
Significantly lower than average
ACCUMULATE
Between +10% to +20%
R -2
Lower than average
MARKET PERFORM
Between -10% to +10%
R -3
Medium / In-line with the average
REDUCE
Between -10% to -20%
R -4
Above average
UNDERPERFORM
Lower than -20%
R -5
Significantly above average
Contacts
Saugata Sarkar
Shahan Keushgerian
Zaid Al Nafoosi, CMT, CFTe
Head of Research
Senior Research Analyst
Senior Research Analyst
Tel: (+974) 4476 6534
Tel: (+974) 4476 6509
Tel: (+974) 4476 6535
[email protected]
[email protected]
[email protected]
QNB Financial Services Co. WLL One Person Company Contact Center: (+974) 4476 6666 PO Box 24025 Doha, Qatar
Disclaimer and Copyright Notice: This publication has been prepared by QNB Financial Services Co. WLL One Person Company (“QNBFS”) a wholly-owned subsidiary of QNB SAQ (“QNB”). QNBFS is regulated by the Qatar Financial Markets Authority and the Qatar Exchange QNB SAQ is regulated by the Qatar Central Bank. This publication expresses the views and opinions of QNBFS at a given time only. It is not an offer, promotion or recommendation to buy or sell securities or other investments, nor is it intended to constitute legal, tax, accounting, or financial advice. QNBFS accepts no liability whatsoever for any direct or indirect losses arising from use of this report. Any investment decision should depend on the individual circumstances of the investor and be based on specifically engaged investment advice. We therefore strongly advise potential investors to seek independent professional advice before making any investment decision. Although the information in this report has been obtained from sources that QNBFS believes to be reliable, we have not independently verified such information and it may not be accurate or complete. QNBFS does not make any representations or warranties as to the accuracy and completeness of the information it may contain, and declines any liability in that respect. For reports dealing with Technical Analysis, expressed opinions and/or recommendations may be different or contrary to the opinions/recommendations of QNBFS Fundamental Research as a result of depending solely on the historical technical data (price and volume). QNBFS reserves the right to amend the views and opinions expressed in this publication at any time. It may also express viewpoints or make investment decisions that differ significantly from, or even contradict, the views and opinions included in this report. This report may not be reproduced in whole or in part without permission from QNBFS COPYRIGHT: No part of this document may be reproduced without the explicit written permission of QNBFS.
18
MARKET PERFORM SAR63.50 (7.1%)
Risk Rating Target Price
R-3 SAR59.00
Largest Retail Banking Franchise in KSA; Market Perform
Al Rajhi Bank dominates the retail banking space. The bank has a 16% market share in loans and deposits (2nd largest among domestic banks). RJHI commands the largest market share in retail lending (37%). Established in 1978, the bank’s strategy is to continue to dominate the retail space which is evidenced by the loan portfolio; retail loans as a portion of total loans increased from 53% in 2010 to 75% in 2015. Moreover, the retail segment of the loan book grew by a CAGR (2010-15) of 19.9% vs. a negative CAGR of 1.8% for the corporates. RJHI has been an outperformer on a YTD basis as the stock (total-return basis) appreciated by 25.9% vs. TASI’s 3.6% and flat performance from the TASI Banking & Financial Services Index. At current levels, we believe the stock is fairly valued and hence initiate coverage with a target price of SAR59.00.
Highlights
Current Market Price (SAR)
63.50
Dividend Yield (%)
2.2
Bloomberg Ticker
RJHI AB
ADR/GDR Ticker
N/A
Reuters Ticker
1120.SE
ISIN Sector*
SA0007879113 Banks & Financial Svcs.
52wk High/52wk Low (SAR) 3-m Average Volume (‘000) Mkt. Cap. ($ bn/SAR bn)
We expect strong performance in 2016 (given net profit grew by 17.3% YoY in 9M2016), a subdued 2017 followed by an improvement in 2018; we pencil in a bottomline CAGR of 14.0% in 2015-2020e. We estimate a 14.8% growth in net income to SAR8.19bn in 2016 mainly due to a 12.2% jump in net interest income and strong fees (+16.0%). We expect provisions to increase by 24.8% based on possible asset quality concerns resulting from a fragile macro-economic environment and specifically retail becoming problematic due to public sector employees’ salary cuts. It should be noted
that in a rising interest rate environment, RJHI’s NIM expands more than its peers’ as non-interest bearing deposits represents ~92% of total deposits. Moreover, we
Key Data
foresee 2017 to be a weak year. We expect net income to inch up by 1.0% to SAR8.26bn as a result of slower growth in total revenue (+5.0% vs. 12.8% in 2016e). We estimate net interest income to increase by only 6.6% to SAR11.92bn due to a soft growth in loans, despite FED rate hikes. Nonetheless, we expect 2018 to be an improved year. We forecast net income to increase by 8.2% driven by a recovery in non-interest income (+6.9% vs. flat 2017e) and slower provisions formation. We envision a solid 2019 as the economic situation improves. We pencil in a growth of 33.6% in net income (SAR11.95bn), driven by total revenue and a 25.6% drop in net provisions. Al Rajhi Bank is the largest retail banking franchise/brand with a 37% market share in this segment; we estimate an overall loan book CAGR of 10.7% during 2015-20e. RJHI is predominately a retail bank with its loan book split between the retail (71%) and corporate (29%) segments over the past four years (2012-2015). Al Rajhi Bank has always traded at rich multiples. The stock currently trades at a 25% and 12% discount to its 5-year average P/B and P/E ratios, respectively. On the other hand, the stock is also trading at a 55% premium to its peers on a P/B basis. We believe that the premium P/B valuation is due to KSA retail investors’ bias toward Shari’ah compliant stocks. We are of the view that this trend will not reverse in the medium term and the stock will continue to trade at a premium to its peers.
