Samba Financial Group
Samba Financial Group Reinstating Coverage
Buy
12-Month Target Price SAR 31.00
Bang for the Buck
November 10, 2015
Expected Total Return Price as on Nov-09, 2015
SAR 22.17
Upside to Target Price
39.8%
Expected Dividend Yield
5.4%
Expected Total Return
45.2%
Market Data 52 Week H/L
SAR 20.90/31.00
Market Capitalization
SAR 44,340 mln
Shares Outstanding
2,000 mln
Free Float
50.29%
12-Month ADTV (000’s)
100.165
TASI Weight
2.79%
Reuters Code
1090.SE
Bloomberg Symbol
SAMBA AB
Operating with a network of 72 branches and an asset base of SAR 217 billion (as of 2014), Samba Financial Group (Samba) is the fourth largest bank in the country. Government institutions hold almost 50% stake providing an inherent sovereign backing. Although Citibank sold-off its last remaining shares in 2004, legacy brand equity continues to benefit Samba versus local peers. The bank trades at one of the most attractive relative valuations within the top five banking space in KSA. While some of this may be explained by sub-par performance on metrics such as LDR, we contend valuations need to correct upwards to reflect growth potential. Our justified P/B valuations place the stock firmly on our Buy list with a target price of SAR 31. Loan growth to lead LDR rise
We believe loan growth will trough in 2015E and start on an expansionary mode going forward. A rising interest rate environment is unlikely to impede advances. Lower appetite at comparable large banks may actually aide in loan book expansion. We do not foresee a material NPL rise at Samba given the current loan portfolio and a constricted loan to deposit ratio (LDR) of 72% (2015E). Even assuming an increase in provisions for credit losses from SAR 141 million in 2014 to SAR 537 million by 2018 keeps the NPL coverage ratio in excess of 100%. Constrained deposit growth
We expect restricted deposit growth at a CAGR of 2.8% between 2015-18 versus a CAGR of 6.1% during 2011-14 on the back of weaker economic growth for the next three years. 65% demand deposits are a blessing but fade in comparison to Rajhi’s 89% and NCB’s at 75%. We agree with management that these demand deposits are mostly inelastic.
1-Year Price Performance 120 110 100
NIMs to rebound
Falling average asset yields from 2.7% in 2011 to 2.3% in 2015 have outweighed declining cost of funds from 0.31% to 0.25% for the same period. Consequently, NIMs have shrunk by 300bps to 2.1% this year. We bet on a rebound to 2.3% by 2018 leading to a net income CAGR of 5.4% through 2018.
90 80
70 N
D
J
F
M
A
M
Samba
J
J
A
TASI
S
O
TBFSI
Enticing valuations
Source: Bloomberg
Nov-09, 2015
Samba
TASI
TBFSI
22.17
7,015
15,649
Using a 12.0% ROE, 10.4% cost of equity and 6.6% long term growth rate, we arrive at a justified P/B multiple of 1.4x. Applying it to 2016E book value of SAR 21.73/share, we arrive at our SAR 31 target price, +40% upside from current levels. Buy. Key Financials
Total Change 6-months
(25.9%)
(27.8%)
(27.6%)
FY December 31 (SAR mln) Net Comm. Income
1-Year
(22.4%)
(28.4%)
(27.2%)
2-Year
(2.5%)
(14.9%)
(10.5%)
Provisions for credit losses NIM
2014A
2015E
2016E
2017E
4,593
4,654
5,059
5,403
141
335
489
654
2.2%
2.1%
2.2%
2.3%
30.2%
28.3%
27.7%
27.2%
NPL coverage
160%
122%
112%
108%
ROAA
2.4%
2.3%
2.3%
2.4%
Cost-to-income
F2015E
SAR mln
Special Comm. Income
5,108
Special Comm. Expense
(454)
ROAE
13.6%
13.4%
13.4%
12.9%
Net Comm. Income
4,654
CAR
19.9%
18.4%
17.9%
18.1%
Total Operating Income
7,882
EPS (SAR)
2.50
2.66
2.81
2.90
Total Operating Expense
(2,566)
DPS (SAR)
1.12
1.20
1.30
1.30
32.32
20.26
21.73
23.35
P/E
9.0x
8.5x
8.0x
7.8x
P/B
0.7x
1.1x
1.0x
1.0x
Net Income
5,315
Muhammad Faisal Potrik [email protected] +966-11-203-6807
BVPS
Sultan S. Al-Abdulkarim
[email protected]
+966-11-203-6812
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
Samba Financial Group Reinstating Coverage
Reinstating Coverage We reinstate coverage on Samba Financial Group (Samba) with a Buy rating and a SAR 31 target price.
