Growing Demand for Credit
June 27, 2016
SAUDI ARABIAN BANKS 2Q2016 Preview
Growing Demand for Credit Tight liquidity on the back of pressure on deposits is one of the biggest challenges facing the banking sector at present. A rise in advances and pressure on deposits has resulted in a rising Loan to Deposit Ratio (LDR) for the banking sector. Additionally, tight liquidity has also caused an increasing interest rate environment leading to a rising cost of funds. Mounting SABIOR also means higher asset yields for the banks, especially when corporates and other entities seek out more credit to mostly cover short term needs. 2016 has been characterized to date by a crunch on deposits, SAIBOR climbing more than 30 bps and advances on a steady uptrend. We believe these trends may continue going forward in the absence of an inflow of fresh money into the interbank system. Ex h ibit 1: Ban kin g Sector's Deposits & Gov . Bon ds (SAR bln )
Ex h ibit 2: 3-Mon th SAIBOR
1,660
160
2.1%
1,640
140
1.9%
1,620
120
1.7%
100
1.5%
80
1.3%
60
1.1%
40
0.9%
1,500
20
0.7%
1,480
0
1,600 1,580 1,560 1,540 1,520
J
F
M
A
M
J
J
A
Deposits
S
O
N
D
J
F
M
A
0.5% J
F M
Gov. Bonds
Source: SAMA
A
M
J
J
A
S
O
N
D
J
F
M
A
3M SAIBOR Source: Bloomberg
Decline in deposits on a year-on-year (Y/Y) basis in February 2016 was the first in over two decades and even though it was mainly a consequence of the high base effect due to the two-month salary bonus last year, deposits have continued to lag in the following two months as well. Taking a closer look at the monthly change, deposits jumped to SAR 1,609 bln (+2% M/M) in March 2016 after a constant decline since November 2015. However, they contracted again in April (-1% M/M) to SAR 1,598 bln, indicating persistent pressure on deposits. It does not appear that May numbers would be too promising either. Simultaneously, banks’ holdings of government bonds witnessed a rapid growth this year, a consequence of the government local bond issuing program to fund part of its deficit. Banks’ holdings increased from SAR 87 bln in January 2016 to SAR 140 bln in April, recording a double-digit growth in each of the 3 months until April. Pressure on liquidity is clearly evident as the issuance of government bonds accelerates and deposits withdrawals continue. As a result, the 3-month Saudi Arabian Interbank Offered Rate (SAIBOR) has jumped to levels not seen since the beginning of 2009. Since March, 3-month SAIBOR has increased from 1.80% to 2.15% in May, continuing its upward move consistent with market conditions. The tight liquidity situation may continue as government spending is expected to remain muted. Therefore, we anticipate deposits to remain under pressure and interest rates to be on the rise. A possible interest rate hike by the US Fed would need to be reflected in a higher funds rate by SAMA.
Muhammad Faisal Potrik
Mansour A. Al-Ammari
[email protected] +966-11-203-6807
[email protected] +966-11-203-6815
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
SAUDI ARABIAN BANKS 2Q2016 Preview
Ex h ibit 3: Adv an ces to th e Priv ate Sector (SAR bln )
Ex h ibit 4: Adv an ces to th e Pu blic Sector (SAR bln )
1,400
48 46
1,350
44 42
1,300
40 38
1,250 36 34
1,200
32 30
1,150 J
F
M
A
M
J
J
A
S
O
N
D
J
F
Source: SAMA
M
A
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
A
Source: SAMA
With liquidity shortage comes demand for credit. As illustrated in Exhibit 3, private sector lending has been on a steady increase as the need for credit grows, especially for short-term activities, to bridge gap in payments. Loans to private sector have risen by +1% to SAR 1,357 bln in April 2016 from SAR 1,322 bln in January. At the same time, lending to the public sector has been fluctuating. With lower oil prices, advances to the public sector declined from SAR 44 billion in January 2015 to SAR 38 billion by July. However, since the beginning of the current year, there has been an increase from SAR 38 billion in January 2016 to SAR 46 billion through April, as illustrated in Exhibit 4 above. By April, lending to the public sector has risen to the highest since January 2015. Any further rise in advances to the public sector would result in exacerbating the already tough liquidity situation within the banking sector.
