SAMBA Financial Group (SAMBA) - DirectFN
SAMBA Financial Group (SAMBA) Recommendation Share Price Implied Upside
OUTPERFORM SAR21.70 24.4%
Risk Rating Target Price
R-3 SAR27.00
Key Data Current Market Price (SAR)
Initiating Coverage With a Price Target of SAR27.00
Bloomberg Ticker
SAMBA Financial Group (SAMBA) had a 10% market share in both loans and deposits (4th largest among domestic banks) as of September 2015. What is of significance is SAMBA commands the 3nd and 4th largest market share in corporate lending (12%) and Shari’ah compliant loans (7%), respectively. Equipped with one of the lowest LDRs and short-term repriceable loans, SAMBA is in a position to benefit from tight liquidity conditions and/or a rising interest rate environment.
ADR/GDR Ticker
Highlights
21.70
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 8.3% in 2014-2019e. Due to the weak overall outlook for 2016, we expect net income to decline by 8.5% to SAR4.8bn. In times of weak market conditions, asset quality deteriorates and provisions rise. As such, we pencil in a cost of risk (CoR) of 35bps (13bps in 2015) which leads to provisions increasing by 192.2% to SAR471.3mn. Moreover, we foresee sluggish growth in net interest income and a 5% dip in 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 11.7% to SAR5.3bn led by strong core banking income and investment income. We estimate core income to gain by 9.6% led by a 9.2% growth in net interest income, 12.0% growth in f/x income and 10.0% gain in fees & commissions. Moreover, investment income is modeled to grow by 19.0% (down 22.9% in 2016). We caution that our estimates could be revised downward if oil prices
4.1 SAMBA AB N/A
Reuters Ticker
1090.SE
ISIN Sector*
SA0007879097 Banks & Financial Svcs.
52wk High/52wk Low (SAR) 3-m Average Volume (‘000) Mkt. Cap. ($ bn/SAR bn) Shares Outstanding (mn) QFI Limit* (%)
31.00/20.90 752.4 43.4/11.9 2,000.0 20.0
Current QFI* (%)
0.08
1-Year Total Return (%)
(4.3)
Fiscal Year End
December 31
Source: Bloomberg (as of December 09, 2015), *Tadawul (as of December 09, 2015); Note: QFI is Qualified Foreign Investors
remain depressed/and or deteriorate.
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 SAMBA as 51.2% and 24.1% of loans are repriceable within 3 months and 3-12 months (implying 75.3% is repriceable within one year), respectively. SAMBA is an established corporate and investment banking franchise with a 12% market share in the corporate banking segment (3rd largest among domestic peers); we estimate an overall loan book CAGR of 8.9% during 2014-19e. SAMBA is mostly known for being a corporate oriented bank with corporate loans representing on average ~83% of its loan book between 2008-2014. In 2009/2010, SAMBA faced headwinds from the services and others segments, which prompted the bank to focus on other segments in the corporate market and improve its overall asset quality. We believe the bank is currently focusing on the transportation & communication segments (expanded by a CAGR of 22.9% in 2009-2014 and represents 12% of overall loans vs. 6% in 2009), manufacturing (grew by a CAGR of 13.9% in 2009-2014 and contributes 16% vs. 12% in 2009) and commerce (gained by a CAGR of 6.5% during 2009-2014 and represents 18% of the bank’s loan portfolio). We are of the view that the corporates' segment, the historical niche segment for the bank, should drive the credit off-take. On the other hand, we do not expect aggressive growth from the retail segment, which was 16% of the loan portfolio in 2014. We do note SAMBA is also well known as a banker to the affluent and HNI customer segments and this could potentially drive retail growth going forward. Overall, we pencil in loan book growth of
3.9%, 5.0%, 8.9% and 12.2% 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 SAR27.00 and an Outperform rating. SAMBA is trading at a 2016e P/B and P/E of 0.9x and 9.1x, respectively. The stock offers a yield of 4.1% in 2016 and 4.4% in 2017. Risks: 1) Declining oil prices remains the biggest risk for SAMBA 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) P/B (x) DPS (SAR) Dividend Yield (%)
FY2014 2.50 11.0 8.7 1.1 0.81 3.7
FY2015e 2.61 4.1 8.3 1.0 0.90 4.1
FY2016e 2.38 -8.5 9.1 0.9 0.90 4.1
FY2017e 2.66 11.7 8.1 0.9 0.95 4.4
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
Thursday, 10 December 2015
1
Valuation Our target price of SAR27.00/share implies an upside of 24.4% over the current price. As such, we rate SAMBA an Outperform. 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 SAMBA 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 SAMBA'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 SAMBA’s case, 80% of the fair value is derived from the bank's beginning BVPS vs. 12% from the terminal value. Both valuation methodologies are based on a common Cost of Equity (Ke) assumption of 11.1%. We calculate a risk free rate of 4.5% and factor in an adjusted beta of 1.0 vs. 0.99 (actual). Finally, we add a local equity risk premium of 6.7% to arrive at a Ke of 11.1%. Valuation Matrix WEV Sustainable RoAE (%) Book Value of 2016e (SAR) Estimated Cost of Equity (%)
RI 12.4%
Beginning BVPS (2016e) (SAR)
22.87 11.2%
21.39
Present Value of Interim Residuals (SAR)
2.22
Present Value of Terminal Value (SAR)
3.28
Terminal Growth Rate (%)
4.0%
Fundamental P/B
Intrinsic Value (SAR)
27.00
Intrinsic Value (SAR)
27.00
1.2x
Current Market Price (SAR)
21.70
Current Market Price (SAR)
21.70
Upside/(Downside) Potential (%)
24.4%
Upside/(Downside) Potential (%)
24.4%
Equity Value (SAR mn)
54,000
Equity Value (SAR mn)
54,000
Source: Bloomberg, QNBFS estimates
Price Target Calculation Methodology
Equity Value (SAR mn)
Weight (%)
WEV
54,000
50
Fair Value (SAR mn) 27,000
Residual Income
54,000
50
27,000
Blended Equity Value
54,000
Shares Outstanding (mn)
2,000.0
Target Price (SAR)
27.00
Upside/(Downside)
24.4%
Source: Bloomberg, QNBFS estimates
We present below a scenario analysis of possible price targets based on a Base, Bull and Bear scenarios. Scenario Analysis
Bear
Base
Bull
Sustainable RoAE G
11.0% 3.5%
12.4% 4.0%
14.0% 5.0%
Ke
12.1%
11.1%
10.1%
P/B
0.87
1.18
1.75
Blended Fair Value based on WEV & RI
20.00
27.00
40.00
Source: QNBFS estimates
Thursday, 10 December 2015
2