Sector well placed versus global peers We continue to believe that Saudi banks are at a strong footing in terms of capitalization levels, CARs and regulated by a very proactive central bank (SAMA). Any upcoming stress is likely to be addressed appropriately. On a sector level, a rise in interest rates (most probably in the next Fed meeting in December) can expand net interest margins. The SAR peg to the USD will ensure a pass-through of rates. Standard & Poor’s (S&P) has taken a negative view on KSA and the local banking sector changing ratings. They downgraded 5 Saudi banks with a negative outlook citing increased economic risks and tougher operating conditions on November 5th. S&P had cut Saudi Arabia’s long-term foreign and local currency ratings “A-plus/A-1” with a negative outlook on October 30th. In early November, Fitch changed the outlook on SABB, ANB and Saudi Fransi to negative citing “a deteriorating operating environment could be characterized by slowing loan growth, reduction in earning and profitability growth, a deterioration in asset quality metrics, and subsequent impact on capital, as well as tighter liquidity, and could result in a downgrade of the banks’ long-term IDRs”. Moody’s has been more measured in its approach weighing the strengths of the country (such as high foreign exchange reserves, low debt to GDP ratio) against the stress caused by subdued international crude prices and opting to maintain ratings and a stable outlook. It said “Saudi Arabia's fiscal position is weakening but is still relatively strong”. Comparative valuation of the 12 local banks in terms of relative multiples (P/B and P/E) and dividend yield reveals valuations have narrowed. Despite a dividend yield of 3.3% and 3.6% in 2013 and 2014 respectively, Samba trades at a 2015E P/B and P/E of just 1.1x and 8.9x respectively based on Bloomberg consensus data. Table 1: Local Ban ks Comparativ e Valu ation s Company RB BJAZ SAIB SHB BSF SABB ANB SAMBA Rajhi Bilad Alinma NCB AVERAGE
Price (SAR) 12.55 17.98 18.05 29.60 28.03 26.38 25.87 22.17 50.82 24.01 14.42 51.65
2013 9.5x 11.0x 9.1x 11.3x 14.0x 10.5x 10.3x 9.9x 12.0x 16.4x 21.2x 9.8x 12.1x
P/E 2014 8.7x 12.6x 8.2x 9.3x 9.6x 9.3x 9.0x 8.9x 12.1x 13.9x 17.0x 11.9x 10.9x
2015E 8.5x 6.2x 9.1x 8.6x 8.8x 9.0x 8.3x 8.8x 12.1x 13.9x 14.6x 11.8x 10.0x
2013 1.1x 1.3x 1.1x 1.8x 1.5x 1.7x 1.4x 1.3x 2.1x 2.4x 1.3x 1.9x 1.6x
P/B 2014 1.1x 1.2x 1.0x 1.6x 1.3x 1.5x 1.3x 1.1x 2.0x 2.0x 1.2x 2.3x 1.5x
2015E 1.0x 0.9x 0.9x 1.4x 1.1x 1.4x 1.2x 1.1x 1.9x 1.9x 1.2x 2.0x 1.3x
Dividend Yield 2013 2014 2015E 5.8% 5.8% 6.1% 3.8% 4.1% 4.3% 2.8% 3.6% 3.2% 1.2% 3.2% 2.8% 2.7% 2.9% 1.6% 3.9% 4.5% 3.3% 3.7% 4.6% 4.5% 3.4% 3.3% 1.7% 3.5% 4.0% 3.7% 2.8% 3.2% 3.3% 3.7% 3.7%
Source: Bloomberg
November 10, 2015
|2
Samba Financial Group Reinstating Coverage
Advances growth to slow We believe loan growth will trough in 2015 and commence an expansionary mode going forward. LDR is expected to gradually rise from 72% in 2015 to 74% through 2018. Were it not for a forecasted relatively difficult external operating environment, we would have expected an even greater rise given a meek last couple of years as LDR has not done justice to the banks size and status. Gross advances growth has waned over the last 3 years, dropping from 16.6% in 2012 to an estimated 