2Q2016 Expectations Table 1 below details our 2Q2016 forecasts for banking stocks under coverage. We expect an average +7% Y/Y increase in net special commission income on the back of rising interest rates as well as growth in advances and other assets. SAIBOR has continued its upward march and now trades comfortably in excess of 2.0%. While this secular rise in SAIBOR is a boon for the banks in terms of earnings, it does signal a tight liquidity environment, which is not so positive if it continues for an extended period of time. This rise in commission income is unlikely to flow through completely to the bottom line as we expect a +3% Y/Y growth in net income for the banks as a consequence of escalating expenses. We have modeled in a higher provisioning charge for the quarter in line with market conditions. For Al Rajhi, we forecast provisions of SAR 548 million in 2Q versus SAR 538 million in the preceding quarter and SAR 468 million last year. Similarly, for SAMBA we expect SAR 50 million in provisions as against SAR 45 million in 1Q and SAR 27 million last year. Pressure on deposit growth is likely to persist with a minor +1% Y/Y rise expected overall. We believe SAMBA and Hollandi will post a deposit growth of +5% and +4% Y/Y respectively. With a higher proportion of interest bearing time deposits, Hollandi has been able to attract some money while SAMBA has bucked the general sector trend and has been able to grow its deposit base. Fransi, SABB and Alrajhi are all expected to post a marginal Y/Y decline in deposits between -1% and -2%. Loan demand has been strong due to higher financing requirements in the face of limited liquidity in the system. As a result, we forecast an overall +4% Y/Y growth in advances for the banks we cover. Hollandi is likely to lead with a +12% Y/Y rise followed by SABB and Alrajhi at +4%. Advance growth at Fransi is expected to be muted at only +1% Y/Y.
Page 2 of 4
SAUDI ARABIAN BANKS 2Q2016 Preview
Table 1: 2Q2016 Estimates (SAR mln, ex cept per share data) Net Comm Income Company
2Q2015
2Q2016E
Net Income
Y/Y Chg
2Q2015
2Q2016E
Net Advances Y/Y Chg
2Q2015
2Q2016E
Deposits Y/Y Chg
2Q2015
2Q2016E
Y/Y Chg
SHB
564
601
7%
539
513
-5%
71,203
79,546
12%
83,354
86,404
4%
BSF
1,016
1,081
6%
1,016
1,093
8%
124,708
125,601
1%
142,594
141,110
-1%
SABB
1,067
1,153
8%
1,137
1,152
1%
126,551
131,933
4%
151,019
149,255
-1%
SAMBA
1,163
1,268
9%
1,333
1,355
2%
130,549
134,344
3%
170,582
179,224
5%
ALRAJHI
2,514
2,692
7%
1,941
2,058
6%
210,621
218,558
4%
266,506
262,135
-2%
Group Total
6,324
6,796
7%
5,967
6,170
3%
663,631
689,982
4%
814,055
818,126
1%
Source: Riyad Capital, Company Reports
We currently have a Buy rating on Hollandi, Fransi, SABB and SAMBA while Alrajhi is rated Neutral as it trades close to our target price of SAR 64.00 with a 2016E P/E of 13.2x versus average of 8.3x and 2016E P/B of 2.0x as compared to an average of 1.2x. At current prices, we believe Fransi is enticing at a forward P/B of just 0.9x and an upside of over 45% to our target price of SAR 34.00. Table 2: Rating s and Valuations (SAR mln) TASI
Current
Market
Target
Company
Code
Price
Cap
Price
SHB
1040
12.00
13,717
BSF
1050
22.85
SABB
1060
SAMBA ALRAJHI
Dividend
P/E
P/B
Rating
Yield
2015
2016E
2015
2016E
17.00
Buy
4.2%
6.8x
6.7x
1.1x
1.0x
27,543
34.00
Buy
4.4%
6.8x
7.1x
1.0x
0.9x
20.30
30,450
32.00
Buy
3.7%
7.0x
6.9x
1.1x
1.0x
1090
19.82
39,640
31.00
Buy
5.5%
7.6x
7.2x
1.0x
0.9x
1120
57.90
94,088
64.00
Neutral
2.6%
13.2x
12.9x
2.0x
1.9x
8.3x
8.1x
1.2x
1.1x
Group Average Source: Riyad Capital
The Tadawul has risen in 2Q by 4.1%. However, banks have lagged market performance with the banking sector index (TBFSI) increasing only 0.3%. Within our coverage universe we find that Alrajhi has performed strongly rising 11.6% while SAMBA has declined -2.7%. The other three stocks have all lost ground falling between -4.5% and -10.6%. Ex h ibit 5: 2Q Ban kin g Sector v s. TASI Performan ce 15.0%
10.0%
5.0%
0.0%
-5.0%
ALRAJHI
SAMBA
TASI
TBFSI
SHB
-10.0% BSF
SABB
-15.0% Source: Tadawul
Page 3 of 4
SAUDI ARABIAN BANKS 2Q2016 Preview
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia (“KSA”). Website: www.riyadcapital.com
Page 4 of 4
SAUDI ARABIAN BANKS 2Q2016 Preview
