Banque Saudi Fransi (BSFR) - SLIDEBLAST.COM
Banque Saudi Fransi (BSFR) Recommendation Share Price Implied Upside
ACCUMULATE SAR27.90 18.3%
Risk Rating Target Price
R-3 SAR33.00
Key Data Current Market Price (SAR)
Initiating Coverage With a Price Target of SAR33.00
Bloomberg Ticker
Banque Saudi Fransi (BSFR) has a 9% and 8% market share in loans (5th largest among domestic banks) and deposits (6th largest among domestic banks), respectively. What is of significant importance is BSFR commands the 2nd largest market share in corporate lending at 12%. Leveraging off Credit Agricole’s technical support (a prominent French bank and BSFR’s strategic shareholder) and its successful corporate banking franchise/platform, BSFR’s strategy is to cross-sell the bank’s products and services, in turn boosting its fees & commissions income. Moreover, the bank is targeting mid-segment retail and HNIs vs. mass retail.
ADR/GDR Ticker
Highlights
3-m Average Volume (‘000)
27.90
Dividend Yield (%)
We expect positive performance in 2015, weak performance in 2016 followed by a rebound in 2017; we pencil in a bottom-line CAGR of 9.0% in 2014-2019e vs. 7.3% in 2009-2014. Due to the weak overall outlook for 2016, we expect net income to decline by 4.1% to SAR3.8bn. In times of weak market conditions, asset quality deteriorates and provisions rise. As such, we pencil in a cost of risk (CoR) of 33bps (16bps in 2015) which leads to provisions jumping by 145.7% to SAR444.3mn. We also foresee sluggish growth in net interest income and fees. At the same time, we estimate a significant drop in investment income. However, 2017 could be a promising year. We expect net income to grow by 10.4% to SAR4.2bn led by strong core banking income and investment income. We estimate core income to gain by 9.1% led by a 11.4% growth in net interest income, 8.0% growth in f/x income and 6.0% gain in fees & commissions. Moreover, investment income is modeled to grow by 15.1% (down 22.4% in 2016). We caution that our estimates could be revised downward if oil prices
3.8 BSFR AB N/A
Reuters Ticker
1050.SE
ISIN Sector*
SA0007879782 Banks & Financial Svcs.
52wk High/52wk Low (SAR)
40.90/26.90 180.8
Mkt. Cap. ($ bn/SAR bn)
33.6/9.0
Shares Outstanding (mn)
1,205.4
QFI Limit* (%) Current QFI* (%) 1-Year Total Return (%) Fiscal Year End
20.0 0.1 (11.3) December 31
Source: Bloomberg (as of December 01, 2015), *Tadawul (as of December 01, 2015); Note: QFI is Qualified Foreign Investors
remain depressed longer than expected.
25bps interest rate hike by the FED is positive but not a game changer for NIMs and spreads; further hikes would be material. The FED is expected to hike interest rates by 25bps in December 2015. This is positive for BSFR as 52.5% and 35.4% of loans are repriceable within 3 months and 3-12 months, respectively. BSFR is an established corporate banking franchise with a 12% market share in this segment (highest among domestic peers); we estimate an overall loan book CAGR of 8.6% during 2014-19e. BSFR is mostly known for being a corporate oriented bank with corporate loans representing on average ~91% of its loan book between 2006-2014. However, by mid-2000, the bank modified its strategy tapping the retail sector more aggressively. This did not work to the bank's advantage as impaired retail loans expanded by 28% in 2011 and 33% in 2012. As such, the bank has adopted a more cautious approach about lending to retail; it plans to target the mid-segment and HNIs vs. mass retail. During 2012-2013, BSFR cleaned/restructured its retail book and some corporate accounts. We are of the view that the corporates' segment, the historical niche segment for the bank, should drive credit off-take. We pencil in loan book growth
of 7.8%, 5.3%, 7.9% and 10.0% in 2015, 2016, 2017 and 2018, respectively.
Catalysts
Beyond a stabilization/recovery in oil prices, the following developments could be perceived positively by the market: improvement in NIMs and spreads.
Recommendation, Valuation and Risks
Recommendation and valuation: We assign a Price Target of SAR33.00 and an Accumulate rating. BSFR is trading at a 2016e P/B and P/E of 1.0x and 8.8x, respectively. The stock offers a yield of 3.9% and 4.1% in 2016 and 2017, respectively.
Risks: 1) Declining oil prices remains the biggest risk for BSFR and the Saudi banking sector and 2) Greater-than-expected asset quality deterioration.
Key Financial Data and Estimates EPS (SAR) EPS Growth (%) P/E (x) BVPS (SAR) P/B (x) DPS (SAR) Dividend Yield (%)
FY2014 2.92 46.2 9.6 22.0 1.3 0.95 3.4
FY2015e 3.32 13.7 8.4 25.3 1.1 1.05 3.8
FY2016e 3.18 (4.1) 8.8 27.4 1.0 1.10 3.9
FY2017e 3.51 10.4 7.9 29.8 0.9 1.15 4.1
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, 02 December 2015
1
Valuation Our target price of SAR33.00/share implies an upside of 18.3% over the current price. As such, we rate BSFR an Accumulate. Key risk to our
assumptions and target price is oil prices remaining depressed, which in turn would further weaken the Saudi economy, resulting in having more projects being put on hold or suspended. Consequently, this would put further pressure on the banking sector. Another major risk is the geopolitical situation in the Middle East. We value BSFR using a blended valuation methodology, which assigns a 50%:50% weighting to a) Warranted Equity Valuation (WEV) and b) Residual Income Model (RI). 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) and expected long-term growth in earnings (g) 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. Based on this method we arrive at a fundamental P/B of 1.2x. b)
We also derive BSFR's fair value by employing the RI valuation technique, 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).