Shares Outstanding (mn) FOL Limit* (%)
65.00/44.70 254.3 27.5/103.2 1,625.0 49.00
Current FOL* (%)
1.27
1-Year Total Return (%)
32.3
Fiscal Year End
December 31
Source: Bloomberg (as of December 06, 2016), *Tadawul (as of December 06, 2016); Note:* Foreign Ownership Limit
Catalysts
Beyond a stabilization/recovery in oil prices, the following developments could be perceived positively by the market: 1) further clarity on long-term development initiatives in KSA and 2) further improvement in NIMs & spreads following rate hikes.
Recommendation, Valuation and Risks
Recommendation and valuation: We assign a Price Target of SAR59.00 and Market Perform rating. RJHI is trading at a 2017e P/B and P/E of 1.9x and 12.5x, respectively. Moreover the stock trades at a PEG of 1.0x based on a CAGR (2015-2020e) of 14.0%, which indicates that the stock is trading around its fair value. Risks: 1) Depressed oil prices remains the biggest risk for RJHI and the Saudi banking sector and 2) Greater-than-expected asset quality deterioration, especially given that RJHI is predominately a retail bank.
Key Financial Data and Estimates EPS (SAR) EPS Growth (%) P/E (x) BVPS (SAR) P/B (x) Dividend Yield (%)
FY2015 4.39 4.3 14.5 28.7 2.2 2.4
FY2016e 5.04 14.8 12.6 30.7 2.1 2.3
FY2017e 5.09 1.0 12.5 33.2 1.9 2.2
FY2018e 5.51 8.2 11.5 36.2 1.8 2.3
Shahan Keushgerian +974 4476 6509 [email protected] Saugata Sarkar +974 4476 6534 [email protected]
Source: Company data, QNBFS estimates; Note: All data based on current number of shares
Wednesday, 07 December 2016
1
Valuation We value RJHI using 4 variations of the Residual Income Model (RI); 1) Warranted Equity Valuation, 2) RI based on a fundamental P/B, 3) RI based on a persistence factor and 4) RI based on RoE converging to cost of equity:
e)
a)
We utilize a WEV technique derived from the Gordon Growth Model: P/B = (RoAE-g)/(Ke-g). This model uses sustainable return on average equity (RoAE) based on the mean forecast over the next seven years, cost of equity (Ke), expected long-term growth in earnings (g) and present value of interim dividends to arrive at a fair value for this stock. We consider this method best suited to arriving at an intrinsic valuation through the economic cycle.
b)
We derive RJHI's fair value by employing the RI valuation technique (based on a fundamental P/B), which is calculated based on the sum of its beginning book value, present value of interim residuals (net income minus equity charge) and the present value of the terminal value (we apply a fundamental P/B multiple based on the Gordon Growth Model to the ending book value at the end of our forecast horizon). We derive the P/B from the Gordon Growth Model: P/B = (RoAE-g)/(Ke-g). This model uses sustainable return on average equity (RoAE) based on the mean over our forecast period, cost of equity (Ke) and expected long-term growth in earnings (g) to arrive at fundamental/justified P/B. Based on this method we arrive at a fundamental P/B of 1.9x.
c)
The second variation of the RI that we use is based on a persistence factor. The persistence factor is applied on the terminal value. The maximum persistence factor is 1.0, which means that residual income does not decline and will continue indefinitely. The minimum persistence factor is 0, which means that residual income stops after the initial stage. Companies with stronger or stable market share will have higher persistence factors. High persistence factor is applicable when the firm has a low dividend payout and when the industry has been able to maintain RoEs above the cost of equity historically. Low persistence factor is applicable when RoE is extremely high and likely to decline and high levels of accruals & special items, such as nonrecurring items that will weigh down future RoE. In RJHI's case we use a persistence factor of 1.0 as it fits the above stated criteria.
d)
The third variation of the RI that we utilize is based on RI converging to cost of equity where the terminal value equated to zero. This method assumes that over time the industry becomes highly competitive and firms will not be able to generate economic profits. As such profits are not reinvested in the company, instead are paid out in the form of dividends to shareholders.