3.0% this year. However, we expect the trend to reverse from next year with loan growth rising to 4.0% by 2018. Lower crude price expectations going forward leading to weaker GDP growth would keep the upside potential in check, in our view. IMF has recently revised upwards its 2015E GDP growth rate estimates from 2.8% to 3.4% versus 3.5% in 2014 with a slower growth forecast of 2.2% in 2016. Loan growth has been fueled by government spending which is likely to slow down going forward. Ex h ibit 1: Net Adv an ces (SAR bln ) an d Growth (%) 160 8.9%
140
7.9%
Ex h ibit 2: Loan to Deposit Ratio (%) 10%
77%
9%
76%
75.8%
8% 120
75% 7%
100
6%
74%
80
5%
73%
60
4%
72%
3.0%
3.5%
3.5%
40
4.0%
74.2% 73.4% 73.1% 72.3% 71.7%
3% 71% 2%
20 2013
2014
2015E
Net Advances
Source: Company Reports, Riyad Capital
2016E
2017E
2018E
1%
70%
0%
69% 2013
2014
2015E
Advances Growth
2016E
2017E
2018E
LDR
Source: Company Reports, Riyad Capital
In absolute terms, we forecast gross advances to rise from SAR 127 billion in 2014 to SAR 145 billion by 2018. At the same time, we expect provisioning to be strengthened with provisions for credit losses charge (net of recoveries) rising from SAR 141 million last year to SAR 537 million by 2018. We believe it is wise to expect a rise in non-performing loans (NPLs) for the next few years as lower economic growth and more careful government spending may put pressure on corporates, particularly smaller ones. Exhibit 3 below illustrates our expectations of an increase in NPLs from SAR 1.66 billion to SAR 2.71 billion through 2018. While NPL coverage may also decline from a high of 145% in 2014, it is likely to remain above 100% through 2018.
November 10, 2015
|3
Samba Financial Group Reinstating Coverage Ex h ibit 3: NPLs an d NPL cov erag e 3.00
2.71 2.54
2.50
180% 160%
2.32
140%
2.12
2.01
2.00
120% 1.66
100% 1.50 80% 1.00
60% 40%
0.50 20% 0.00
0% 2013
2014
2015E
2016E
NPLs (SAR bln)
2017E
2018E
NPL Coverage (5)
Source: Company Reports, Riyad Capital
Deposit growth to slowdown For the past two years (2013-14), demand deposits have constituted an average 65% of total customer deposits. These non-interest bearing (NIB) deposits are one of the lifelines for most banks in the country. For some of its larger peers, the proportion is even higher such as Al Rajhi at 89% and NCB at 75% although they have different dynamics. These deposits feed into better margins for the banks. Ex h ibit 4: Deposits (SAR bln ) an d Growth (%) 250
9% 8%
8.0%
200
7% 6%
6.5%
150
5% 4%
3.4%
100
2.5%
50
3.0%
3%
3.0%
2% 1%
-
0% 2013
2014
2015E Total Deposits
2016E
2017E
2018E
Deposits Growth
Source: Company Reports, Riyad Capital
Deposits growth Y/Y has been volatile ranging between 2.8% to 8.4% over the last four years. Despite lower oil prices, we expect deposits to reach SAR 177 billion by December-end 2015 (SAR 175 billion at September-end) corresponding to a Y/Y growth of 8.0%, one of the highest in recent years. We expect the growth to ease going forward to 3.0% by 2018. Tight liquidity with corporates and retail clients would be one of the contributing factors in our view. We may also witness a trend within the banking sector where interest bearing deposits start to replace non-interest bearing deposits if rates rise significantly. However, this remains to be tested.