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). In Banque Saudi Fransi's case, 77% of the fair value is derived from the bank's beginning BVPS vs. 14% from the terminal value. Both valuation methodologies are based on a common Cost of Equity (Ke) assumption of 11.4%. We calculate a risk free rate of 4.5% and factor in an adjusted beta of 1.03 vs. 0.85 (actual from Bloomberg) as we believe banks are a direct proxy for the economy. Finally, we add a local equity risk premium of 6.7% to arrive at a Ke of 11.4%. Valuation Matrix WEV Sustainable RoAE (%) Book Value of 2016e (SAR) Estimated Cost of Equity (%)
RI 13.0% 27.40 11.4%
Beginning BVPS (2016e) (SAR)
25.27
Present Value of Interim Residuals (SAR)
2.68
Present Value of Terminal Value (SAR)
4.72
Terminal Growth Rate (%)
4.0%
Fundamental P/B
Intrinsic Value (SAR)
33.00
Intrinsic Value (SAR)
33.00
1.2x
Current Market Price (SAR)
27.90
Current Market Price (SAR)
27.90
Upside/(Downside) Potential (%)
18.3%
Upside/(Downside) Potential (%)
18.3%
Equity Value (SAR mn)
39,777
Equity Value (SAR mn)
39,777
Source: Bloomberg, QNBFS estimates
Price Target Calculation Methodology
Equity Value (SAR mn)
Weight (%)
WEV
39,777
50
Fair Value (SAR mn) 19,888
Residual Income
39,777
50
19,888
Blended Equity Value
13,565
Shares Outstanding (mn)
1,205.4
Target Price (SAR)
33.00
Upside/(Downside)
18.3%
Source: Bloomberg, QNBFS estimates
We present below a scenario analysis of possible price targets based on a Base, Bull and Bear scenarios. Scenario Analysis Sustainable RoAE G Ke P/B
Bear 12.0% 3.5% 12.4% 0.95
Base 13.0% 4.0% 11.4% 1.21
Bull 14.0% 5.0% 10.4% 1.66
Blended Fair Value based on WEV & RI
26.00
33.00
45.00
Source: QNBFS estimates
Wednesday, 02 December 2015
2
Trading at a 38% discount to its Historical P/B… 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Mar-05
Historical Median - 1.9x Current P/B 1.2x
Sep-08
Mar-12
Sep-15
Source: Bloomberg
BSFR's valuation is undemanding. The stock trades at a steep discount to its 10-year average P/B and P/E ratios. Moreover, if we exclude the bull years and the global financial crisis years the stock is still trading at a 16% and 25% discount to its median P/B and P/E,
respectively. …And a 33% discount to its Historical P/E 40.00 38.00 36.00 34.00
Historical Median - 12.7x Current P/E 8.5x
32.00 30.00 28.00 26.00 24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Mar-05
Sep-08
Mar-12
Sep-15
Source: Bloomberg
Wednesday, 02 December 2015
3
Key Forecasts Loan Portfolio BSFR is an established corporate banking franchise with a 12% market share in this segment (highest among domestic peers); we estimate an overall loan book CAGR of 8.6% during 2014-19e. BSFR is mostly known for being a corporate oriented bank with corporate loans representing on average ~91% of its loan book between 2006-2014. However, by mid-2000 the bank modified its strategy by tapping the retail sector more aggressively. This did not work to the bank's advantage as impaired retail loans expanded by 28% in 2011 and 33% in 2012. Moreover, NPLs arising from retail contributed 35% of total NPLs. As such, the bank has become more cautious about lending to this sector; it plans to target the mid-segment and HNIs vs. mass retail. During 2012-2013, BSFR cleaned/restructured its retail book and some corporate accounts. Thus impaired retail loans dropped by 3% and 10% in 2013 and 2014, respectively. Moreover, retail loans contracted by 13.4% in 2013 while were marginally up (+0.5%) in 2014. We are of the view that the corporates' segment, the historical niche segment for the bank, should drive the credit off-take. We pencil in loan book growth of 7.8%, 5.3%, 7.9% and 10.0% in 2015, 2016, 2017 and 2018, respectively. We expect the loan book to grow to SAR176.2bn in 2019e from SAR116.5n in 2014. It should be noted that we expect low single digit growth in 2016 due to depressed oil prices, which is adversely affecting KSA's economy.
Loans to Exhibit 8.6% CAGR (SAR mn)
Loans Skewed Towards Corporates 176,192
180,000
100%
8.6% CAGR 157,119 142,773
47%
75%
132,370
46%
46%
16%
13%
17%
19%
45%
44%
20%
19%
19%
20%
7%
9%
8%
8%
2013
2014
125,660 120,000
111,307
116,541 50% 22%
25%
60,000
12% 9%
10%
12%
10%
11%
11%
2010
2011
2012
0% Retail Manufacturing Other Corporates
2013
2014
2015e
2016e
2017e
2018e
2019e
Real Estate & Construction Commerce
Source: Company data, QNBFS estimates
Shari’ah compliant financing to drive loan growth. Given KSA's corporate sectors' preference for Shari’ah compliant loans, the former has grown by a CAGR of 30.4% (2005-2014) vs. 3.3% that of conventional loans.
Shari’ah Compliant Loan Growth Outpaced Conventional; Currently Shari’ah Compliant Loans Dominate BSFR's Loan Book 100% 86% 80% 71%
75%
67% 61%
59% 52%
50% 39% 29%
48%
48%
41%
58%
56%
52% 44%
42%
33%
20%
25% 14%
0% 2005
2006
2007
2008 Conventional Loans
2009
2010
2011
2012
2013
2014
Sharia'h Compliant Loans
Source: Company data
Wednesday, 02 December 2015
4
Deposit Book BSFR has a 8% market share in deposits, 5th among domestic banks; we estimate deposits to grow by a CAGR of 8.3% during 2014-19e. The bank has successfully managed to raise non-interest bearing deposits. In 2014 non-interest bearing deposits reached a peak at 73% of total deposits. Given the anticipated Fed rate hike, we believe BSFR's current deposit structure is not sustainable. Thus, we estimate a gradual decline in non-interest bearing deposits. On a side note, SAMA has enforced a deposit insurance scheme in which banks would have to apply a charge of 5bps on non-sovereign deposits. Consequently, this would increase interest expense going forward.
Non-Interest Bearing Deposits have Reached Non-Sustainable Levels; A Gradual Drop is Imminent 100%
75%
50%
56% 65%
73%
73%
70%
68%
65%
27%
27%
30%
32%
35%
2014
2015e
2016e
2017e
2018e
50%
25%
50%
44% 35%
0% 2011
2012
2013
Interest Bearing Deposits
Non-Interest Bearing Deposits
Source: Company data, QNBFS estimates
LDR (Loans to stable sources of funds) expected to remain below SAMA's 85% limit. Given BSFR's conservative nature, we do not assume an expansion in the LDR. 100.0% SAMA's 85% Limit 80.9%
82.6%
80.7%
80.2% 75.5%
79.0%
77.8%
78.7%
75.0%
50.0%
25.0%
0.0% 2011
2012
2013
2014
2015e
2016e
2017e
2018e
Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
5
Operating Performance We expect positive performance in 2015, weak performance in 2016 followed by a rebound in 2017; we pencil in a bottom-line CAGR of 9.0% in 2014-2019e. We estimate net income to grow by 13.7% to SAR4.0bn in 2015 mainly due to a 50.6% drop in net provisions. It is worth mentioning that BSFR was cleaning its books during 2012 and 2013 due to impaired retail and some corporate accounts, leading provisions to expand by 181.1% and 117.6% in 2012 and 2013, respectively. In 2014, net income soared by 46.2% on the back of robust operating income coupled with a contraction in provisions (down 62.1%). Coming back to 2015, we expect provisions to further drop by 50.6% based on sound asset quality and the trend in 9M2015. Moreover, we expect net income to be boosted by investment income while estimating healthy growth from core banking income since 2014's jump in profitability stemmed from a low base effect. On the other hand, due to the weak overall outlook for 2016, we expect net income to decline by 4.1% to SAR3.8bn. In times of weak market conditions, asset quality deteriorates and provisions rise. As such, we pencil in a cost of risk (CoR) of 33bps (16bps in 2015) which leads to provisions increasing by 145.7% to SAR444.3mn. Moreover, we foresee sluggish growth in net interest income and fees. At the same time, we estimate a significant drop in investment income. Finally, 2017 could be a promising year. We expect net income to grow by 10.4% to SAR4.2bn led by strong core banking income and investment income. We estimate core income to gain by 9.1% led by a 11.4% growth in net interest income, 8.0% growth in f/x income and 6.0% gain in fees & commissions. Moreover, investment income is modeled to grow by 15.1% (down 22.4% in 2016). We caution that our estimates could be revised downward if oil prices remain depressed longer than expected. 25bps interest rate hike by the FED is positive but not a game changer for NIMs and spreads; further hikes would be material The FED is expected to hike interest rates by 25bps in December 2015. This is positive for BSFR, as 52.5% and 35.4% of loans are repriceable within 3 months and 3-12 months, respectively. However, funding would not remain free in our view as the bank's portion of non-interest bearing deposits to total deposits peaked at 73%. As such, we expect depositors to demand a return on their funds. Consequently, we estimate a measured rise in NIMs.