The RI model is suitable for the following reasons: 1) when the company does not pay dividends or the pattern of dividend payments is unpredictable; 2) the company is expected to generate negative free cash flows for the foreseeable future and 3) as the traditional free cash flow to equity (FCFE) formula does not apply to banks. A major advantage of RI in equity valuation is that a greater portion of the company's intrinsic value is recognized from the beginning BVPS as opposed to the terminal value (common in traditional FCFE methodology). We use KSA's 5 year swaps rate of 4.2% as the risk free rate and factor in an adjusted beta of 1.0 vs. 0.90 (actual from Bloomberg) as we believe banks are a direct proxy for the economy. Finally, we add a local equity risk premium of 7.5% to arrive at a Ke of 11.70%. Valuation Methodologies Fundamental P/B (WEV) Sustainable RoAE (%) Estimated Cost of Equity (%) Terminal Growth Rate (%) Fundamental P/B Intrinsic Value (SAR) Current Market Price (SAR) Upside/(Downside) Potential (%) Equity Value (SAR mn)
RI Based on Fundamental P/B 17.6 11.70 5.0 1.9x
Beginning BVPS (2017e) (SAR) Present Value of Interim Residuals (SAR) Present Value of Terminal Value (SAR) Fundamental P/B
62.00
Intrinsic Value (SAR)
63.50
Current Market Price (SAR)
(2.4%) 100,750
Upside/(Downside) Potential (%) Equity Value (SAR mn)
30.7 9.07 22.47 1.9x 62.00 63.50 (2.4%) 100,750
Source: Bloomberg, QNBFS estimates
RI Based on Persistence Factor Beginning BVPS (2017e) (SAR) Present Value of Interim Residuals (SAR) Present Value of Terminal Value (SAR)
RI Based on RoE Converging to Ke 30.7
Beginning BVPS (2017e) (SAR)
9.07
Present Value of Interim Residuals (SAR)
15.81
Less: Minority Interest
N/A
Persistence Factor
1.0x
Intrinsic Value (SAR) Current Market Price (SAR) Upside/(Downside) Potential (%) Equity Value (SAR mn)
30.7 22.43
Present Value of Terminal Value (SAR)
N/M
Less: Minority Interest
N/A
56.00
Intrinsic Value (SAR)
63.50
Current Market Price (SAR)
63.50
Upside/(Downside) Potential (%)
(15.0)
Equity Value (SAR mn)
87,750
(11.8%) 91,000
54.00
Source: Bloomberg, QNBFS estimates
Wednesday, 07 December 2016
2
Trading at a 26% discount to its Median P/B… 5.0
Historical Median – 2.8x 2016e P/B – 2.1x 2017e P/B – 1.9x 4.0
3.0
2.0
1.0 Nov-10
KSA Banks’ Median P/B – 1.8x
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Source: Bloomberg
Al Rajhi Bank has always traded at rich multiples. The stock currently trades at a 25% and 12% discount to its 5-year average P/B and P/E ratios, respectively. On the other hand, the stock is also trading at a 55% premium to its peers on a P/B basis. We believe that the
premium P/B valuation is due to KSA retail investors’ bias towards Shari’ah compliant stocks. We are of the view that this trend will not reverse in the medium term and the stock will continue to trade at a premium to its peers. …And a 12% discount to its Historical Median P/E 20.0 Historical Median - 14.4x 2016e P/E - 12.6x 2017e P/E - 12.5x
15.0
10.0
5.0 Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Source: Bloomberg
Wednesday, 07 December 2016
3
Key Forecasts Operating Performance We expect strong performance in 2016 (given net profit grew by 17.3% YoY in 9M2016) , subdued 2017 followed by an improvement in 2018; we pencil in a bottom-line CAGR of 14.0% in 2015-2020e. We estimate a 14.8% growth in net income to SAR8.19bn in 2016 mainly due to a 12.2% jump in net interest income and strong fees (+16.0%). We expect provisions to increase by 24.8% based on possible asset quality concerns resulting from a fragile macro-economic environment and specifically retail becoming problematic due to public sector employees’ salary cuts. As such, we pencil in a cost of risk (CoR) of 105bps (92bps in 2015) which leads provisions to increase to SAR2.4bn. On the other