November 10, 2015
|4
Samba Financial Group Reinstating Coverage
Special commission income to grow at 7.1% CAGR Despite sluggish loan growth, rising interest rates and expanding margins is expected to result in a 7.1% CAGR growth in total special commission income between 2015 and 2018 versus a CAGR of 1.3% between 2011 and 2014. Income from loans will likely remain the largest contributor, 77% in 2018 as compared to 79% in 2014. At the same, we anticipate a 6.1% CAGR rise in total special commission expenses. Ex h ibit 5: Total In come Growth to Win d-down 7,000
8.0%
6,000
7.0% 6.0%
5,000
5.0%
4,000 4.0%
3,000 3.0%
2,000
2.0%
1,000
1.0%
0
0.0%
2013
2014
2015E
Tot al Sp Comm Inc om e
2016E
Income from loans
2017E
2018E
Tot al Income Growth
Source: Company Reports, Riyad Capital
Fee-income has risen at an impressive CAGR of 8.3% between 2011 and 2014 but may moderate to 4.5% through 2018. As the bank raises its investment book mainly on the back of increase in government bonds, we forecast investment income to grow at a CAGR of 6.0% until 2018. Although returns on sovereign bonds are typically lower, the zero risk weighting make them an attractive proposition.
NIMs likely to expand albeit marginally Cost of deposit for Samba stood at just 0.24% in 2014, which we expect to marginally decline to 0.23% this year. Despite higher interest rates, increase in cost of deposits is likely to be marginal with our expectations at 0.25% by 2018. Net Interest Margins (NIMs) have generally been falling over the last few years. From 2.9% in 2009, they have come down to 2.2% in 2014 and likely to make a low of 2.1% in 2015. However, we expect a change in course from 2016 with a rise to 2.2% and then to 2.3% in 2018 as higher interest rates benefit. Average asset yield is also forecasted to grow from 2.3% in 2015 to 2.5% in 2018 as higher rates are passed on to consumers.
November 10, 2015
|5
Samba Financial Group Reinstating Coverage Ex h ibit 6: Net In terest Marg in s & Av g Asset Yield (%)
2.6% 2.3%
2.5% 2.2%
2013
2.4%
2.3%
2.1%
2.1%
2014
2015E NIMs
2016E
2.5%
2.4% 2.2%
2017E
2.3%
2018E
Avg Asset Yield
Source: Company Reports, Riyad Capital
67% bonus in 2014 Amid a flurry of bonus issues within the banking sector, Samba did not fall behind and issued its own 67% bonus for the year 2014 taking paid up capital to SAR 20 billion. The previous bonus was announced for the year 2013 when paid up capital was raised from SAR 9 billion to SAR 12 billion. Ex h ibit 7: Stable Div iden d Pay ou ts 1.6
50% 45%
1.4 1.30
1.2
1.0
1.12
1.40
1.30
1.20
40% 35% 30%
0.98
0.8
25%
0.6
20% 15%
0.4 10% 0.2
5%
0.0
0% 2013
2014
2015E
DPS
2016E
Dividend Payout
2017E
2018E
Dividend Yield
Source: Company Reports, Riyad Capital
With an average payout of 44% for the last three years, Samba has been paying out stable dividends. Our model assumes an average payout of 45% going forward. The bank has already announced a SAR 0.60 DPS for 1H2015 and a similar dividend can be expected for the second half taking the full year payout to SAR 1.20.
November 10, 2015
|6
Samba Financial Group Reinstating Coverage
Valuation and Recommendation We prefer the P/B valuation method for Samba. We find this a suitable valuation tool for financial firms given a stable book value that effectively captures returns. As illustrated in the table below, we have calculated a justified P/B multiple using a 12.0% ROE, 10.4% cost of equity and 6.6% growth rate. The growth rate stems from a long term ROE of 12.0% and a long term retention rate of 55%. Table 2: P/B Valuation Assumptions Risk-free rate Equity risk premium Beta CoE LT retention rate
3.70% 6.75% 0.99 10.4% 55.0%
Book Value per share (SAR)
2015E
2016E
2017E
2018E
20.26
21.73
23.35
25.07
LT ROE LT growth rate Cost of Equity Justified P/B
12.0% 6.6% 10.4% 1.4x
Per Share Fair Value
31.03
Source: Riyad Capital
Our justified P/B multiple for Samba comes out to 1.4x which we apply to our 2016E book value per share forecast of SAR 21.73 to arrive at a SAR 31.03 fair value. As a cross‐check we carried out a P/E valuation assuming a target P/E multiple of 10.0x, the average 2015E P/E for all banks based on Bloomberg consensus estimates. We applied this multiple to our average EPS forecast between 2016 and 2018 of SAR 2.94 leading to a fair value of SAR 29.42. Table 3: P/E Valu ation
EPS
2015E
2016E
2017E
2018E
2.66
2.81
2.90
3.12
Target P/E multiple Avg EPS (2016E-2018E)
10.0x 2.94
Fair value per share
29.42
Source: Riyad Capital
We reinstate coverage on Samba Financial Group (Samba) with a 12-month target price of SAR 31.00 representing 1.5x P/B and 11.7x P/E. With an upside of 40% to our target price, we recommend a Buy.