Growing Demand for Credit Tight liquidity on the back of pressure on deposits is one of the biggest challenges facing the banking sector at present. A rise in advances and pressure on deposits has resulted in a rising Loan to Deposit Ratio (LDR) for the banking sector. Additionally, tight liquidity has also caused an increasing interest rate environment leading to a rising cost of funds. Mounting SABIOR also means higher asset yields for the banks, especially when corporates and other entities seek out more credit to mostly cover short term needs. 2016 has been characterized to date by a crunch on deposits, SAIBOR climbing more than 30 bps and advances on a steady uptrend. We believe these trends may continue going forward in the absence of an inflow of fresh money into the interbank system. Ex h ibit 1: Ban kin g Sector's Deposits & Gov . Bon ds (SAR bln )
Ex h ibit 2: 3-Mon th SAIBOR
1,660
160
2.1%
1,640
140
1.9%
1,620
120
1.7%
100
1.5%
80
1.3%
60
1.1%
40
0.9%
1,500
20
0.7%
1,480
0
1,600 1,580 1,560 1,540 1,520
J
F
M
A
M
J
J
A
Deposits
S
O
N
D
J
F
M
A
0.5% J
F M
Gov. Bonds
Source: SAMA
A
M
J
J
A
S
O
N
D
J
F
M
A
3M SAIBOR Source: Bloomberg
Decline in deposits on a year-on-year (Y/Y) basis in February 2016 was the first in over two decades and even though it was mainly a consequence of the high base effect due to the two-month salary bonus last year, deposits have continued to lag in the following two months as well. Taking a closer look at the monthly change, deposits jumped to SAR 1,609 bln (+2% M/M) in March 2016 after a constant decline since November 2015. However, they contracted again in April (-1% M/M) to SAR 1,598 bln, indicating persistent pressure on deposits. It does not appear that May numbers would be too promising either. Simultaneously, banks’ holdings of government bonds witnessed a rapid growth this year, a consequence of the government local bond issuing program to fund part of its deficit. Banks’ holdings increased from SAR 87 bln in January 2016 to SAR 140 bln in April, recording a double-digit growth in each of the 3 months until April. Pressure on liquidity is clearly evident as the issuance of government bonds accelerates and deposits withdrawals continue. As a result, the 3-month Saudi Arabian Interbank Offered Rate (SAIBOR) has jumped to levels not seen since the beginning of 2009. Since March, 3-month SAIBOR has increased from 1.80% to 2.15% in May, continuing its upward move consistent with market conditions. The tight liquidity situation may continue as government spending is expected to remain muted. Therefore, we anticipate deposits to remain under pressure and interest rates to be on the rise. A possible interest rate hike by the US Fed would need to be reflected in a higher funds rate by SAMA.
Muhammad Faisal Potrik
Mansour A. Al-Ammari
[email protected] +966-11-203-6807
[email protected] +966-11-203-6815
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
SAUDI ARABIAN BANKS 2Q2016 Preview
Ex h ibit 3: Adv an ces to th e Priv ate Sector (SAR bln )
Ex h ibit 4: Adv an ces to th e Pu blic Sector (SAR bln )
1,400
48 46
1,350
44 42
1,300
40 38
1,250 36 34
1,200
32 30
1,150 J
F
M
A
M
J
J
A
S
O
N
D
J
F
Source: SAMA
M
A
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
A
Source: SAMA
With liquidity shortage comes demand for credit. As illustrated in Exhibit 3, private sector lending has been on a steady increase as the need for credit grows, especially for short-term activities, to bridge gap in payments. Loans to private sector have risen by +1% to SAR 1,357 bln in April 2016 from SAR 1,322 bln in January. At the same time, lending to the public sector has been fluctuating. With lower oil prices, advances to the public sector declined from SAR 44 billion in January 2015 to SAR 38 billion by July. However, since the beginning of the current year, there has been an increase from SAR 38 billion in January 2016 to SAR 46 billion through April, as illustrated in Exhibit 4 above. By April, lending to the public sector has risen to the highest since January 2015. Any further rise in advances to the public sector would result in exacerbating the already tough liquidity situation within the banking sector.