hand, we expect NIMs to increase by 40bps to 4.06% given the FED's earlier rate hike. It should be noted that in a rising interest rate environment, RJHI’s NIM expands more than its peers’ as non-interest bearing deposits represents ~92% of total deposits. Moreover, we foresee 2017 to be a weak year. We expect net income to inch up by 1.0% to SAR8.26bn as a result of slower growth in total revenue (+5.0% vs. 12.8% in 2016e). We estimate net interest income to increase by only 6.6% to SAR11.92bn due to a soft growth in loans, despite FED rate hikes. Hence, we expect Al Rajhi’s NIM to increase to 4.18% (+12bps). In-line with our 2016 view, we estimate provisions to gain by 20.0% to SAR2.9bn (CoR 122bps). Nonetheless, we expect 2018 to be an improved year. We forecast net income to increase by 8.2% driven by a recovery in non-interest income (+6.9% vs. flat 2017e) and slower provisions formation. Net interest income is estimated to grow by 7.7% as we expect the bank to remain prudent with lending. Thus, we expect the bank to generate a NIM of 4.24%. We envision a solid 2019 as the economic situation improves. We pencil in a growth of 33.6% in net income (SAR11.95bn), driven by total revenue and a 25.6% drop in net provisions. We caution that our estimates could be revised downward if oil prices remain depressed longer than expected and if asset quality
deteriorates more than expected. Net Income (SAR mn) to Gradually Improve 8,946
9,000 7,885
8,187 7,438 6,836
7,130
20%
8,265
15%
6,000
10% 7%
8% 4% 1%
3,000
0%
-6%
-8%
0 2012
2013
2014
-10% 2015
2016e
Net Income (LHS)
2017e
2018e
Growth (RHS)
Source: Company data, QNBFS estimates
Net Operating Income (SAR mn) to Grow More than Total Revenue & Opex by a 3 Year CAGR of 9.9% vs. -3.2% (2012-2015) 12,500 17.0% 10,014 10,000
9,788 9,148
13.1%
9,088
11,198
12,051
20.0% 15.0%
10,631
10.0% 7.6%
7,500 5.3%
5.0% 5,000 0.0%
-2.3% -0.7% 2,500
-5.0%
-6.5% 0
-10.0% 2012
2013
2014 2015 Net Operating Income (LHS)
2016e 2017e Growth (RHS)
2018e
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
4
NIMs To Progressively Improve With Rate Hikes 8.0%
6.65% 6.0%
6.14% 5.79% 4.35%
5.06%
4.24%
4.0%
4.36% 4.03% 3.81% 2.64%
4.06% 3.79%
4.18%
3.66%
2.63% 2.40%
2.0%
2.24%
2.13%
1.79%
1.19%
1.42%
1.35%
0.0% 2008
2009
2010
2011
2012
2013
NIM
2014
2015
2016e
2017e
2018e
Spread
Source: Company data, QNBFS estimates
Net Interest Income (SAR mn) 14,000
15% 12,833 12% 11,175
12,000
10,000
9,341
9,649
9,817
11,915
9,959 10%
8,000
8% 7%
6,000 5% 4,000 3%
3% 2%
2,000
1%
0
0% 2012
2013
2014
Net Interest Income (LHS)
2015
2016e
2017e
2018e
Growth (RHS)
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
5
RoAE to Remain Under Pressure in 2017 & 2018 On the Back of Excessive Provisioning; To Lift Off from 2019 26.0%
5.0%
4.3% 22.8% 19.9%
20.0%
4.0%
3.7% 17.0% 3.1%
17.0% 16.1%
15.9% 3.2%
3.3%
3.1%
15.9% 3.3%
14.0%
3.0%
8.0%
2.0% 2012
2013
2014 RoAE (LHS)
2015
2016e 2017e RoRWA (RHS)
2018e
Source: Company data, QNBFS estimates
Profitability Dominated by Retail Banking Followed by Treasury; Corporate Banking Jumped 100% 12%
5%
6%
7%
19%
21%
22%
16%
14%
58%
57%
15% 75%
3% 7%
50%
66%
73%
25%
0% 2012 Retail Banking
2013 Corporate Banking
2014 Treasury
2015 Investment & Brokerage
Source: Company Data
Wednesday, 07 December 2016
6
Efficiency RJHI's cost-to-income ratio is at optimal levels given that the bank's operations are heavily skewed to retail. Al Rajhi Bank has done a good job of maintaining its cost-to-income ratio in the low 30%’s level given that it’s predominately a retail operation (cost intensive business) although opex grew by a CAGR (2010-2015) of 9.3% vs. only 3.6% in revenue. We believe this cost management is driven by the bank’s economies of scale. Going forward, we estimate the bank’s cost-to-income ratio to be within its historical range.