Net Income (SAR mn) 6,000
Net Interest Income (SAR mn) 50.0%
46.2%
6,600
20.0% 6,057
5,421 5,080
5,439 4,806
3,999 4,000
15.0%
4,235 3,835
25.0%
3,516
4,400
3,817 4,078 13.5%
20.0% 13.7%
4,313
3,363
11.4%
11.4% 10.0%
6.7%
10.4%
2,406
13.2%
6.8%
2,000
0.0%
2,200
5.8% 5.0%
-4.1% -20.2%
1.7%
0
-25.0% 2013
2014
0
2015e 2016e 2017e 2018e 2019e
Net Income (LHS)
0.0% 2013
2014 2015e 2016e 2017e 2018e 2019e Net Interest Income (LHS)
Growth (RHS)
Growth (RHS)
Source: Company data, QNBFS estimates
NIMs To Progressively Improve 4.0%
3.5%
3.01%
3.0%
2.93%
2.90%
2.88%
2.97% 2.86%
2.86%
2.66%
2.5%
2.41%
2.49%
2013
2014
2.51%
2.53%
2.53%
2015e
2016e
2017e
2.55%
2.0% 2005
2006
2007
2008
2009
2010
2011
2012
2018e
Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
6
RoAE to Remain Under Pressure On the Back of High CARs and Excessive Provisioning 15.0%
2.7%
14.0%
14.2%
13.4% 13.0%
12.5% 12.1% 10.0%
12.3%
2.2%
10.5%
2.2%
2.2% 2.1%
2.0% 2.0%
2.0%
7.5%
5.0%
1.7% 1.5%
2.5%
0.0%
1.2% 2013
2014
2015e
2016e
2017e
RoAE (LHS)
2018e
2019e
RoRWA (RHS)
Source: Company data, QNBFS estimates
Efficiency Cost-to-income ratio at optimal levels. BSFR, has, on average (2010-2014) maintained its efficiency ratio at an optimal level of 32%. This is mainly due to the bank’s focus on corporate banking, which is less cost intensive vs. retail banking. Going forward, we estimate the bank’s cost-to-income ratio to be within its historical range. Having said that, we pencil in a higher ratio in 2016 due to revenue growing less than opex. This is based on the tepid macro outlook in 2016. Operating Efficiency to Remain Robust 40% 33.3%
34.8%
32.9%
34.4%
33.4%
35.4%
34.6%
36.1% 34.0%
35.5% 33.0%
34.4%
20%
0% 2013
2014
2015e
Cost-to-Income (Headline)
2016e
2017e
2018e
Cost-to-Income (Core)
Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
7
Asset Quality BSFR boasts healthy asset quality but this could worsen in 2016 and 2017. We forecast some deterioration in asset quality during 2016 and 2017 as is likely during periods of economic softness. Thus, we estimate an increase in the NPL ratio to 1.25% and 1.35% in 2016 and 2017, respectively. It should be noted that although we expect the NPL ratio to increase, the increase in the ratio still implies NPLs to remain within normal historical/sector norms. We also expect elevated coverage ratios, which should safeguard the bank in case loans are impaired more than estimated. In recent times, BSFR faced headwinds when it targeted the mass retail as discussed under the loans section (impaired retail
loans expanded by 28% in 2011 and 33% in 2012. NPLs arising from retail contributed 35% of total NPLs. As such, the bank has recently become more cautious about lending to retail; it plans to target the mid-segment and HNIs vs. mass retail. Thus impaired retail loans dropped by 3% and 10% in 2013 and 2014, respectively. Moreover, retail loans contracted by 13.4% in 2013 while were marginally up (+0.5%) in 2014). The bank has generally maintained on average a coverage ratio of 155% between 2004 and 2014. On the other hand, BSFR ended 2014 with a coverage ratio of 195%. Furthermore, we are of the view that management would like to remain conservative and maintain a coverage ratio above the 150s (%). 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. Healthy Asset Quality but Could Worsen in 2016 207%
5%
210%
195% 187%
180% 4%
158%
146% 147%
156% 150%
149%
3%
136%
120% 90%
2% 1.23%
1.34%
1.20%
1.35%
1.25%
1.00%
0.99%
1%
60%
1.10%
0.88%
30% 0%
0% 2010
2011
2012
2013 NPL Ratio (LHS)
2014
2015e 2016e Coverage Ratio (RHS)
2017e
2018e
Source: Company data, QNBFS estimates
Capitalization Strong capitalization levels. BSFR has always maintained healthy capitalization levels and we do not expect this trend to reverse. Capitalization Levels Remain Robust 20.0%
15.6% 15.0%
14.7%
13.9%
18.0%
17.3%
17.3%
16.5%
14.8%
15.1%
17.5% 15.8%
15.3%
10.0%
5.0%
0.0% 2012
2013
2014 CAR
2015e
2016e
2017e
Tier 1
Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
8
4Q2015 Estimates We expect BSFR to exhibit a 10.6% QoQ drop in net income (+7.3% YoY). We estimate BSFR to report a net income of SAR912.5mn in 4Q2015 vs. SAR1.02bn in 3Q2015 (SAR850.7mn in 4Q2014). We expect the QoQ decrease in net income to be mainly attributed to a decrease in noninterest income driven by a drop in investment income and f/x income. We expect the YoY growth to emanate from growth in net interest income and fees & commissions. SAR mn Net Interest Income Non-Interest Income Net Operating Income Net Income
4Q2014 970 451 894 851
3Q2015 1,044 546 1,070 1,020
4Q2015e 1,055 461 974 912
Change QoQ (%) 1.1 (15.5) (9.0) (10.6)
Change YoY (%) 8.7 2.1 9.0 7.3
Source: Company data, QNBFS estimates
Company Description As of 9M2015, Banque Saudi Fransi had a 9% and 8% market share in loans (5th largest among domestic banks) and deposits (6th largest among domestic banks), respectively. What is of significance is BSFR commands the 2nd largest market share in corporate lending (12%). Established in 1977, BSFR is a universal bank offering conventional and Shari'ah compliant services to corporates and retail customers, investment banking, brokerage and asset management. The bank has a network of 83 branches and over 560 ATMs. Banking on one of France's prominent banks and strategic shareholder; Credit Agricole (has a technical service agreement with BSFR) which is beneficial to the bank. Leveraging off its successful corporate banking franchise and platform, BSFR’s strategy is to cross-sell the bank’s products and services, boosting its fees & commissions income. Solid shareholder base. BSFR enjoys a strong and stable shareholding structure.