Trading at a 56% discount to its Historical P/B… 10.00 9.50 9.00 8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Jan-05
Historical Median - 2.1x 2016e P/B - 0.9x
Nov-05
Sep-06
Jul-07
May-08
Mar-09
Jan-10
Nov-10
Sep-11
Jul-12
May-13
Mar-14
Jan-15
Nov-15
Source: Bloomberg
SAMBA's valuation is cheap at these levels. 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 38% and 16% discount to its median P/B and P/E,
respectively. …And a 21% discount to its Historical P/E 40.0 38.0 36.0 34.0 32.0 30.0 28.0 26.0 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jan-05
Historical Median - 11.5x 2016e P/E - 9.1x
Nov-05
Sep-06
Jul-07
May-08
Mar-09
Jan-10
Nov-10
Sep-11
Jul-12
May-13
Mar-14
Jan-15
Nov-15
Source: Bloomberg
Steady Dividends (SAR/share) With an Upside Potential 2.0
Attractive Dividend Yield 40%
38% 33%
34%
34%
33%
4.5% 4.1%
36%
35%
4.1%
4.4%
3.7%
32%
3.4%
3.4%
3.4%
3.4%
2010
2011
2012
2013
30% 3.0%
1.0
0.90 0.74
0.74
0.74
0.74
0.90
0.95
20%
0.81 1.5% 10%
0.0
0% 2010
2011 2012 2013 DPS (LHS)
2014 2015e 2016e 2017e Payout Ratio (RHS)
0.0% 2014
2015e 2016e 2017e
Source: Bloomberg, QNBFS estimates
Thursday, 10 December 2015
3
Key Forecasts Loan Portfolio SAMBA is an established corporate and investment banking franchise with a 12% market share in the corporate banking segment (3rd largest among domestic peers); we estimate an overall loan book CAGR of 8.9% during 2014-19e. SAMBA is mostly known for being a corporate oriented bank with corporate loans representing on average ~83% of its loan book between 2008-2014. In 2009/2010, SAMBA faced headwinds from the services and others segments, which prompted the bank to focus on other segments in the corporate market and improve its overall asset quality. We believe the bank is currently focusing on the transportation & communication segments (expanded by a CAGR of 22.9% in 2009-2014 and represents 12% of overall loans vs. 6% in 2009), manufacturing (grew by a CAGR of 13.9% in 20092014 and contributes 16% vs. 12% in 2009) and commerce (gained by a CAGR of 6.5% during 2009-2014 and represents 18% of the bank’s loan portfolio). We are of the view that the corporates' segment, the historical niche segment for the bank, should drive the credit off-take. On the other hand, we do not expect aggressive growth from the retail segment, which was 16% of the loan portfolio in 2014. We do note SAMBA is also well known as a banker to the affluent and HNI customer segments and this could potentially drive retail growth going forward. Overall, we pencil in loan book growth of 3.9%, 5.0%, 8.9% and 12.2% in 2015, 2016, 2017 and 2018, respectively. We expect the loan book to grow to SAR190.4bn in 2019e from SAR124.1bn 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 8.9% CAGR (SAR mn)
Loans Skewed Towards Corporates
200,000
190,385
100%
8.9% CAGR 165,303
40%
150,000 124,079
128,904
43%
44%
43%
42%
18%
18%
18%
18%
13%
13%
14%
14%
16%
8%
7%
7%
8%
8%
19%
19%
17%
16%
16%
2010
2011
2012
2013
2014
75%
147,370 135,292
113,455 50%
21%
100,000
25% 50,000
0% Retail Manufactoring 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 15.1% (2007-2014) vs. 0.09% that of conventional loans.
Shari’ah Compliant Loan Growth Outpaced Conventional; Currently Shari’ah Compliant Loans Dominate SAMBA's Loan Book 80%
76% 68%
68%
63%
60% 55%
60%
52% 45%
40%
37% 32%
56% 48%
44%
40%
32% 24%
20%
0% 2007
2008
2009 Conventional Loans
2010
2011
2012
2013
2014
Shari'ah Compliant Loans
Source: Company data
Thursday, 10 December 2015
4
Deposit Book SAMBA has a 10% market share in deposits, 3rd among domestic banks; we estimate deposits to grow by a CAGR of 8.9% during 2014-19e. The bank has successfully managed to raise non-interest bearing deposits. In 2014 non-interest bearing deposits reached a peak at 71% of total deposits. Given the anticipated Fed rate hike, we believe SAMBA'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% 71% 56%
61%
64%
69%
71%
70% 65%
65%
35%
35%
2017e
2018e
50%
44% 39%
25%
36% 31%
29%
29%
2013
2014
2015e
30%
0% 2010
2011
2012
Interest Bearing Deposits
2016e
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 SAMBA’s conservative nature, we do not assume an expansion in the LDR. SAMBA is pretty liquid with the lowest LDR in KSA after NCB. This is a positive position to be in during tight liquidity conditions as is being experienced in KSA. 90.0%
SAMA's 85% Limit 75.8% 69.0%
71.7%
73.6%
74.9%
75.6%
75.7%
2017e
2018e
64.9% 60.1% 60.0%
30.0%
0.0% 2010
2011
2012
2013
2014
2015e
2016e
Source: Company data, QNBFS estimates
Thursday, 10 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 8.3% in 2014-2019e. We estimate net income to grow by 4.1% to SAR5.2bn in 2015 mainly due to a 55.1% surge in investment income (based on 9M2015 trend). We also expect provisions to increase by 14.1% (13bps CoR) based on the trend in 9M2015 and the fact that net provisions declined by 60.0% in 2014 (12bps CoR). Moreover, we expect net income to be boosted by investment income while estimating subdued growth from core banking income since. On the other hand, due to the weak overall outlook for 2016, we expect net income to decline by 8.5% to SAR4.8bn. In times of weak market conditions, asset quality deteriorates and provisions rise. As such, we pencil in a cost of risk (CoR) of 35bps (13bps in 2015) which leads to provisions increasing by 192.2% to SAR471.3mn. Moreover, we foresee sluggish growth in net interest income and a 5% dip in 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 11.7% to SAR5.3bn led by strong core banking income and investment income. We estimate core income to gain by 9.6% led by a 9.2% growth in net interest income, 12.0% growth in f/x income and 10.0% gain in fees & commissions. Moreover, investment income is modeled to grow by 19.0% (down 22.9% in 2016). We caution that our estimates could be
revised downward if oil prices remain depressed/and or deteriorate. 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 SAMBA, as 51.2% and 24.1% of loans are repriceable within 3 months and 3-12 months (implying 75.3% is repriceable within one year), 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 71%. As such, we expect depositors to demand a return on their funds. Consequently, we estimate a measured rise in NIMs.