Operating Efficiency to Remain Robust 40% 33.1% 29.3%
33.2%
33.9%
33.8% 31.5%
29.8%
31.7%
31.2%
31.4%
31.3%
31.2%
20%
0% 2013
2014 2015 Cost-to-Income (Headline)
2016e 2017e Cost-to-Income (Core)
2018e
Source: Company data, QNBFS estimates
Asset Quality While RJHI enjoys healthy asset quality despite its tilt towards retail, this could worsen by 2017 and 2018. So far in 3Q2016, Al Rajhi has not experienced any stress in its asset quality; NPLs receded by 1.9% YTD and the NPL ratio dropped to 1.38% vs. 1.51% in 2015. We do not assume any deterioration in asset quality for 2016. However, we expect deterioration in asset quality in 2017 and 2018 as is likely during periods of economic softness. Thus, we estimate an increase in the NPL ratio to 1.58% and 1.65% in 2017 and 2018, respectively. It should be noted that although we expect the NPL ratio to increase, the increase in the ratio still implies NPLs to remain lower than the medium-term historical levels. Prior to 2009 and 2010, the NPL ratio was on average 2.59% (2005-2008). However, during the global financial crisis, this ratio moved up to 3.32%. As a result, management has been reducing this ratio through write-offs. Furthermore, we also expect elevated coverage ratios, which should safeguard the bank in case loans are impaired more than estimated. It is important to note here that SAMA has asked banks to put aside more provisions (general provisions) by applying 1% to performing loans. As such, this should keep coverage ratios elevated and dampen ROEs. On a another note, SAMA may scrap the 1% rule as IFRS 9 is implemented in 2018.
Healthy Asset Quality but Could Worsen in 2016 ; NPL Ratio Expected to Remain below Historical Levels 4%
300%
245% 229%
3%
215%
196% 2.2% 2.0% 2% 136%
1.7% 148%
137%
200% 177%
144% 1.6%
1.5% 1.3%
1.6%
1.7%
1.4% 100%
1%
0%
0% 2010
2011
2012
2013 NPL Ratio (LHS)
2014
2015
2016e
2017e
2018e
Coverage Ratio (RHS)
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
7
Cost of Risk to Remain High Amid Economic Uncertainty 30.0%
160 143 25.3% 121
22.9% 115
19.7%
20.0%
22.2%
21.5%
26.2%
25.8%
122
122 120
105
18.2% 92
105
80
10.0% 40
0.0%
0 2011
2012
2013
2014
2015
2016e
Provisions to PPP (LHS)
2017e
2018e
CoR (RHS)
Source: Company data, QNBFS estimates
Loan Portfolio Al Rajhi Bank is the largest retail banking franchise/brand with a 37% market share in this segment; we estimate an overall loan book CAGR of 10.7% during 2015-20e. RJHI is predominately a retail bank with its loan book split between the retail (71%) and corporate (29%) segments over the past four years (2012-2015). We are of the view that the bank’s strategy is to continue to dominate the retail space which is evidenced by the loan portfolio; retail loans as a portion of total loans increased from 53% in 2010 to 75% in 2015. Moreover, The retail segment of the loan book grew by a CAGR (2010-15) of 19.9% vs. a negative CAGR of 1.8% for the corporates. Furthermore, in 3Q2016 RJHI’s assets from retail expanded by 7.5% YTD (loans by segment are not available on a quarterly basis). So far on a YTD basis, net loans grew by 7.4% vs. 5.0% for the total sector. As such we expect net loans to gain by 8.2% in 2016 followed by a small increase of 4.5% in 2017 and 6.0% in 2018 (as a result of adverse macro-economic conditions). On the other hand, we grow the loan book by 20.5% and 15.3% in 2019 and 2020, respectively. We expect the loan book to grow to SAR349.8bn in 2020e from SAR210.2bn in 2015.