2Q2016 Expectations Table 1 below details our 2Q2016 forecasts for banking stocks under coverage. We expect an average +7% Y/Y increase in net special commission income on the back of rising interest rates as well as growth in advances and other assets. SAIBOR has continued its upward march and now trades comfortably in excess of 2.0%. While this secular rise in SAIBOR is a boon for the banks in terms of earnings, it does signal a tight liquidity environment, which is not so positive if it continues for an extended period of time. This rise in commission income is unlikely to flow through completely to the bottom line as we expect a +3% Y/Y growth in net income for the banks as a consequence of escalating expenses. We have modeled in a higher provisioning charge for the quarter in line with market conditions. For Al Rajhi, we forecast provisions of SAR 548 million in 2Q versus SAR 538 million in the preceding quarter and SAR 468 million last year. Similarly, for SAMBA we expect SAR 50 million in provisions as against SAR 45 million in 1Q and SAR 27 million last year. Pressure on deposit growth is likely to persist with a minor +1% Y/Y rise expected overall. We believe SAMBA and Hollandi will post a deposit growth of +5% and +4% Y/Y respectively. With a higher proportion of interest bearing time deposits, Hollandi has been able to attract some money while SAMBA has bucked the general sector trend and has been able to grow its deposit base. Fransi, SABB and Alrajhi are all expected to post a marginal Y/Y decline in deposits between -1% and -2%. Loan demand has been strong due to higher financing requirements in the face of limited liquidity in the system. As a result, we forecast an overall +4% Y/Y growth in advances for the banks we cover. Hollandi is likely to lead with a +12% Y/Y rise followed by SABB and Alrajhi at +4%. Advance growth at Fransi is expected to be muted at only +1% Y/Y.
Page 2 of 4
SAUDI ARABIAN BANKS 2Q2016 Preview
Table 1: 2Q2016 Estimates (SAR mln, ex cept per share data) Net Comm Income Company
2Q2015
2Q2016E
Net Income
Y/Y Chg
2Q2015
2Q2016E
Net Advances Y/Y Chg
2Q2015
2Q2016E
Deposits Y/Y Chg
2Q2015
2Q2016E
Y/Y Chg
SHB
564
601
7%
539
513
-5%
71,203
79,546
12%
83,354
86,404
4%
BSF
1,016
1,081
6%
1,016
1,093
8%
124,708
125,601
1%
142,594
141,110
-1%
SABB
1,067
1,153
8%
1,137
1,152
1%
126,551
131,933
4%
151,019
149,255
-1%
SAMBA
1,163
1,268
9%
1,333
1,355
2%
130,549
134,344
3%
170,582
179,224
5%
ALRAJHI
2,514
2,692
7%
1,941
2,058
6%
210,621
218,558
4%
266,506
262,135
-2%
Group Total
6,324
6,796
7%
5,967
6,170
3%
663,631
689,982
4%
814,055
818,126
1%
Source: Riyad Capital, Company Reports
We currently have a Buy rating on Hollandi, Fransi, SABB and SAMBA while Alrajhi is rated Neutral as it trades close to our target price of SAR 64.00 with a 2016E P/E of 13.2x versus average of 8.3x and 2016E P/B of 2.0x as compared to an average of 1.2x. At current prices, we believe Fransi is enticing at a forward P/B of just 0.9x and an upside of over 45% to our target price of SAR 34.00. Table 2: Rating s and Valuations (SAR mln) TASI
Current
Market
Target
Company
Code
Price
Cap
Price
SHB
1040
12.00
13,717
BSF
1050
22.85
SABB
1060
SAMBA ALRAJHI
Dividend
P/E
P/B
Rating
Yield
2015
2016E
2015
2016E
17.00
Buy
4.2%
6.8x
6.7x
1.1x
1.0x
27,543
34.00
Buy
4.4%
6.8x
7.1x
1.0x
0.9x
20.30
30,450
32.00
Buy
3.7%
7.0x
6.9x
1.1x
1.0x
1090
19.82
39,640
31.00
Buy
5.5%
7.6x
7.2x
1.0x
0.9x
1120
57.90
94,088
64.00
Neutral
2.6%
13.2x
12.9x
2.0x
1.9x
8.3x
8.1x
1.2x
1.1x
Group Average Source: Riyad Capital
The Tadawul has risen in 2Q by 4.1%. However, banks have lagged market performance with the banking sector index (TBFSI) increasing only 0.3%. Within our coverage universe we find that Alrajhi has performed strongly rising 11.6% while SAMBA has declined -2.7%. The other three stocks have all lost ground falling between -4.5% and -10.6%. Ex h ibit 5: 2Q Ban kin g Sector v s. TASI Performan ce 15.0%
10.0%
5.0%
0.0%
-5.0%
ALRAJHI
SAMBA
TASI
TBFSI
SHB
-10.0% BSF
SABB
-15.0% Source: Tadawul
Page 3 of 4
SAUDI ARABIAN BANKS 2Q2016 Preview
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia (“KSA”). Website: www.riyadcapital.com
Page 4 of 4