Net Income (SAR mn)
Net Interest Income (SAR mn)
7,000
6,525
30.0%
6,500
6,098 5,424
6,000
22.5% 5,005
5,212
5,200
5,327
20.0%
4,767
5,000
4,528
4,593
4,705
12.4%
4,968
4,510
10.0%
9.2%
4,000
3,900
11.7%
11.0%
15.0%
10.0% 6.0%
3,000
5.6%
2,600 4.2%
4.1%
5.0%
2,000
0.0%
2.4%
1,300 1.4%
1,000 -8.5% 0
-10.0% 2013
2014
2015e
2016e
Net Income (LHS)
2017e
0
2018e
0.0% 2013
2014
2015e
2016e
2017e
Net Interest Income (LHS)
Growth (RHS)
2018e
Growth (RHS)
Source: Company data, QNBFS estimates
NIMs To Progressively Improve 4.0% 3.59% 3.53% 3.26%
3.0%
3.00% 2.87% 2.81% 2.60%
2.49%
2.49%
2.53%
2.58%
2.0%
1.0% 2008
2009
2010
2011
2012
2013
2014
2015e
2016e
2017e
2018e
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
6
RoAE to Remain Under Pressure On the Back of High CARs and Excessive Provisioning 20.0%
3.5% 3.1% 18.6%
2.9%
3.0%
2.7% 16.1%
2.5%
15.0%
2.6%
2.5%
2.6%
14.5%
2.2% 13.6%
2.3%
2.5%
12.7%
13.6%
2.0%
12.8% 10.0%
11.2%
10.8%
1.5%
1.0%
5.0%
0.5%
0.0%
0.0% 2010
2011
2012
2013
2014
2015e
RoAE
2016e
2017e
2018e
RoRWA
Source: Company data, QNBFS estimates
Efficiency Cost-to-income ratio at optimal levels. SAMBA, has, on average (2010-2014) maintained its efficiency ratio at an optimal level of 30%. This is mainly due to the bank’s focus on corporate banking and treasury operations, 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% 33.6% 30.8%
31.9%
30.5%
32.0%
31.9% 30.2%
31.1%
34.6% 32.6%
33.4% 31.3%
31.9% 29.8%
20%
0% 2012
2013
2014
Cost-to-Income (Headline)
2015e
2016e
2017e
2018e
Cost-to-Income (Core)
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
7
Asset Quality SAMBA’s asset quality has markedly improved since 2009, but it 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 1.12% and 1.28% 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 (pre-2009). We also expect elevated coverage ratios, which should safeguard the bank in case loans are impaired more than estimated. In 2009/2010, SAMBA faced headwinds from the services and others segments
(impaired services loans expanded from SAR87.1mn to SAR1.01bn in 2009 while NPLs arising from the others segment jumped by 33% in 2009. NPLs arising from services and others contributed 35% and 40% of total NPLs, respectively. As such, the bank has become more cautious about lending to services; lending to this segment has dropped by a CAGR of 6% (2009-2014). Thus impaired services loans dropped by a CAGR of 8% during the same time-frame. The bank has generally maintained coverage ratios in the range of 116% and 167% between 2007 and 2014. Moreover, SAMBA ended 2014 with a coverage ratio of 161%. Furthermore, we are of the view that management would like to remain conservative and maintain a coverage ratio above the 100s (%). 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 and 2017 4%
195%
3.74% 3.32%
161% 2.99%
3% 124% 2%
116%
200%
133% 2.21%
159%
145%
144%
160% 129% 120%
118%
1.73% 1.31%
1.12%
1.28%
1.32%
80%
0.89%
1%
40%
0%
0% 2009
2010
2011
2012
2013
2014
2015e
NPL Ratio (LHS)
2016e
2017e
2018e
Coverage Ratio (RHS)
Source: Company data, QNBFS estimates
Credit Costs/Cost of Risk (bps) Have Been Managed Well Since 2010; We Estimate an Increase in 2016 and 2017 Due to Weak Macro Outlook 70 64
65
60
50 40
40
35
34 30
30
29
32
18
20 12
13
2014
2015e
10
0 2008
2009
2010
2011
2012
2013
2016e
2017e
2018e
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
8
Capitalization Robust capitalization levels. SAMBA has always maintained strong capitalization levels and we do not expect this trend to reverse. Capitalization Levels Remain Robust 25.0% 20.0% 20.0%
19.0%
19.4%
19.9% 18.6%
19.2%
20.0%
20.5% 19.3%
19.8%
20.1%
19.4%
19.7%
19.0%
15.0%
10.0%
5.0%
0.0% 2012
2013
2014
2015e
CAR
2016e
2017e
2018e
Tier 1
Source: Company data, QNBFS estimates
4Q2015 Estimates We expect SAMBA to exhibit a 10.1% QoQ drop in net income (flat performance YoY). We estimate SAMBA to report a net income of SAR1.23nn in 4Q2015 vs. SAR1.37bn in 3Q2015 (SAR1.23bn in 4Q2014). We expect the QoQ decrease in net income to be mainly attributed to a decrease in non-interest income driven by a drop in investment income and other income. We estimate the YoY flat performance to emanate from growth in investment income. In SAR mn Net Interest Income Non-Interest Income Net Operating Income Net Income
4Q2014 1,174 644 1,263 1,232
3Q2015 1,184 806 1,403 1,370
4Q2015e 1,231 655 1,285 1,231
Change QoQ (%) 4.0 (18.8) (8.4) (10.1)
Change YoY (%) 4.9 1.8 1.7 (0.0)
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
9
Company Description SAMBA Financial Group (SAMBA) had a 10% market share in both loans and deposits (4th largest among domestic banks) as of September 2015. What is of significance is SAMBA commands the 3nd and 4th largest market share in corporate lending (12%) and Shari’ah compliant loans (7%), respectively. Equipped with one of the lowest LDRs and short-term repriceable loans, SAMBA is in a position to benefit from tight liquidity conditions and/or a rising interest rate environment. Established in 1980, SAMBA (previously known as Saudi American Bank) 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 72 branches and 557 ATMs. In 1980 Citibank a strategic shareholder of SAMBA owned 40% of the bank and managed the bank through a technical management agreement; this proved to be beneficial to SAMBA. By 2003 the technical management agreement expired and Citibank exited the bank in 2004. Leveraging off its successful corporate and investment banking franchise/platform and Citibank’s legacy, SAMBA’s strategy is to cross-sell the bank’s products and services (brokerage, asset management, investment & transaction advisory and consumer products/services). Solid shareholder base. SAMBA enjoys a strong shareholding structure with the government owning 50% of the bank.