Loans to Exhibit 10.7% CAGR (SAR mn) vs. 11.9% (2010-15) 349,785
360,000
11% CAGR
324,000
Loans Dominated by Retail 100%
75% 251,945 237,634 227,362 205,940 210,218
216,000
8%
7%
15%
12%
13%
5%
5%
68%
69%
17% 303,469
288,000 252,000
7%
186,813
20%
5%
5%
12%
10%
6%
5%
11%
10% 50%
180,000 144,000
73%
75%
59% 108,000
25%
53%
72,000 36,000 0%
2013
2014
2015 2016e 2017e 2018e 2019e 2020e
2010 Retail
2011 2012 2013 2014 Building & Construction Commerce
2015 Others
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
8
Deposit Book Al Rajhi Bank has the highest non-interest bearing deposits as a portion of total deposits vs. other KSA banks; this should bode well in a rising interest rate environment. RJHI has a 37% market share in deposits, 2nd among domestic banks; we estimate deposits to grow by a CAGR of 9.3% during 2015-20e. The bank has effectively managed to maintain on average ~90% total deposits in non-interest bearing form. Given the previous Fed rate hike and the anticipation of further hikes in December 2016 and 2017, we believe RJHI will have to raise interestbearing deposits in order to keep its LDR in check. However, we are of the view that interest bearing deposits as a percentage of total deposits will be in-line with historical trends. Thus, we estimate a modest decline in non-interest bearing deposits. The bank’s non-interest bearing deposits grew at a CAGR of 13.1% (2010-2015) vs. interest bearing deposits, which only grew by 1.7% only. On the other hand a we forecast a reversal in this trend with interest bearing deposits growing by a CAGR (2015-20e) of 45.7%. Further, we expect deposits to
grow by 6.7% in 2016, tick up only by 2.2% and 4.5% in 2017 and 2018, respectively as the economic outlook still remains uncertain. However, we expect deposits to expand by 20.0% and 14.0 in 2019 and 2020, respectively as the economy revives. Non-Interest Bearing Deposits have Reached Non-Sustainable Levels; A Gradual Drop is Imminent 100%
75%
50%
87%
93%
97%
7%
3% 2011
91%
91%
9%
9%
2013
2014
92%
90%
87%
96%
9%
10%
13%
4% 2015
2016e
2017e
2018e
25%
0%
13%
2010
2012
Interest Bearing
Non-Interest Bearing
Source: Company data, QNBFS estimates
LDR (Loans to stable sources of funds) always remained below SAMA's 90% limit. Given RJHI's conservative nature, we do not assume any pressure on the LDR. SAMA’s 90% Limit
100.0%
77.7%
80.7%
80.4%
2013
2014
81.5%
82.6%
84.5%
2015
2016e
2017e
85.8%
75.0%
50.0%
25.0%
0.0% 2012
2018e
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
9
Capitalization Robust capitalization levels. RJHI has always maintained strong capitalization levels through strong profitability and retention rate. Moreover, we do not expect this trend to reverse.
Capitalization Levels Remain Robust 25.0% 20.8% 20.0%
19.6%
19.7%
19.6% 18.5%
18.5%
21.1%
20.9%
20.0%
20.0%
19.8%
18.9%
15.0%
10.0%
5.0%
0.0% 2013
2014
2015 CAR
2016e
2017e
2018e
Tier 1
Source: Company data, QNBFS estimates
Company Description As of 3Q2016, Al Rajhi Bank had a 16% market share in loans and deposits (2nd largest among domestic banks). Moreover, RJHI commands the largest market share in retail lending (37%) and is the largest Islamic bank globally. Established in 1978, Al Rajhi Bank is a commercial bank offering Shari'ah compliant services to retail customers and corporates, brokerage and asset management. The bank has a network of 537 branches and over 4,300 ATMs.
Major Shareholders Shareholders
Investor Type
Country
Awqaf Suleiman Bin Abdulaziz Al Rajhi Holding Co.
Share (%)
Institutional
KSA
14.79
General Organization for Social Insurance (GOSI)
Government
KSA
10.19
Mohammed Abdulaziz Al Rajhi & Sons Investment Co.
Institutional
KSA
2.05
Total
27.03
Source: Tadawul
Subsidiaries/Associates Company
Country
Share (%)
Al Rajhi Capital
KSA
Al Rajhi Takaful Agency
KSA
99
Al Rajhi Development Company Ltd.
KSA
100
AL Rajhi for Administrative Services Company
KSA
100
Al Rajhi Banking & Investment Corp.
Malaysia
100
Al Rajhi Bank - Kuwait
Kuwait
100
Al Rajhi Bank - Jordan
Jordan
100
Al Rajhi Comp. for Cooperative Insurance
KSA
22.5
100
Source: Company data
Wednesday, 07 December 2016