Major Shareholders Shareholders
Investor Type
Country
Credit Agricole
Institutional
France
Share (%) 31.1
General Organization for Social Insurance (GOSI)
Government
KSA
13.3
Al Rashed Family
Private
KSA
9.8
Total
54.2
Source: Tadawul
Subsidiaries/Associates Company
Country
Saudi Fransi Capital
KSA
Share (%) 100.0
Saudi Fransi Insurance Agency (SAFIA)
KSA
100.0
Saudi Fransi Financing & Leasing
KSA
100.0
SOFINCO Saudi Fransi
KSA
100.0
Sakan Real Estate Financing
KSA
100.0
Banque BEMO Saudi Fransi
Syria
27.0
Saudi Fransi Corporative Insurance Co. (Allianz Saudi Fransi)
KSA
32.5
Source: Company data
Wednesday, 02 December 2015
9
Detailed Financial Statements Ratios
FY2014
FY2015e
FY2016e
FY2017e
RoAE
14.2
14.0
12.1
12.3
RoAA
2.0
2.1
1.9
1.9
Profitability (%)
RoRWA
2.0
2.2
2.0
2.0
NIM (% of IEAs)
2.49
2.51
2.53
2.53
NIM (% of RWAs)
2.22
2.20
2.20
2.26
NIM (% of AAs)
2.13
2.14
2.15
2.19
1.6
1.4
1.4
1.4
Cost-to-Income (Headline)
32.9
33.4
34.6
34.0
Cost-to-Income (Core)
34.4
35.4
36.1
35.5
LDR
75.5
80.7
79.0
77.8
Loans/Assets
61.7
65.1
63.4
62.2
Cash & Interbank Loans-to-Total Assets
11.7
12.4
11.9
9.4
Deposits to Assets
77.0
77.1
77.0
77.0
Wholesale Funding to Loans
11.2
6.4
6.4
6.9
311.0
340.4
314.2
306.4
Spread Efficiency (%)
Liquidity (%)
IEAs to IBLs Asset Quality (%) NPL Ratio
0.99
0.88
1.25
1.35
NPLs to Shareholder's Equity
4.5
3.7
5.1
5.5
NPLs to Tier 1 Capital
4.5
3.9
5.3
5.7
194.8
207.3
157.9
155.7
2.0
1.9
2.0
2.2
0.28
0.16
0.33
0.36
Tier 1 Ratio
14.8
15.1
15.8
15.3
CAR
17.3
17.3
18.0
17.5
Tier 1 Capital to Assets
14.0
15.1
15.1
15.0
Tier 1 Capital to Loans
22.6
23.1
23.9
24.1
Tier 1 Capital to Deposits
18.2
19.5
19.6
19.5
7.1
6.3
6.3
6.4
Net Interest Income
13.5
6.8
5.8
11.4
Total Revenue
14.5
8.5
4.1
10.1
Net Income (Attributable)
46.2
13.7
-4.1
10.4
4.7
7.8
5.3
7.9
10.4
2.5
8.0
10.0
Coverage Ratio ALL/Average Loans Cost of Risk Capitalization (%)
Leverage (x) Growth (%)
Loans Deposits Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
10
Income Statement (In SAR mn)
FY2014
FY2015e
FY2016e
FY2017e
Net Interest Income
3,817
4,078
4,313
4,806
Fees & Commissions
1,292
1,369
1,431
1,517
FX Income
354
387
418
451
Investment Income
254
342
272
311
Other Income
70
102
104
113
Non-Interest Income
1,970
2,201
2,225
2,392
Total Income
5,787
6,279
6,538
7,198
Operating Expenses
(1,904)
(2,099)
(2,259)
(2,448)
Operating Income
3,883
4,180
4,279
4,751
Net Provisions & Investment Impairments
(366)
(181)
(444)
(515)
Net Profit
3,516
3,999
3,835
4,235
FY2014
FY2015e
FY2016e
FY2017e 15,921
Source: Company data, QNBFS estimates
Balance Sheet (In SAR mn) Assets Cash & Balances with Central Bank
20,014
16,380
22,515
Interbank Loans
2,009
7,540
2,250
5,711
Net Investments
45,102
36,263
45,216
58,608
116,541
125,660
132,370
142,773
4,506
6,528
5,856
6,274
605
640
535
428
188,777
193,010
208,742
229,716
Net Loans Other Assets Net PP&E Total Assets Liabilities Interbank Deposits
3,863
1,277
1,753
3,091
Customer Deposits
145,275
148,907
160,820
176,902
9,131
6,713
6,713
6,713
Term Loans Other Liabilities Total Liabilities Shareholders’ Equity Total Liabilities & Shareholders’ Equity
4,036
5,658
6,433
7,076
162,306
162,555
175,718
193,782
26,471
30,455
33,024
35,934
188,777
193,010
208,742
229,716
Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
11
KSA Banking Landscape
Wednesday, 02 December 2015
12
Loans/GDP: KSA Underbanked
Young Population: Favorable for Retail Banking
100% 3% 85.0%
75%
87.1%
29%
24%
67.5% 62.6%
50%
44.7%
25% 44%
0% KSA
Kuwait
Oman
Qatar
UAE
0-14
15-40
40-65
65+
Source: Respective Central Banks, UN
2014 Loans Market Share: NCB is the Incumbent BAJ Alinma 3% SAIB 4%
9M2015: RIBL & SAIB Lost Market share While SABB & SHB Gained
Al Bilad 2%
5%
BAJ Alinma 3% SAIB 4% 4%
Al Bilad 2%
NCB 18%
NCB 18%
SHB 5%
SHB 6%
ARNB 8%
RJHI 16%
ARNB 8%
RJHI 16%
SABB 10%
SABB 9% BSFR 9%
RIBL 11% SAMBA 10%
BSFR 9%
RIBL 10% SAMBA 10%
Source: Company financials
Wednesday, 02 December 2015
13
2014 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 17%
BAJ 4%
SHB 6% BSFR 12%
RJHI 7% ARNB 9%
SAMBA 12% SABB 10%
2014 Retail Loans: RJHI Leader Followed by NCB
RJHI 36%
SAMBA 5% ARNB 6% SABB 6% RIBL 10%
RIBL 11%
NCB 19%
Source: Company financials
2014 Conventional Loans Share: RIBL Followed by SAMBA
2014 Shari’ah Loans: RJHI Leader Followed by NCB
SHB 4% SABB 7% SAIB 8%
SAIB 3%
Al Bilad 3%
BAJ 5%
RIBL 19%
RJHI 22%
Alinma 6%
SHB 10% SAMBA 16%
ARNB 11%
ARNB 7% BSFR 7%
NCB 14%
BSFR 15%
RIBL 7%
NCB 19%
SAMBA 7%
SABB 10%
Source: Company financials
Wednesday, 02 December 2015
14
Corporate Loans Dominate as is the Case in the GCC
Conventional Loans vs. Shari’ah Loans:: Shari’ah Favored by Saudis
Convention al Loans 27%
Retail Loans 32% Shari'ah Compliant Loans 73%
Corporate Loans 68%
Source: Company financials
2014 Deposits: NCB & RJHI Dominate Alinma 4%
9M2015 Deposits: NCB Gained Market Share While BSFR Lost
BAJ Al Bilad 2% 3%
BAJ Alinma 3% 4% SAIB 4% NCB 20%
SAIB 4% SHB 5%
Al Bilad 2%
SHB 5%
NCB 21%
ARNB 8%
ARNB 8% RJHI 16%
SABB 9% BSFR 9%
SAMBA 10%
RJHI 16%
SABB 9% BSFR 8%
RIBL 10%
SAMBA 10%
RIBL 9%
Source: Company financials
KSA Enjoys Lowest 9M2015 LDR in GCC 100%
75%
73%
75%
SAMBA
BAJ
78%
79%
79%
Total Banks
RJHI
Al Bilad
85%
86%
86%
87%
88%
89%
83%
SABB
ARNB
RIBL
BSFR
SAIB
Alinma
SHB
65%
50%
25%
0% NCB
Source: Company financials
Wednesday, 02 December 2015
15
Markets Factoring in a Rate Hike; KSA Appears to be Experiencing a Liquidity Crunch as is Evident by the Sudden Sharp Spike 160.0
140.0
120.0
100.0
80.0
60.0
40.0
3M SAIBOR
3M LIBOR
3M SAIBOR
3M LIBOR
Source: Bloomberg
Actual 3M SAIBOR and LIBOR Rates 1.20 1.10 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20
Source: Bloomberg
Wednesday, 02 December 2015
16
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
Head of Research
Senior Research Analyst
Tel: (+974) 4476 6534
Tel: (+974) 4476 6509
[email protected]
[email protected]
QNB Financial Services SPC Contact Center: (+974) 4476 6666 PO Box 24025 Doha, Qatar
Disclaimer and Copyright Notice: This publication has been prepared by QNB Financial Services SPC (“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.