Major Shareholders Shareholders
Investor Type
Country
Share (%)
Public Investment Fund
Government
KSA
22.9
Public Pension Fund
Government
KSA
15.0
General Organization for Social Insurance (GOSI)
Government
KSA
11.8
Total
49.7
Source: Tadawul
Subsidiaries/Associates Company
Country
Share (%)
SAMBA Capital
KSA
100.0
SAMBA Real Estate Company
KSA
100.0
SAMBA Bank Limited
Pakistan
84.51
Source: Company data
Thursday, 10 December 2015
10
Detailed Financial Statements Ratios
FY2014
FY2015e
FY2016e
FY2017e
RoAE
13.6
12.8
10.8
11.2
RoAA
2.4
2.3
2.0
2.1
Profitability (%)
RoRWA
2.6
2.5
2.2
2.3
NIM (% of IEAs)
2.60
2.49
2.49
2.53
NIM (% of RWAs)
2.35
2.28
2.31
2.35
NIM (% of AAs)
2.17
2.07
2.07
2.14
2.1
2.0
2.0
2.0
Cost-to-Income (Headline)
30.2
31.1
32.6
31.3
Cost-to-Income (Core)
31.9
33.6
34.6
33.4
LDR
75.8
73.6
74.9
75.6
Loans/Assets
57.1
54.5
55.3
56.3
Cash & Interbank Loans-to-Total Assets
10.2
14.3
11.8
9.5
Deposits to Assets
75.3
74.1
73.8
74.5
7.6
9.7
9.0
7.3
334.6
311.3
312.8
286.1
NPL Ratio
1.3
0.9
1.1
1.3
NPLs to Shareholder's Equity
4.3
2.7
3.4
3.9
Spread Efficiency (%)
Liquidity (%)
Wholesale Funding to Loans IEAs to IBLs Asset Quality (%)
NPLs to Tier 1 Capital
4.3
2.9
3.6
4.1
160.7
195.2
158.8
144.1
2.2
1.8
1.8
1.9
0.12
0.13
0.35
0.40
Tier 1 Ratio
19.2
19.3
19.8
19.4
CAR
19.9
20.0
20.5
20.1
Tier 1 Capital to Assets
17.8
17.1
17.7
17.9
Tier 1 Capital to Loans
31.3
31.4
32.1
31.8
Tier 1 Capital to Deposits
23.7
23.1
24.0
24.0
5.6
5.5
5.3
5.3
1.4
2.4
5.6
9.2
Coverage Ratio ALL/Average Loans Cost of Risk Capitalization (%)
Leverage (x) Growth (%) Net Interest Income Total Revenue
5.5
5.6
-0.4
10.5
11.0
4.1
-8.5
11.7
Loans
9.4
3.9
5.0
8.9
Deposits
3.4
7.0
3.0
8.0
Assets
6.0
8.8
3.4
6.9
RWAs
7.6
3.6
4.5
10.3
Net Income
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
11
Income Statement (In SAR mn)
FY2014
FY2015e
FY2016e
FY2017e
Net Interest Income
4,593
4,705
4,968
5,424
Fees & Commissions
1,775
1,740
1,653
1,818
FX Income
499
524
503
564
Investment Income
382
593
457
544
Other Income
135
236
189
236
Non-Interest Income
2,791
3,093
2,802
3,162
Total Income
7,385
7,798
7,770
8,586
Operating Expenses
(2,233)
(2,422)
(2,530)
(2,688)
Operating Income
5,152
5,376
5,240
5,898
Net Provisions & Investment Impairments
(141)
(161)
(471)
(569)
Net Profit Before Minority Interest
5,010
5,214
4,769
5,329
Minority Interest Net Profit
(5)
(2)
(2)
(2)
5,005
5,212
4,767
5,327
FY2014
FY2015e
FY2016e
FY2017e 17,546
Source: Company data, QNBFS estimates
Balance Sheet (In SAR mn) Assets Cash & Balances with Central Bank
14,679
21,031
18,052
Interbank Loans
7,406
12,890
10,823
7,368
Net Investments
64,516
67,276
73,489
82,017
Net Loans
124,079
128,904
135,292
147,370
Other Assets
4,652
4,165
4,775
5,198
Net PP&E
2,067
2,224
2,152
2,079
217,399
236,491
244,583
261,578
Total Assets Liabilities Interbank Deposits
9,385
12,545
12,237
10,786
Customer Deposits
163,795
175,260
180,518
194,960
-
-
-
-
Term Loans Other Liabilities Total Liabilities Shareholders’ Equity Total Liabilities & Shareholders’ Equity
5,307
5,784
5,957
6,434
178,487
193,589
198,713
212,179
38,784
42,772
45,738
49,265
217,399
236,491
244,583
261,578
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
12
KSA Banking Landscape
Thursday, 10 December 2015
13
Loans/GDP: KSA Underbanked
Young Population: Favorable for Retail Banking
100% 3% 87.1%
85.0%
75%
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
Oct. 2015: Al Rajhi Boasts Largest Branch Network
Market Cap: NCB Dominates, Followed by Al Rajhi and SAMBA
600
120.0 523 103.5
500
100.0
400
80.0
78.5
344 334 300
60.0 43.5
200
40.0
152
37.5 36.6 30.9
119 100
83
82
22.9 21.0 72
75
63
57
20.0 48
12.0 11.3 6.5
13 0
14.6
0.0
Source: SAMA, Bloomberg
Thursday, 10 December 2015
14
2014 Loans Market Share: NCB is the Incumbent Al Bilad 2% BAJ Alinma 3% SAIB 4% 5%
9M2015: RIBL & SAIB Lost Market share While SABB & SHB Gained 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%
BSFR 9%
SAMBA 10%
RIBL 10% SAMBA 10%
Source: Company financials
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%
RIBL 11%
2014 Retail Loans: RJHI Leader Followed by NCB
RJHI 36%
SAMBA 5% ARNB 6% SABB 6% RIBL 10%
NCB 19%
Source: Company financials
Thursday, 10 December 2015
15
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
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%
Corporate Loans 68%
Shari'ah Compliant Loans 73%
Source: Company financials
Thursday, 10 December 2015
16
2014 Deposits: NCB & RJHI Dominate
9M2015 Deposits: NCB Gained Market Share While BSFR Lost
BAJ Al Bilad 2% Alinma 3% 4%
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
Thursday, 10 December 2015
17
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
Thursday, 10 December 2015
18
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.