10
Detailed Financial Statements Ratios
FY2015
FY2016e
FY2017e
FY2018e
RoAE
16.1
17.0
15.9
15.9
RoAA
2.3
2.5
2.4
2.5
Profitability (%)
RoRWA
3.1
3.3
3.2
3.3
NIM (% of IEAs)
3.66
4.06
4.18
4.24
NIM (% of RWAs)
4.30
4.55
4.60
4.67
NIM (% of AAs)
3.20
3.44
3.49
3.58
2.1
1.2
1.4
1.4
Cost-to-Income (Headline)
33.9
31.5
31.2
31.2
Cost-to-Income (Core)
33.8
31.7
31.4
31.3
LDR
81.5
82.6
84.5
85.8
Loans/Assets
66.6
68.0
68.0
68.3
Cash & Interbank Loans-to-Total Assets
17.1
17.4
16.7
16.5
Deposits to Assets
81.7
82.3
80.5
79.7
2.2
1.0
3.2
3.5
1909.1
1096.3
844.7
684.2
NPL Ratio
1.5
1.4
1.6
1.7
NPLs to Shareholder's Equity
7.0
6.5
7.2
7.4
NPLs to Tier 1 Capital
7.0
6.8
7.4
7.6
Spread Efficiency (%)
Liquidity (%)
Wholesale Funding to Loans IEAs to IBLs Asset Quality (%)
Coverage Ratio
176.7
214.5
228.5
245.1
ALL/Average Loans
2.7
3.1
3.7
4.2
Cost of Risk
92
105
122
122
Tier 1 Ratio
19.7
18.9
19.8
20.0
CAR
20.8
20.0
20.9
21.1
Tier 1 Capital to Assets
14.8
14.4
15.0
15.5
Tier 1 Capital to Loans
22.2
21.2
22.0
22.7
Tier 1 Capital to Deposits
18.1
17.5
18.6
19.5
6.8
6.7
6.5
6.3
Net Interest Income
1.4
12.2
6.6
7.7
Non-Interest income
Capitalization (%)
Leverage (x) Growth (%)
-1.6
14.4
0.9
6.9
Total Revenue
0.6
12.8
5.0
7.5
Opex
3.1
4.7
4.3
7.2
-0.7
17.0
5.3
7.6
-15.3
24.8
20.0
5.9
Net Income
4.3
14.8
1.0
8.2
Loans
2.1
8.2
4.5
6.0
Deposits
0.7
6.7
2.2
4.5
Assets
2.6
5.9
4.5
5.5
RWAs
4.2
7.8
3.6
8.1
Net Operating Income Net Provisions & Impairments
Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
11
Income Statement (In SAR mn)
FY2015
FY2016e
FY2017e
FY2018e
Net Interest Income
9,959
11,175
11,915
12,833
Fees & Commissions
2,704
3,137
3,231
3,392
FX Income
980
931
940
1,053
Other Income
103
266
201
228
Non-Interest Income Total Revenue Operating Expenses Net Operating Income
3,787
4,333
4,372
4,673
13,746
15,508
16,287
17,506
(4,658)
(4,878)
(5,089)
(5,455)
9,088
10,631
11,198
12,051
(1,958)
(2,444)
(2,933)
(3,106)
7,130
8,187
8,265
8,946
FY2015
FY2016e
FY2017e
FY2018e
Cash & Balances with Central Bank
27,054
41,264
39,361
38,194
Interbank Loans
26,911
17,052
19,011
22,675
Net Investments
39,877
35,323
39,642
41,316
210,218
227,362
237,634
251,945
Other Assets
5,981
7,019
7,276
7,886
Net PP&E
5,579
6,281
6,349
6,636
315,620
334,303
349,273
368,651
Interbank Deposits
4,558
2,246
7,720
8,726
Customer Deposits
257,822
275,096
281,148
293,799
6,601
7,152
6,466
7,345
268,981
284,494
295,334
309,870
46,639
49,809
53,939
58,781
315,620
334,303
349,273
368,651
Net Provisions & Investment Impairments Net Profit Source: Company data, QNBFS estimates
Balance Sheet (In SAR mn) Assets
Net Loans
Total Assets Liabilities
Other Liabilities Total Liabilities Shareholders’ Equity Total Liabilities & Shareholders’ Equity Source: Company data, QNBFS estimates
Wednesday, 07 December 2016
12
KSA Banking Landscape
Wednesday, 07 December 2016
13
Loans/GDP: KSA Underbanked
Young Population: Favorable for Retail Banking 124%
125%
3%
109% 100%
92% 87%
86% 75%
85%
29%
24%
68% 63% 56%
50%
45%
25% 44%
0% KSA
Oman
Kuwait
2014
UAE
Qatar 0-14
2015
15-40
40-65
65+
Source: Respective Central Banks, IMF, UN
RJHI Claims Largest Branch Network
RJHI - Large Cap Stock (SAR bn)
600
120 537 103.2
500
100 83.8
400
80
355 334 300
60 46.0 40
200 151 120 100
84 83 78 72 70 61
31.6 21.1 21.6
20 48 14
0
36.3 33.9
14.7
11.9 10.4
5.4
0
Source: SAMA, Bloomberg
Wednesday, 07 December 2016
14
2015 Loans Market Share: NCB is the Incumbent BAJ Al Bilad Alinma 3% 3% 4% SAIB 4%
3Q2016: RJHI Marginally Increased its Market Share BAJ Alinma 3% 4% SAIB 5%
Al Bilad 3%
NCB 18%
NCB 18% SHB 5%
SHB 6% ARNB 8%
RJHI 15%
SABB 9%
ANB 8%
RJHI 16%
SABB 9% BSFR 9%
RIBL 11%
BSFR 9%
SAMBA 10%
RIBL 11% SAMBA 9%
Source: Company financials
2015 Corporate Loans Share: NCB Followed by BSFR
BAJ Alinma 3% 5% SAIB 5%
SAIB BSFR 3% Al Bilad 2% 3% Alinma SHB 3% 3%
Al Bilad 2%
NCB 18%
BAJ 4%
SHB 6% BSFR 12%
RJHI 6% ARNB 9%
SAMBA 12% SABB 11%
RIBL 11%
2015 Retail Loans: RJHI Dominates Retail
RJHI 37%
SAMBA 5% ARNB 6% SABB 6% RIBL 10%
NCB 19%
Source: Company financials
Wednesday, 07 December 2016
15
2015 Conventional Loans Share: RIBL Followed by SAMBA