17
ACCUMULATE SAR27.90 18.3%
Risk Rating Target Price
R-3 SAR33.00
Key Data Current Market Price (SAR)
Initiating Coverage With a Price Target of SAR33.00
Bloomberg Ticker
Banque Saudi Fransi (BSFR) has a 9% and 8% market share in loans (5th largest among domestic banks) and deposits (6th largest among domestic banks), respectively. What is of significant importance is BSFR commands the 2nd largest market share in corporate lending at 12%. Leveraging off Credit Agricole’s technical support (a prominent French bank and BSFR’s strategic shareholder) and its successful corporate banking franchise/platform, BSFR’s strategy is to cross-sell the bank’s products and services, in turn boosting its fees & commissions income. Moreover, the bank is targeting mid-segment retail and HNIs vs. mass retail.
ADR/GDR Ticker
Highlights
3-m Average Volume (‘000)
27.90
Dividend Yield (%)
We expect positive performance in 2015, weak performance in 2016 followed by a rebound in 2017; we pencil in a bottom-line CAGR of 9.0% in 2014-2019e vs. 7.3% in 2009-2014. Due to the weak overall outlook for 2016, we expect net income to decline by 4.1% to SAR3.8bn. In times of weak market conditions, asset quality deteriorates and provisions rise. As such, we pencil in a cost of risk (CoR) of 33bps (16bps in 2015) which leads to provisions jumping by 145.7% to SAR444.3mn. We also foresee sluggish growth in net interest income and fees. At the same time, we estimate a significant drop in investment income. However, 2017 could be a promising year. We expect net income to grow by 10.4% to SAR4.2bn led by strong core banking income and investment income. We estimate core income to gain by 9.1% led by a 11.4% growth in net interest income, 8.0% growth in f/x income and 6.0% gain in fees & commissions. Moreover, investment income is modeled to grow by 15.1% (down 22.4% in 2016). We caution that our estimates could be revised downward if oil prices
3.8 BSFR AB N/A
Reuters Ticker
1050.SE
ISIN Sector*
SA0007879782 Banks & Financial Svcs.
52wk High/52wk Low (SAR)
40.90/26.90 180.8
Mkt. Cap. ($ bn/SAR bn)
33.6/9.0
Shares Outstanding (mn)
1,205.4
QFI Limit* (%) Current QFI* (%) 1-Year Total Return (%) Fiscal Year End
20.0 0.1 (11.3) December 31
Source: Bloomberg (as of December 01, 2015), *Tadawul (as of December 01, 2015); Note: QFI is Qualified Foreign Investors
remain depressed longer than expected.
25bps interest rate hike by the FED is positive but not a game changer for NIMs and spreads; further hikes would be material. The FED is expected to hike interest rates by 25bps in December 2015. This is positive for BSFR as 52.5% and 35.4% of loans are repriceable within 3 months and 3-12 months, respectively. BSFR is an established corporate banking franchise with a 12% market share in this segment (highest among domestic peers); we estimate an overall loan book CAGR of 8.6% during 2014-19e. BSFR is mostly known for being a corporate oriented bank with corporate loans representing on average ~91% of its loan book between 2006-2014. However, by mid-2000, the bank modified its strategy tapping the retail sector more aggressively. This did not work to the bank's advantage as impaired retail loans expanded by 28% in 2011 and 33% in 2012. As such, the bank has adopted a more cautious approach about lending to retail; it plans to target the mid-segment and HNIs vs. mass retail. During 2012-2013, BSFR cleaned/restructured its retail book and some corporate accounts. We are of the view that the corporates' segment, the historical niche segment for the bank, should drive credit off-take. We pencil in loan book growth
of 7.8%, 5.3%, 7.9% and 10.0% in 2015, 2016, 2017 and 2018, respectively.
Catalysts
Beyond a stabilization/recovery in oil prices, the following developments could be perceived positively by the market: improvement in NIMs and spreads.
Recommendation, Valuation and Risks
Recommendation and valuation: We assign a Price Target of SAR33.00 and an Accumulate rating. BSFR is trading at a 2016e P/B and P/E of 1.0x and 8.8x, respectively. The stock offers a yield of 3.9% and 4.1% in 2016 and 2017, respectively.
Risks: 1) Declining oil prices remains the biggest risk for BSFR and the Saudi banking sector and 2) Greater-than-expected asset quality deterioration.
Key Financial Data and Estimates EPS (SAR) EPS Growth (%) P/E (x) BVPS (SAR) P/B (x) DPS (SAR) Dividend Yield (%)
FY2014 2.92 46.2 9.6 22.0 1.3 0.95 3.4
FY2015e 3.32 13.7 8.4 25.3 1.1 1.05 3.8
FY2016e 3.18 (4.1) 8.8 27.4 1.0 1.10 3.9
FY2017e 3.51 10.4 7.9 29.8 0.9 1.15 4.1
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, 02 December 2015
1
Valuation Our target price of SAR33.00/share implies an upside of 18.3% over the current price. As such, we rate BSFR an Accumulate. Key risk to our
assumptions and target price is oil prices remaining depressed, which in turn would further weaken the Saudi economy, resulting in having more projects being put on hold or suspended. Consequently, this would put further pressure on the banking sector. Another major risk is the geopolitical situation in the Middle East. We value BSFR using a blended valuation methodology, which assigns a 50%:50% weighting to a) Warranted Equity Valuation (WEV) and b) Residual Income Model (RI). 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) and expected long-term growth in earnings (g) 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. Based on this method we arrive at a fundamental P/B of 1.2x. b)
We also derive BSFR's fair value by employing the RI valuation technique, 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).