19
OUTPERFORM SAR21.70 24.4%
Risk Rating Target Price
R-3 SAR27.00
Key Data Current Market Price (SAR)
Initiating Coverage With a Price Target of SAR27.00
Bloomberg Ticker
SAMBA Financial Group (SAMBA) had a 10% market share in both loans and deposits (4th largest among domestic banks) as of September 2015. What is of significance is SAMBA commands the 3nd and 4th largest market share in corporate lending (12%) and Shari’ah compliant loans (7%), respectively. Equipped with one of the lowest LDRs and short-term repriceable loans, SAMBA is in a position to benefit from tight liquidity conditions and/or a rising interest rate environment.
ADR/GDR Ticker
Highlights
21.70
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 8.3% in 2014-2019e. Due to the weak overall outlook for 2016, we expect net income to decline by 8.5% to SAR4.8bn. In times of weak market conditions, asset quality deteriorates and provisions rise. As such, we pencil in a cost of risk (CoR) of 35bps (13bps in 2015) which leads to provisions increasing by 192.2% to SAR471.3mn. Moreover, we foresee sluggish growth in net interest income and a 5% dip in 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 11.7% to SAR5.3bn led by strong core banking income and investment income. We estimate core income to gain by 9.6% led by a 9.2% growth in net interest income, 12.0% growth in f/x income and 10.0% gain in fees & commissions. Moreover, investment income is modeled to grow by 19.0% (down 22.9% in 2016). We caution that our estimates could be revised downward if oil prices
4.1 SAMBA AB N/A
Reuters Ticker
1090.SE
ISIN Sector*
SA0007879097 Banks & Financial Svcs.
52wk High/52wk Low (SAR) 3-m Average Volume (‘000) Mkt. Cap. ($ bn/SAR bn) Shares Outstanding (mn) QFI Limit* (%)
31.00/20.90 752.4 43.4/11.9 2,000.0 20.0
Current QFI* (%)
0.08
1-Year Total Return (%)
(4.3)
Fiscal Year End
December 31
Source: Bloomberg (as of December 09, 2015), *Tadawul (as of December 09, 2015); Note: QFI is Qualified Foreign Investors
remain depressed/and or deteriorate.
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 SAMBA as 51.2% and 24.1% of loans are repriceable within 3 months and 3-12 months (implying 75.3% is repriceable within one year), respectively. SAMBA is an established corporate and investment banking franchise with a 12% market share in the corporate banking segment (3rd largest among domestic peers); we estimate an overall loan book CAGR of 8.9% during 2014-19e. SAMBA is mostly known for being a corporate oriented bank with corporate loans representing on average ~83% of its loan book between 2008-2014. In 2009/2010, SAMBA faced headwinds from the services and others segments, which prompted the bank to focus on other segments in the corporate market and improve its overall asset quality. We believe the bank is currently focusing on the transportation & communication segments (expanded by a CAGR of 22.9% in 2009-2014 and represents 12% of overall loans vs. 6% in 2009), manufacturing (grew by a CAGR of 13.9% in 2009-2014 and contributes 16% vs. 12% in 2009) and commerce (gained by a CAGR of 6.5% during 2009-2014 and represents 18% of the bank’s loan portfolio). We are of the view that the corporates' segment, the historical niche segment for the bank, should drive the credit off-take. On the other hand, we do not expect aggressive growth from the retail segment, which was 16% of the loan portfolio in 2014. We do note SAMBA is also well known as a banker to the affluent and HNI customer segments and this could potentially drive retail growth going forward. Overall, we pencil in loan book growth of
3.9%, 5.0%, 8.9% and 12.2% 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 SAR27.00 and an Outperform rating. SAMBA is trading at a 2016e P/B and P/E of 0.9x and 9.1x, respectively. The stock offers a yield of 4.1% in 2016 and 4.4% in 2017. Risks: 1) Declining oil prices remains the biggest risk for SAMBA 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) P/B (x) DPS (SAR) Dividend Yield (%)
FY2014 2.50 11.0 8.7 1.1 0.81 3.7
FY2015e 2.61 4.1 8.3 1.0 0.90 4.1
FY2016e 2.38 -8.5 9.1 0.9 0.90 4.1
FY2017e 2.66 11.7 8.1 0.9 0.95 4.4
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
Thursday, 10 December 2015
1
Valuation Our target price of SAR27.00/share implies an upside of 24.4% over the current price. As such, we rate SAMBA an Outperform. 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 SAMBA 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 SAMBA'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 SAMBA’s case, 80% of the fair value is derived from the bank's beginning BVPS vs. 12% from the terminal value. Both valuation methodologies are based on a common Cost of Equity (Ke) assumption of 11.1%. We calculate a risk free rate of 4.5% and factor in an adjusted beta of 1.0 vs. 0.99 (actual). Finally, we add a local equity risk premium of 6.7% to arrive at a Ke of 11.1%. Valuation Matrix WEV Sustainable RoAE (%) Book Value of 2016e (SAR) Estimated Cost of Equity (%)
RI 12.4%
Beginning BVPS (2016e) (SAR)
22.87 11.2%
21.39
Present Value of Interim Residuals (SAR)
2.22
Present Value of Terminal Value (SAR)
3.28
Terminal Growth Rate (%)
4.0%
Fundamental P/B
Intrinsic Value (SAR)
27.00
Intrinsic Value (SAR)
27.00
1.2x
Current Market Price (SAR)
21.70
Current Market Price (SAR)
21.70
Upside/(Downside) Potential (%)
24.4%
Upside/(Downside) Potential (%)
24.4%
Equity Value (SAR mn)
54,000
Equity Value (SAR mn)
54,000
Source: Bloomberg, QNBFS estimates
Price Target Calculation Methodology
Equity Value (SAR mn)
Weight (%)
WEV
54,000
50
Fair Value (SAR mn) 27,000
Residual Income
54,000
50
27,000
Blended Equity Value
54,000
Shares Outstanding (mn)
2,000.0
Target Price (SAR)
27.00
Upside/(Downside)
24.4%
Source: Bloomberg, QNBFS estimates
We present below a scenario analysis of possible price targets based on a Base, Bull and Bear scenarios. Scenario Analysis
Bear
Base
Bull
Sustainable RoAE G
11.0% 3.5%
12.4% 4.0%
14.0% 5.0%
Ke
12.1%
11.1%
10.1%
P/B
0.87
1.18
1.75
Blended Fair Value based on WEV & RI
20.00
27.00
40.00
Source: QNBFS estimates
Thursday, 10 December 2015
2
Trading at a 56% discount to its Historical P/B… 10.00 9.50 9.00 8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Jan-05