2015 Shari’ah Loans: RJHI & NCB at Stiff Competition Al Bilad SHB SAIB 4% 4% 3%
SABB 8%
BAJ 4%
SAIB 8%
RIBL 22%
SHB 11%
RJHI 21%
Alinma 6% ARNB 7%
SAMBA 17%
ARNB 13% NCB 5%
BSFR 7% RIBL 7%
BSFR 16%
NCB 20%
SAMBA 7%
SABB 10%
Source: Company financials
Corporate Loans Dominate as is the Case in the GCC
Conventional Loans vs. Shari’ah Loans: Shari’ah Favored by Saudis
Retail Loans 32%
Convention al Loans 25% Corporate Loans 68%
Shari'ah Compliant Loans 75%
Source: Company financials
Wednesday, 07 December 2016
16
2015 Deposits: NCB & RJHI Dominate
3Q2016 Deposits: RJHI Gained Market Share While NCB Lost
BAJ Al Bilad 3% Alinma 3% 4%
Alinma 5%
BAJ SAIB 3% 4%
Al Bilad 2%
NCB 19%
NCB 20%
SAIB 4% SHB 5%
SHB 5%
ARNB 9%
ANB 8% RJHI 16%
RJHI 15%
SABB 9% BSFR 9%
SAMBA 10%
SABB 9%
RIBL 10%
BSFR 9%
RIBL 10%
SAMBA 10%
Source: Company financials
RJHI's LDR (headline/simple LDR) On The Lower End 100%
83%
84%
RJHI
NCB
91%
92%
92%
88%
90%
86%
87%
90%
86%
BAJ
Average
SABB
Al Bilad
Alinma
ANB
BSFR
SHB
SAIB
75% 75%
50%
25%
0% SAMBA Source: Company financials
Wednesday, 07 December 2016
17
Recommendations
Risk Ratings
Based on the range for the upside / downside offered by the 12 month target price of a stock versus the current market price
Reflecting historic and expected price volatility versus the local market average and qualitative risk analysis of fundamentals
OUTPERFORM
Greater than +20%
R -1
Significantly lower than average
ACCUMULATE
Between +10% to +20%
R -2
Lower than average
MARKET PERFORM
Between -10% to +10%
R -3
Medium / In-line with the average
REDUCE
Between -10% to -20%
R -4
Above average
UNDERPERFORM
Lower than -20%
R -5
Significantly above average
Contacts
Saugata Sarkar
Shahan Keushgerian
Zaid Al Nafoosi, CMT, CFTe
Head of Research
Senior Research Analyst
Senior Research Analyst
Tel: (+974) 4476 6534
Tel: (+974) 4476 6509
Tel: (+974) 4476 6535
[email protected]
[email protected]
[email protected]
QNB Financial Services Co. WLL One Person Company Contact Center: (+974) 4476 6666 PO Box 24025 Doha, Qatar
Disclaimer and Copyright Notice: This publication has been prepared by QNB Financial Services Co. WLL One Person Company (“QNBFS”) a wholly-owned subsidiary of QNB SAQ (“QNB”). QNBFS is regulated by the Qatar Financial Markets Authority and the Qatar Exchange QNB SAQ is regulated by the Qatar Central Bank. This publication expresses the views and opinions of QNBFS at a given time only. It is not an offer, promotion or recommendation to buy or sell securities or other investments, nor is it intended to constitute legal, tax, accounting, or financial advice. QNBFS accepts no liability whatsoever for any direct or indirect losses arising from use of this report. Any investment decision should depend on the individual circumstances of the investor and be based on specifically engaged investment advice. We therefore strongly advise potential investors to seek independent professional advice before making any investment decision. Although the information in this report has been obtained from sources that QNBFS believes to be reliable, we have not independently verified such information and it may not be accurate or complete. QNBFS does not make any representations or warranties as to the accuracy and completeness of the information it may contain, and declines any liability in that respect. For reports dealing with Technical Analysis, expressed opinions and/or recommendations may be different or contrary to the opinions/recommendations of QNBFS Fundamental Research as a result of depending solely on the historical technical data (price and volume). QNBFS reserves the right to amend the views and opinions expressed in this publication at any time. It may also express viewpoints or make investment decisions that differ significantly from, or even contradict, the views and opinions included in this report. This report may not be reproduced in whole or in part without permission from QNBFS COPYRIGHT: No part of this document may be reproduced without the explicit written permission of QNBFS.
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