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). In Banque Saudi Fransi's case, 77% of the fair value is derived from the bank's beginning BVPS vs. 14% from the terminal value. Both valuation methodologies are based on a common Cost of Equity (Ke) assumption of 11.4%. We calculate a risk free rate of 4.5% and factor in an adjusted beta of 1.03 vs. 0.85 (actual from Bloomberg) as we believe banks are a direct proxy for the economy. Finally, we add a local equity risk premium of 6.7% to arrive at a Ke of 11.4%. Valuation Matrix WEV Sustainable RoAE (%) Book Value of 2016e (SAR) Estimated Cost of Equity (%)
RI 13.0% 27.40 11.4%
Beginning BVPS (2016e) (SAR)
25.27
Present Value of Interim Residuals (SAR)
2.68
Present Value of Terminal Value (SAR)
4.72
Terminal Growth Rate (%)
4.0%
Fundamental P/B
Intrinsic Value (SAR)
33.00
Intrinsic Value (SAR)
33.00
1.2x
Current Market Price (SAR)
27.90
Current Market Price (SAR)
27.90
Upside/(Downside) Potential (%)
18.3%
Upside/(Downside) Potential (%)
18.3%
Equity Value (SAR mn)
39,777
Equity Value (SAR mn)
39,777
Source: Bloomberg, QNBFS estimates
Price Target Calculation Methodology
Equity Value (SAR mn)
Weight (%)
WEV
39,777
50
Fair Value (SAR mn) 19,888
Residual Income
39,777
50
19,888
Blended Equity Value
13,565
Shares Outstanding (mn)
1,205.4
Target Price (SAR)
33.00
Upside/(Downside)
18.3%
Source: Bloomberg, QNBFS estimates
We present below a scenario analysis of possible price targets based on a Base, Bull and Bear scenarios. Scenario Analysis Sustainable RoAE G Ke P/B
Bear 12.0% 3.5% 12.4% 0.95
Base 13.0% 4.0% 11.4% 1.21
Bull 14.0% 5.0% 10.4% 1.66
Blended Fair Value based on WEV & RI
26.00
33.00
45.00
Source: QNBFS estimates
Wednesday, 02 December 2015
2
Trading at a 38% discount to its Historical P/B… 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Mar-05
Historical Median - 1.9x Current P/B 1.2x
Sep-08
Mar-12
Sep-15
Source: Bloomberg
BSFR's valuation is undemanding. The stock trades at a steep discount to its 10-year average P/B and P/E ratios. Moreover, if we exclude the bull years and the global financial crisis years the stock is still trading at a 16% and 25% discount to its median P/B and P/E,
respectively. …And a 33% discount to its Historical P/E 40.00 38.00 36.00 34.00
Historical Median - 12.7x Current P/E 8.5x
32.00 30.00 28.00 26.00 24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Mar-05
Sep-08
Mar-12
Sep-15
Source: Bloomberg
Wednesday, 02 December 2015
3
Key Forecasts Loan Portfolio BSFR is an established corporate banking franchise with a 12% market share in this segment (highest among domestic peers); we estimate an overall loan book CAGR of 8.6% during 2014-19e. BSFR is mostly known for being a corporate oriented bank with corporate loans representing on average ~91% of its loan book between 2006-2014. However, by mid-2000 the bank modified its strategy by tapping the retail sector more aggressively. This did not work to the bank's advantage as impaired retail loans expanded by 28% in 2011 and 33% in 2012. Moreover, NPLs arising from retail contributed 35% of total NPLs. As such, the bank has become more cautious about lending to this sector; it plans to target the mid-segment and HNIs vs. mass retail. During 2012-2013, BSFR cleaned/restructured its retail book and some corporate accounts. Thus impaired retail loans dropped by 3% and 10% in 2013 and 2014, respectively. Moreover, retail loans contracted by 13.4% in 2013 while were marginally up (+0.5%) in 2014. We are of the view that the corporates' segment, the historical niche segment for the bank, should drive the credit off-take. We pencil in loan book growth of 7.8%, 5.3%, 7.9% and 10.0% in 2015, 2016, 2017 and 2018, respectively. We expect the loan book to grow to SAR176.2bn in 2019e from SAR116.5n in 2014. It should be noted that we expect low single digit growth in 2016 due to depressed oil prices, which is adversely affecting KSA's economy.
Loans to Exhibit 8.6% CAGR (SAR mn)
Loans Skewed Towards Corporates 176,192
180,000
100%
8.6% CAGR 157,119 142,773
47%
75%
132,370
46%
46%
16%
13%
17%
19%
45%
44%
20%
19%
19%
20%
7%
9%
8%
8%
2013
2014
125,660 120,000
111,307
116,541 50% 22%
25%
60,000
12% 9%
10%
12%
10%
11%
11%
2010
2011
2012
0% Retail Manufacturing Other Corporates
2013
2014
2015e
2016e
2017e
2018e
2019e
Real Estate & Construction Commerce
Source: Company data, QNBFS estimates
Shari’ah compliant financing to drive loan growth. Given KSA's corporate sectors' preference for Shari’ah compliant loans, the former has grown by a CAGR of 30.4% (2005-2014) vs. 3.3% that of conventional loans.
Shari’ah Compliant Loan Growth Outpaced Conventional; Currently Shari’ah Compliant Loans Dominate BSFR's Loan Book 100% 86% 80% 71%
75%
67% 61%
59% 52%
50% 39% 29%
48%
48%
41%
58%
56%
52% 44%
42%
33%
20%
25% 14%
0% 2005
2006
2007
2008 Conventional Loans
2009
2010
2011
2012
2013
2014
Sharia'h Compliant Loans
Source: Company data
Wednesday, 02 December 2015
4
Deposit Book BSFR has a 8% market share in deposits, 5th among domestic banks; we estimate deposits to grow by a CAGR of 8.3% during 2014-19e. The bank has successfully managed to raise non-interest bearing deposits. In 2014 non-interest bearing deposits reached a peak at 73% of total deposits. Given the anticipated Fed rate hike, we believe BSFR's current deposit structure is not sustainable. Thus, we estimate a gradual decline in non-interest bearing deposits. On a side note, SAMA has enforced a deposit insurance scheme in which banks would have to apply a charge of 5bps on non-sovereign deposits. Consequently, this would increase interest expense going forward.
Non-Interest Bearing Deposits have Reached Non-Sustainable Levels; A Gradual Drop is Imminent 100%
75%
50%
56% 65%
73%
73%
70%
68%
65%
27%
27%
30%
32%
35%
2014
2015e
2016e
2017e
2018e
50%
25%
50%
44% 35%
0% 2011
2012
2013
Interest Bearing Deposits
Non-Interest Bearing Deposits
Source: Company data, QNBFS estimates
LDR (Loans to stable sources of funds) expected to remain below SAMA's 85% limit. Given BSFR's conservative nature, we do not assume an expansion in the LDR. 100.0% SAMA's 85% Limit 80.9%
82.6%
80.7%
80.2% 75.5%
79.0%
77.8%
78.7%
75.0%
50.0%
25.0%
0.0% 2011
2012
2013
2014
2015e
2016e
2017e
2018e
Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
5
Operating Performance We expect positive performance in 2015, weak performance in 2016 followed by a rebound in 2017; we pencil in a bottom-line CAGR of 9.0% in 2014-2019e. We estimate net income to grow by 13.7% to SAR4.0bn in 2015 mainly due to a 50.6% drop in net provisions. It is worth mentioning that BSFR was cleaning its books during 2012 and 2013 due to impaired retail and some corporate accounts, leading provisions to expand by 181.1% and 117.6% in 2012 and 2013, respectively. In 2014, net income soared by 46.2% on the back of robust operating income coupled with a contraction in provisions (down 62.1%). Coming back to 2015, we expect provisions to further drop by 50.6% based on sound asset quality and the trend in 9M2015. Moreover, we expect net income to be boosted by investment income while estimating healthy growth from core banking income since 2014's jump in profitability stemmed from a low base effect. On the other hand, due to the weak overall outlook for 2016, we expect net income to decline by 4.1% to SAR3.8bn. In times of weak market conditions, asset quality deteriorates and provisions rise. As such, we pencil in a cost of risk (CoR) of 33bps (16bps in 2015) which leads to provisions increasing by 145.7% to SAR444.3mn. Moreover, we foresee sluggish growth in net interest income and fees. At the same time, we estimate a significant drop in investment income. Finally, 2017 could be a promising year. We expect net income to grow by 10.4% to SAR4.2bn led by strong core banking income and investment income. We estimate core income to gain by 9.1% led by a 11.4% growth in net interest income, 8.0% growth in f/x income and 6.0% gain in fees & commissions. Moreover, investment income is modeled to grow by 15.1% (down 22.4% in 2016). We caution that our estimates could be revised downward if oil prices remain depressed longer than expected. 25bps interest rate hike by the FED is positive but not a game changer for NIMs and spreads; further hikes would be material The FED is expected to hike interest rates by 25bps in December 2015. This is positive for BSFR, as 52.5% and 35.4% of loans are repriceable within 3 months and 3-12 months, respectively. However, funding would not remain free in our view as the bank's portion of non-interest bearing deposits to total deposits peaked at 73%. As such, we expect depositors to demand a return on their funds. Consequently, we estimate a measured rise in NIMs.