Historical Median - 2.1x 2016e P/B - 0.9x
Nov-05
Sep-06
Jul-07
May-08
Mar-09
Jan-10
Nov-10
Sep-11
Jul-12
May-13
Mar-14
Jan-15
Nov-15
Source: Bloomberg
SAMBA's valuation is cheap at these levels. 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 38% and 16% discount to its median P/B and P/E,
respectively. …And a 21% discount to its Historical P/E 40.0 38.0 36.0 34.0 32.0 30.0 28.0 26.0 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jan-05
Historical Median - 11.5x 2016e P/E - 9.1x
Nov-05
Sep-06
Jul-07
May-08
Mar-09
Jan-10
Nov-10
Sep-11
Jul-12
May-13
Mar-14
Jan-15
Nov-15
Source: Bloomberg
Steady Dividends (SAR/share) With an Upside Potential 2.0
Attractive Dividend Yield 40%
38% 33%
34%
34%
33%
4.5% 4.1%
36%
35%
4.1%
4.4%
3.7%
32%
3.4%
3.4%
3.4%
3.4%
2010
2011
2012
2013
30% 3.0%
1.0
0.90 0.74
0.74
0.74
0.74
0.90
0.95
20%
0.81 1.5% 10%
0.0
0% 2010
2011 2012 2013 DPS (LHS)
2014 2015e 2016e 2017e Payout Ratio (RHS)
0.0% 2014
2015e 2016e 2017e
Source: Bloomberg, QNBFS estimates
Thursday, 10 December 2015
3
Key Forecasts Loan Portfolio SAMBA is an established corporate and investment banking franchise with a 12% market share in the corporate banking segment (3rd largest among domestic peers); we estimate an overall loan book CAGR of 8.9% during 2014-19e. SAMBA is mostly known for being a corporate oriented bank with corporate loans representing on average ~83% of its loan book between 2008-2014. In 2009/2010, SAMBA faced headwinds from the services and others segments, which prompted the bank to focus on other segments in the corporate market and improve its overall asset quality. We believe the bank is currently focusing on the transportation & communication segments (expanded by a CAGR of 22.9% in 2009-2014 and represents 12% of overall loans vs. 6% in 2009), manufacturing (grew by a CAGR of 13.9% in 20092014 and contributes 16% vs. 12% in 2009) and commerce (gained by a CAGR of 6.5% during 2009-2014 and represents 18% of the bank’s loan portfolio). We are of the view that the corporates' segment, the historical niche segment for the bank, should drive the credit off-take. On the other hand, we do not expect aggressive growth from the retail segment, which was 16% of the loan portfolio in 2014. We do note SAMBA is also well known as a banker to the affluent and HNI customer segments and this could potentially drive retail growth going forward. Overall, we pencil in loan book growth of 3.9%, 5.0%, 8.9% and 12.2% in 2015, 2016, 2017 and 2018, respectively. We expect the loan book to grow to SAR190.4bn in 2019e from SAR124.1bn 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 8.9% CAGR (SAR mn)
Loans Skewed Towards Corporates
200,000
190,385
100%
8.9% CAGR 165,303
40%
150,000 124,079
128,904
43%
44%
43%
42%
18%
18%
18%
18%
13%
13%
14%
14%
16%
8%
7%
7%
8%
8%
19%
19%
17%
16%
16%
2010
2011
2012
2013
2014
75%
147,370 135,292
113,455 50%
21%
100,000
25% 50,000
0% Retail Manufactoring 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 15.1% (2007-2014) vs. 0.09% that of conventional loans.
Shari’ah Compliant Loan Growth Outpaced Conventional; Currently Shari’ah Compliant Loans Dominate SAMBA's Loan Book 80%
76% 68%
68%
63%
60% 55%
60%
52% 45%
40%
37% 32%
56% 48%
44%
40%
32% 24%
20%
0% 2007
2008
2009 Conventional Loans
2010
2011
2012
2013
2014
Shari'ah Compliant Loans
Source: Company data
Thursday, 10 December 2015
4
Deposit Book SAMBA has a 10% market share in deposits, 3rd among domestic banks; we estimate deposits to grow by a CAGR of 8.9% during 2014-19e. The bank has successfully managed to raise non-interest bearing deposits. In 2014 non-interest bearing deposits reached a peak at 71% of total deposits. Given the anticipated Fed rate hike, we believe SAMBA'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% 71% 56%
61%
64%
69%
71%
70% 65%
65%
35%
35%
2017e
2018e
50%
44% 39%
25%
36% 31%
29%
29%
2013
2014
2015e
30%
0% 2010
2011
2012
Interest Bearing Deposits
2016e
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 SAMBA’s conservative nature, we do not assume an expansion in the LDR. SAMBA is pretty liquid with the lowest LDR in KSA after NCB. This is a positive position to be in during tight liquidity conditions as is being experienced in KSA. 90.0%
SAMA's 85% Limit 75.8% 69.0%
71.7%
73.6%
74.9%
75.6%
75.7%
2017e
2018e
64.9% 60.1% 60.0%
30.0%
0.0% 2010
2011
2012
2013
2014
2015e
2016e
Source: Company data, QNBFS estimates
Thursday, 10 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 8.3% in 2014-2019e. We estimate net income to grow by 4.1% to SAR5.2bn in 2015 mainly due to a 55.1% surge in investment income (based on 9M2015 trend). We also expect provisions to increase by 14.1% (13bps CoR) based on the trend in 9M2015 and the fact that net provisions declined by 60.0% in 2014 (12bps CoR). Moreover, we expect net income to be boosted by investment income while estimating subdued growth from core banking income since. On the other hand, due to the weak overall outlook for 2016, we expect net income to decline by 8.5% to SAR4.8bn. In times of weak market conditions, asset quality deteriorates and provisions rise. As such, we pencil in a cost of risk (CoR) of 35bps (13bps in 2015) which leads to provisions increasing by 192.2% to SAR471.3mn. Moreover, we foresee sluggish growth in net interest income and a 5% dip in 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 11.7% to SAR5.3bn led by strong core banking income and investment income. We estimate core income to gain by 9.6% led by a 9.2% growth in net interest income, 12.0% growth in f/x income and 10.0% gain in fees & commissions. Moreover, investment income is modeled to grow by 19.0% (down 22.9% in 2016). We caution that our estimates could be
revised downward if oil prices remain depressed/and or deteriorate. 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 SAMBA, as 51.2% and 24.1% of loans are repriceable within 3 months and 3-12 months (implying 75.3% is repriceable within one year), 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 71%. As such, we expect depositors to demand a return on their funds. Consequently, we estimate a measured rise in NIMs.