Net Income (SAR mn) 6,000
Net Interest Income (SAR mn) 50.0%
46.2%
6,600
20.0% 6,057
5,421 5,080
5,439 4,806
3,999 4,000
15.0%
4,235 3,835
25.0%
3,516
4,400
3,817 4,078 13.5%
20.0% 13.7%
4,313
3,363
11.4%
11.4% 10.0%
6.7%
10.4%
2,406
13.2%
6.8%
2,000
0.0%
2,200
5.8% 5.0%
-4.1% -20.2%
1.7%
0
-25.0% 2013
2014
0
2015e 2016e 2017e 2018e 2019e
Net Income (LHS)
0.0% 2013
2014 2015e 2016e 2017e 2018e 2019e Net Interest Income (LHS)
Growth (RHS)
Growth (RHS)
Source: Company data, QNBFS estimates
NIMs To Progressively Improve 4.0%
3.5%
3.01%
3.0%
2.93%
2.90%
2.88%
2.97% 2.86%
2.86%
2.66%
2.5%
2.41%
2.49%
2013
2014
2.51%
2.53%
2.53%
2015e
2016e
2017e
2.55%
2.0% 2005
2006
2007
2008
2009
2010
2011
2012
2018e
Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
6
RoAE to Remain Under Pressure On the Back of High CARs and Excessive Provisioning 15.0%
2.7%
14.0%
14.2%
13.4% 13.0%
12.5% 12.1% 10.0%
12.3%
2.2%
10.5%
2.2%
2.2% 2.1%
2.0% 2.0%
2.0%
7.5%
5.0%
1.7% 1.5%
2.5%
0.0%
1.2% 2013
2014
2015e
2016e
2017e
RoAE (LHS)
2018e
2019e
RoRWA (RHS)
Source: Company data, QNBFS estimates
Efficiency Cost-to-income ratio at optimal levels. BSFR, has, on average (2010-2014) maintained its efficiency ratio at an optimal level of 32%. This is mainly due to the bank’s focus on corporate banking, which is less cost intensive vs. retail banking. Going forward, we estimate the bank’s cost-to-income ratio to be within its historical range. Having said that, we pencil in a higher ratio in 2016 due to revenue growing less than opex. This is based on the tepid macro outlook in 2016. Operating Efficiency to Remain Robust 40% 33.3%
34.8%
32.9%
34.4%
33.4%
35.4%
34.6%
36.1% 34.0%
35.5% 33.0%
34.4%
20%
0% 2013
2014
2015e
Cost-to-Income (Headline)
2016e
2017e
2018e
Cost-to-Income (Core)
Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
7
Asset Quality BSFR boasts healthy asset quality but this could worsen in 2016 and 2017. We forecast some deterioration in asset quality during 2016 and 2017 as is likely during periods of economic softness. Thus, we estimate an increase in the NPL ratio to 1.25% and 1.35% in 2016 and 2017, respectively. It should be noted that although we expect the NPL ratio to increase, the increase in the ratio still implies NPLs to remain within normal historical/sector norms. We also expect elevated coverage ratios, which should safeguard the bank in case loans are impaired more than estimated. In recent times, BSFR faced headwinds when it targeted the mass retail as discussed under the loans section (impaired retail
loans expanded by 28% in 2011 and 33% in 2012. NPLs arising from retail contributed 35% of total NPLs. As such, the bank has recently become more cautious about lending to retail; it plans to target the mid-segment and HNIs vs. mass retail. Thus impaired retail loans dropped by 3% and 10% in 2013 and 2014, respectively. Moreover, retail loans contracted by 13.4% in 2013 while were marginally up (+0.5%) in 2014). The bank has generally maintained on average a coverage ratio of 155% between 2004 and 2014. On the other hand, BSFR ended 2014 with a coverage ratio of 195%. Furthermore, we are of the view that management would like to remain conservative and maintain a coverage ratio above the 150s (%). 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. Healthy Asset Quality but Could Worsen in 2016 207%
5%
210%
195% 187%
180% 4%
158%
146% 147%
156% 150%
149%
3%
136%
120% 90%
2% 1.23%
1.34%
1.20%
1.35%
1.25%
1.00%
0.99%
1%
60%
1.10%
0.88%
30% 0%
0% 2010
2011
2012
2013 NPL Ratio (LHS)
2014
2015e 2016e Coverage Ratio (RHS)
2017e
2018e
Source: Company data, QNBFS estimates
Capitalization Strong capitalization levels. BSFR has always maintained healthy capitalization levels and we do not expect this trend to reverse. Capitalization Levels Remain Robust 20.0%
15.6% 15.0%
14.7%
13.9%
18.0%
17.3%
17.3%
16.5%
14.8%
15.1%
17.5% 15.8%
15.3%
10.0%
5.0%
0.0% 2012
2013
2014 CAR
2015e
2016e
2017e
Tier 1
Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
8
4Q2015 Estimates We expect BSFR to exhibit a 10.6% QoQ drop in net income (+7.3% YoY). We estimate BSFR to report a net income of SAR912.5mn in 4Q2015 vs. SAR1.02bn in 3Q2015 (SAR850.7mn in 4Q2014). We expect the QoQ decrease in net income to be mainly attributed to a decrease in noninterest income driven by a drop in investment income and f/x income. We expect the YoY growth to emanate from growth in net interest income and fees & commissions. SAR mn Net Interest Income Non-Interest Income Net Operating Income Net Income
4Q2014 970 451 894 851
3Q2015 1,044 546 1,070 1,020
4Q2015e 1,055 461 974 912
Change QoQ (%) 1.1 (15.5) (9.0) (10.6)
Change YoY (%) 8.7 2.1 9.0 7.3
Source: Company data, QNBFS estimates
Company Description As of 9M2015, Banque Saudi Fransi had a 9% and 8% market share in loans (5th largest among domestic banks) and deposits (6th largest among domestic banks), respectively. What is of significance is BSFR commands the 2nd largest market share in corporate lending (12%). Established in 1977, BSFR is a universal bank offering conventional and Shari'ah compliant services to corporates and retail customers, investment banking, brokerage and asset management. The bank has a network of 83 branches and over 560 ATMs. Banking on one of France's prominent banks and strategic shareholder; Credit Agricole (has a technical service agreement with BSFR) which is beneficial to the bank. Leveraging off its successful corporate banking franchise and platform, BSFR’s strategy is to cross-sell the bank’s products and services, boosting its fees & commissions income. Solid shareholder base. BSFR enjoys a strong and stable shareholding structure.
Major Shareholders Shareholders
Investor Type
Country
Credit Agricole
Institutional
France
Share (%) 31.1
General Organization for Social Insurance (GOSI)
Government
KSA
13.3
Al Rashed Family
Private
KSA
9.8
Total
54.2
Source: Tadawul
Subsidiaries/Associates Company
Country
Saudi Fransi Capital
KSA
Share (%) 100.0
Saudi Fransi Insurance Agency (SAFIA)
KSA
100.0
Saudi Fransi Financing & Leasing
KSA
100.0
SOFINCO Saudi Fransi
KSA
100.0
Sakan Real Estate Financing
KSA
100.0
Banque BEMO Saudi Fransi
Syria
27.0
Saudi Fransi Corporative Insurance Co. (Allianz Saudi Fransi)
KSA
32.5
Source: Company data
Wednesday, 02 December 2015
9
Detailed Financial Statements Ratios
FY2014
FY2015e
FY2016e
FY2017e
RoAE
14.2
14.0
12.1
12.3
RoAA
2.0
2.1
1.9
1.9
Profitability (%)
RoRWA
2.0
2.2
2.0
2.0
NIM (% of IEAs)
2.49
2.51
2.53
2.53
NIM (% of RWAs)
2.22
2.20
2.20
2.26
NIM (% of AAs)
2.13
2.14
2.15
2.19
1.6
1.4
1.4
1.4
Cost-to-Income (Headline)
32.9
33.4
34.6
34.0
Cost-to-Income (Core)
34.4
35.4
36.1
35.5
LDR
75.5
80.7
79.0
77.8
Loans/Assets
61.7
65.1
63.4
62.2
Cash & Interbank Loans-to-Total Assets
11.7
12.4
11.9
9.4
Deposits to Assets
77.0
77.1
77.0
77.0
Wholesale Funding to Loans
11.2
6.4
6.4
6.9
311.0
340.4
314.2
306.4
Spread Efficiency (%)
Liquidity (%)
IEAs to IBLs Asset Quality (%) NPL Ratio
0.99
0.88
1.25
1.35
NPLs to Shareholder's Equity
4.5
3.7
5.1
5.5
NPLs to Tier 1 Capital
4.5
3.9
5.3
5.7
194.8
207.3
157.9
155.7
2.0
1.9
2.0
2.2
0.28
0.16
0.33
0.36
Tier 1 Ratio
14.8
15.1
15.8
15.3
CAR
17.3
17.3
18.0
17.5
Tier 1 Capital to Assets
14.0
15.1
15.1
15.0
Tier 1 Capital to Loans
22.6
23.1
23.9
24.1
Tier 1 Capital to Deposits
18.2
19.5
19.6
19.5
7.1
6.3
6.3
6.4
Net Interest Income
13.5
6.8
5.8
11.4
Total Revenue
14.5
8.5
4.1
10.1
Net Income (Attributable)
46.2
13.7
-4.1
10.4
4.7
7.8
5.3
7.9
10.4
2.5
8.0
10.0
Coverage Ratio ALL/Average Loans Cost of Risk Capitalization (%)
Leverage (x) Growth (%)
Loans Deposits Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
10
Income Statement (In SAR mn)
FY2014
FY2015e
FY2016e
FY2017e
Net Interest Income
3,817
4,078
4,313
4,806
Fees & Commissions
1,292
1,369
1,431
1,517
FX Income
354
387
418
451
Investment Income
254
342
272
311
Other Income
70
102
104
113
Non-Interest Income
1,970
2,201
2,225
2,392
Total Income
5,787
6,279
6,538
7,198
Operating Expenses
(1,904)
(2,099)
(2,259)
(2,448)
Operating Income
3,883
4,180
4,279
4,751
Net Provisions & Investment Impairments
(366)
(181)
(444)
(515)
Net Profit
3,516
3,999
3,835
4,235
FY2014
FY2015e
FY2016e
FY2017e 15,921
Source: Company data, QNBFS estimates
Balance Sheet (In SAR mn) Assets Cash & Balances with Central Bank
20,014
16,380
22,515
Interbank Loans
2,009
7,540
2,250
5,711
Net Investments
45,102
36,263
45,216
58,608
116,541
125,660
132,370
142,773
4,506
6,528
5,856
6,274
605
640
535
428
188,777
193,010
208,742
229,716
Net Loans Other Assets Net PP&E Total Assets Liabilities Interbank Deposits
3,863
1,277
1,753
3,091
Customer Deposits
145,275
148,907
160,820
176,902
9,131
6,713
6,713
6,713
Term Loans Other Liabilities Total Liabilities Shareholders’ Equity Total Liabilities & Shareholders’ Equity
4,036
5,658
6,433
7,076
162,306
162,555
175,718
193,782
26,471
30,455
33,024
35,934
188,777
193,010
208,742
229,716
Source: Company data, QNBFS estimates
Wednesday, 02 December 2015
11
KSA Banking Landscape
Wednesday, 02 December 2015
12
Loans/GDP: KSA Underbanked
Young Population: Favorable for Retail Banking
100% 3% 85.0%
75%
87.1%
29%
24%
67.5% 62.6%
50%
44.7%
25% 44%
0% KSA
Kuwait
Oman
Qatar
UAE
0-14
15-40
40-65
65+
Source: Respective Central Banks, UN
2014 Loans Market Share: NCB is the Incumbent BAJ Alinma 3% SAIB 4%
9M2015: RIBL & SAIB Lost Market share While SABB & SHB Gained
Al Bilad 2%
5%
BAJ Alinma 3% SAIB 4% 4%
Al Bilad 2%
NCB 18%
NCB 18%
SHB 5%
SHB 6%
ARNB 8%
RJHI 16%
ARNB 8%
RJHI 16%
SABB 10%
SABB 9% BSFR 9%
RIBL 11% SAMBA 10%
BSFR 9%
RIBL 10% SAMBA 10%
Source: Company financials
Wednesday, 02 December 2015
13
2014 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 17%
BAJ 4%
SHB 6% BSFR 12%
RJHI 7% ARNB 9%
SAMBA 12% SABB 10%
2014 Retail Loans: RJHI Leader Followed by NCB
RJHI 36%
SAMBA 5% ARNB 6% SABB 6% RIBL 10%
RIBL 11%
NCB 19%
Source: Company financials
2014 Conventional Loans Share: RIBL Followed by SAMBA
2014 Shari’ah Loans: RJHI Leader Followed by NCB
SHB 4% SABB 7% SAIB 8%
SAIB 3%
Al Bilad 3%
BAJ 5%
RIBL 19%
RJHI 22%
Alinma 6%
SHB 10% SAMBA 16%
ARNB 11%
ARNB 7% BSFR 7%
NCB 14%
BSFR 15%
RIBL 7%
NCB 19%
SAMBA 7%
SABB 10%
Source: Company financials
Wednesday, 02 December 2015
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Corporate Loans Dominate as is the Case in the GCC
Conventional Loans vs. Shari’ah Loans:: Shari’ah Favored by Saudis
Convention al Loans 27%
Retail Loans 32% Shari'ah Compliant Loans 73%
Corporate Loans 68%
Source: Company financials
2014 Deposits: NCB & RJHI Dominate Alinma 4%
9M2015 Deposits: NCB Gained Market Share While BSFR Lost
BAJ Al Bilad 2% 3%
BAJ Alinma 3% 4% SAIB 4% NCB 20%
SAIB 4% SHB 5%
Al Bilad 2%
SHB 5%
NCB 21%
ARNB 8%
ARNB 8% RJHI 16%
SABB 9% BSFR 9%
SAMBA 10%
RJHI 16%
SABB 9% BSFR 8%
RIBL 10%
SAMBA 10%
RIBL 9%
Source: Company financials
KSA Enjoys Lowest 9M2015 LDR in GCC 100%
75%
73%
75%
SAMBA
BAJ
78%
79%
79%
Total Banks
RJHI
Al Bilad
85%
86%
86%
87%
88%
89%
83%
SABB
ARNB
RIBL
BSFR
SAIB
Alinma
SHB
65%
50%
25%
0% NCB
Source: Company financials
Wednesday, 02 December 2015
15
Markets Factoring in a Rate Hike; KSA Appears to be Experiencing a Liquidity Crunch as is Evident by the Sudden Sharp Spike 160.0
140.0
120.0
100.0
80.0
60.0
40.0
3M SAIBOR
3M LIBOR
3M SAIBOR
3M LIBOR
Source: Bloomberg
Actual 3M SAIBOR and LIBOR Rates 1.20 1.10 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20
Source: Bloomberg
Wednesday, 02 December 2015
16
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
Head of Research
Senior Research Analyst
Tel: (+974) 4476 6534
Tel: (+974) 4476 6509
[email protected]
[email protected]
QNB Financial Services SPC Contact Center: (+974) 4476 6666 PO Box 24025 Doha, Qatar
Disclaimer and Copyright Notice: This publication has been prepared by QNB Financial Services SPC (“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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