Net Income (SAR mn)
Net Interest Income (SAR mn)
7,000
6,525
30.0%
6,500
6,098 5,424
6,000
22.5% 5,005
5,212
5,200
5,327
20.0%
4,767
5,000
4,528
4,593
4,705
12.4%
4,968
4,510
10.0%
9.2%
4,000
3,900
11.7%
11.0%
15.0%
10.0% 6.0%
3,000
5.6%
2,600 4.2%
4.1%
5.0%
2,000
0.0%
2.4%
1,300 1.4%
1,000 -8.5% 0
-10.0% 2013
2014
2015e
2016e
Net Income (LHS)
2017e
0
2018e
0.0% 2013
2014
2015e
2016e
2017e
Net Interest Income (LHS)
Growth (RHS)
2018e
Growth (RHS)
Source: Company data, QNBFS estimates
NIMs To Progressively Improve 4.0% 3.59% 3.53% 3.26%
3.0%
3.00% 2.87% 2.81% 2.60%
2.49%
2.49%
2.53%
2.58%
2.0%
1.0% 2008
2009
2010
2011
2012
2013
2014
2015e
2016e
2017e
2018e
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
6
RoAE to Remain Under Pressure On the Back of High CARs and Excessive Provisioning 20.0%
3.5% 3.1% 18.6%
2.9%
3.0%
2.7% 16.1%
2.5%
15.0%
2.6%
2.5%
2.6%
14.5%
2.2% 13.6%
2.3%
2.5%
12.7%
13.6%
2.0%
12.8% 10.0%
11.2%
10.8%
1.5%
1.0%
5.0%
0.5%
0.0%
0.0% 2010
2011
2012
2013
2014
2015e
RoAE
2016e
2017e
2018e
RoRWA
Source: Company data, QNBFS estimates
Efficiency Cost-to-income ratio at optimal levels. SAMBA, has, on average (2010-2014) maintained its efficiency ratio at an optimal level of 30%. This is mainly due to the bank’s focus on corporate banking and treasury operations, 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% 33.6% 30.8%
31.9%
30.5%
32.0%
31.9% 30.2%
31.1%
34.6% 32.6%
33.4% 31.3%
31.9% 29.8%
20%
0% 2012
2013
2014
Cost-to-Income (Headline)
2015e
2016e
2017e
2018e
Cost-to-Income (Core)
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
7
Asset Quality SAMBA’s asset quality has markedly improved since 2009, but it 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 1.12% and 1.28% 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 (pre-2009). We also expect elevated coverage ratios, which should safeguard the bank in case loans are impaired more than estimated. In 2009/2010, SAMBA faced headwinds from the services and others segments
(impaired services loans expanded from SAR87.1mn to SAR1.01bn in 2009 while NPLs arising from the others segment jumped by 33% in 2009. NPLs arising from services and others contributed 35% and 40% of total NPLs, respectively. As such, the bank has become more cautious about lending to services; lending to this segment has dropped by a CAGR of 6% (2009-2014). Thus impaired services loans dropped by a CAGR of 8% during the same time-frame. The bank has generally maintained coverage ratios in the range of 116% and 167% between 2007 and 2014. Moreover, SAMBA ended 2014 with a coverage ratio of 161%. Furthermore, we are of the view that management would like to remain conservative and maintain a coverage ratio above the 100s (%). 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 and 2017 4%
195%
3.74% 3.32%
161% 2.99%
3% 124% 2%
116%
200%
133% 2.21%
159%
145%
144%
160% 129% 120%
118%
1.73% 1.31%
1.12%
1.28%
1.32%
80%
0.89%
1%
40%
0%
0% 2009
2010
2011
2012
2013
2014
2015e
NPL Ratio (LHS)
2016e
2017e
2018e
Coverage Ratio (RHS)
Source: Company data, QNBFS estimates
Credit Costs/Cost of Risk (bps) Have Been Managed Well Since 2010; We Estimate an Increase in 2016 and 2017 Due to Weak Macro Outlook 70 64
65
60
50 40
40
35
34 30
30
29
32
18
20 12
13
2014
2015e
10
0 2008
2009
2010
2011
2012
2013
2016e
2017e
2018e
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
8
Capitalization Robust capitalization levels. SAMBA has always maintained strong capitalization levels and we do not expect this trend to reverse. Capitalization Levels Remain Robust 25.0% 20.0% 20.0%
19.0%
19.4%
19.9% 18.6%
19.2%
20.0%
20.5% 19.3%
19.8%
20.1%
19.4%
19.7%
19.0%
15.0%
10.0%
5.0%
0.0% 2012
2013
2014
2015e
CAR
2016e
2017e
2018e
Tier 1
Source: Company data, QNBFS estimates
4Q2015 Estimates We expect SAMBA to exhibit a 10.1% QoQ drop in net income (flat performance YoY). We estimate SAMBA to report a net income of SAR1.23nn in 4Q2015 vs. SAR1.37bn in 3Q2015 (SAR1.23bn in 4Q2014). We expect the QoQ decrease in net income to be mainly attributed to a decrease in non-interest income driven by a drop in investment income and other income. We estimate the YoY flat performance to emanate from growth in investment income. In SAR mn Net Interest Income Non-Interest Income Net Operating Income Net Income
4Q2014 1,174 644 1,263 1,232
3Q2015 1,184 806 1,403 1,370
4Q2015e 1,231 655 1,285 1,231
Change QoQ (%) 4.0 (18.8) (8.4) (10.1)
Change YoY (%) 4.9 1.8 1.7 (0.0)
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
9
Company Description SAMBA Financial Group (SAMBA) had a 10% market share in both loans and deposits (4th largest among domestic banks) as of September 2015. What is of significance is SAMBA commands the 3nd and 4th largest market share in corporate lending (12%) and Shari’ah compliant loans (7%), respectively. Equipped with one of the lowest LDRs and short-term repriceable loans, SAMBA is in a position to benefit from tight liquidity conditions and/or a rising interest rate environment. Established in 1980, SAMBA (previously known as Saudi American Bank) 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 72 branches and 557 ATMs. In 1980 Citibank a strategic shareholder of SAMBA owned 40% of the bank and managed the bank through a technical management agreement; this proved to be beneficial to SAMBA. By 2003 the technical management agreement expired and Citibank exited the bank in 2004. Leveraging off its successful corporate and investment banking franchise/platform and Citibank’s legacy, SAMBA’s strategy is to cross-sell the bank’s products and services (brokerage, asset management, investment & transaction advisory and consumer products/services). Solid shareholder base. SAMBA enjoys a strong shareholding structure with the government owning 50% of the bank.
Major Shareholders Shareholders
Investor Type
Country
Share (%)
Public Investment Fund
Government
KSA
22.9
Public Pension Fund
Government
KSA
15.0
General Organization for Social Insurance (GOSI)
Government
KSA
11.8
Total
49.7
Source: Tadawul
Subsidiaries/Associates Company
Country
Share (%)
SAMBA Capital
KSA
100.0
SAMBA Real Estate Company
KSA
100.0
SAMBA Bank Limited
Pakistan
84.51
Source: Company data
Thursday, 10 December 2015
10
Detailed Financial Statements Ratios
FY2014
FY2015e
FY2016e
FY2017e
RoAE
13.6
12.8
10.8
11.2
RoAA
2.4
2.3
2.0
2.1
Profitability (%)
RoRWA
2.6
2.5
2.2
2.3
NIM (% of IEAs)
2.60
2.49
2.49
2.53
NIM (% of RWAs)
2.35
2.28
2.31
2.35
NIM (% of AAs)
2.17
2.07
2.07
2.14
2.1
2.0
2.0
2.0
Cost-to-Income (Headline)
30.2
31.1
32.6
31.3
Cost-to-Income (Core)
31.9
33.6
34.6
33.4
LDR
75.8
73.6
74.9
75.6
Loans/Assets
57.1
54.5
55.3
56.3
Cash & Interbank Loans-to-Total Assets
10.2
14.3
11.8
9.5
Deposits to Assets
75.3
74.1
73.8
74.5
7.6
9.7
9.0
7.3
334.6
311.3
312.8
286.1
NPL Ratio
1.3
0.9
1.1
1.3
NPLs to Shareholder's Equity
4.3
2.7
3.4
3.9
Spread Efficiency (%)
Liquidity (%)
Wholesale Funding to Loans IEAs to IBLs Asset Quality (%)
NPLs to Tier 1 Capital
4.3
2.9
3.6
4.1
160.7
195.2
158.8
144.1
2.2
1.8
1.8
1.9
0.12
0.13
0.35
0.40
Tier 1 Ratio
19.2
19.3
19.8
19.4
CAR
19.9
20.0
20.5
20.1
Tier 1 Capital to Assets
17.8
17.1
17.7
17.9
Tier 1 Capital to Loans
31.3
31.4
32.1
31.8
Tier 1 Capital to Deposits
23.7
23.1
24.0
24.0
5.6
5.5
5.3
5.3
1.4
2.4
5.6
9.2
Coverage Ratio ALL/Average Loans Cost of Risk Capitalization (%)
Leverage (x) Growth (%) Net Interest Income Total Revenue
5.5
5.6
-0.4
10.5
11.0
4.1
-8.5
11.7
Loans
9.4
3.9
5.0
8.9
Deposits
3.4
7.0
3.0
8.0
Assets
6.0
8.8
3.4
6.9
RWAs
7.6
3.6
4.5
10.3
Net Income
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
11
Income Statement (In SAR mn)
FY2014
FY2015e
FY2016e
FY2017e
Net Interest Income
4,593
4,705
4,968
5,424
Fees & Commissions
1,775
1,740
1,653
1,818
FX Income
499
524
503
564
Investment Income
382
593
457
544
Other Income
135
236
189
236
Non-Interest Income
2,791
3,093
2,802
3,162
Total Income
7,385
7,798
7,770
8,586
Operating Expenses
(2,233)
(2,422)
(2,530)
(2,688)
Operating Income
5,152
5,376
5,240
5,898
Net Provisions & Investment Impairments
(141)
(161)
(471)
(569)
Net Profit Before Minority Interest
5,010
5,214
4,769
5,329
Minority Interest Net Profit
(5)
(2)
(2)
(2)
5,005
5,212
4,767
5,327
FY2014
FY2015e
FY2016e
FY2017e 17,546
Source: Company data, QNBFS estimates
Balance Sheet (In SAR mn) Assets Cash & Balances with Central Bank
14,679
21,031
18,052
Interbank Loans
7,406
12,890
10,823
7,368
Net Investments
64,516
67,276
73,489
82,017
Net Loans
124,079
128,904
135,292
147,370
Other Assets
4,652
4,165
4,775
5,198
Net PP&E
2,067
2,224
2,152
2,079
217,399
236,491
244,583
261,578
Total Assets Liabilities Interbank Deposits
9,385
12,545
12,237
10,786
Customer Deposits
163,795
175,260
180,518
194,960
-
-
-
-
Term Loans Other Liabilities Total Liabilities Shareholders’ Equity Total Liabilities & Shareholders’ Equity
5,307
5,784
5,957
6,434
178,487
193,589
198,713
212,179
38,784
42,772
45,738
49,265
217,399
236,491
244,583
261,578
Source: Company data, QNBFS estimates
Thursday, 10 December 2015
12
KSA Banking Landscape
Thursday, 10 December 2015
13
Loans/GDP: KSA Underbanked
Young Population: Favorable for Retail Banking
100% 3% 87.1%
85.0%
75%
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
Oct. 2015: Al Rajhi Boasts Largest Branch Network
Market Cap: NCB Dominates, Followed by Al Rajhi and SAMBA
600
120.0 523 103.5
500
100.0
400
80.0
78.5
344 334 300
60.0 43.5
200
40.0
152
37.5 36.6 30.9
119 100
83
82
22.9 21.0 72
75
63
57
20.0 48
12.0 11.3 6.5
13 0
14.6
0.0
Source: SAMA, Bloomberg
Thursday, 10 December 2015
14
2014 Loans Market Share: NCB is the Incumbent Al Bilad 2% BAJ Alinma 3% SAIB 4% 5%
9M2015: RIBL & SAIB Lost Market share While SABB & SHB Gained 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%
BSFR 9%
SAMBA 10%
RIBL 10% SAMBA 10%
Source: Company financials
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%
RIBL 11%
2014 Retail Loans: RJHI Leader Followed by NCB
RJHI 36%
SAMBA 5% ARNB 6% SABB 6% RIBL 10%
NCB 19%
Source: Company financials
Thursday, 10 December 2015
15
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
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%
Corporate Loans 68%
Shari'ah Compliant Loans 73%
Source: Company financials
Thursday, 10 December 2015
16
2014 Deposits: NCB & RJHI Dominate
9M2015 Deposits: NCB Gained Market Share While BSFR Lost
BAJ Al Bilad 2% Alinma 3% 4%
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
Thursday, 10 December 2015
17
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
Thursday, 10 December 2015
18
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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