November 10, 2015
|7
Samba Financial Group Reinstating Coverage
Summary Financials Table 4: Samba Su mmary Fin an cials Income Statement (SAR mln) Special Comm Income Special Comm Income Net Special Comm Income Other Income Operating Income Operating Expense Profit/Loss minority shareholder Net Income Shares Outstanding (mln) EPS (on current shares) DPS
Balance Sheet (SAR mln) Assets Cash & Bank Bal. with SAMA Due from Banks Total Investments Net Loans and Advances Other Assets Net Fixed Assets Total Assets
2014 5,041 448 4,593 2,792 7,385 2,374 (5) 5,005 1,200 2.50 1.12
2015E 5,108 454 4,654 3,228 7,882 2,566
2016E 5,545 485 5,060 3,386 8,446 2,826
2017E 5,913 510 5,403 3,462 8,865 3,066
5,316 2,000 2.66 1.20
5,620 2,000 2.81 1.30
5,799 2,000 2.90 1.30
2014
2015E
2016E
2017E
14,679 7,406 64,516 124,079 4,652 2,067 217,399
21,351 11,257 69,032 127,971 4,419 3,100 237,129
14,445 12,382 74,554 132,516 4,508 4,171 242,577
11,463 13,620 78,282 137,101 4,598 5,262 250,326
Liabilities & Equity Customer Deposits Due to Banks Debt Sec. in Issue Borrowings Total Liabilities
163,795 9,385 5,307 178,487
176,898 14,547 5,042 196,487
181,321 12,365 5,294 198,979
186,761 11,128 5,611 203,500
Capital Statutory Reserves Retained Earnings Total Shareholders Equity Total Liab & Equity
12,000 12,000 12,926 38,784 217,399
20,000 12,000 7,842 40,514 237,129
20,000 12,000 10,862 43,469 242,577
20,000 12,000 14,061 46,698 250,326
Cash Flows (SAR mln) Cash at Beg. of Year Net Income Dividends Paid Depreciation & Impairment Due from Banks Operating Cash Flow Change in Investments Loans and Advances Debts Inc./Dec. Capital Expenditure Cash at year end
2014 20,383 5,005 (2,061) 134 (2,548) (2,175) (4,648) (10,624) (1,494) 14,679
2015E 14,679 5,316 (2,400) 146 (3,851) 13,556 (6,884) (3,892) (1,182) 21,351
2016E 21,351 5,620 (2,600) 187 (1,126) (51) (6,854) (4,545) (1,267) 14,445
2017E 14,445 5,799 (2,600) 224 (1,238) 2,046 (5,027) (4,584) (1,330) 11,463
Ratios Growth (YoY) Net Special Comm. Income Total Income Net Income Gross Loans Total Investments Customer Deposits Earning Assets
2014
2015E
2016E
2017E
1.4% 5.5% 11.0% 8.9% 6.9% 3.4% 5.8%
1.3% 6.7% 6.2% 3.0% 7.0% 8.0% 9.0%
8.7% 7.2% 5.7% 3.5% 8.0% 2.5% 1.9%
6.8% 5.0% 3.2% 3.5% 5.0% 3.0% 2.8%
6.0% 11.4%
9.1% 4.5%
2.3% 7.3%
3.2% 7.4%
2.4% 13.6% 2.2%
2.3% 13.4% 2.1%
2.3% 13.4% 2.2%
2.4% 12.9% 2.3%
19.9% 160.7% 9.0x 1.2x 5.0% 44.8%
18.4% 121.5% 8.5x 1.1x 5.3% 45.0%
17.9% 112.0% 8.0x 1.0x 5.8% 45.0%
18.1% 108.0% 7.8x 1.0x 5.8% 45.0%
Total Assets Total Equity Profitability RoAA RoAE NIMs Others CAR NPL Coverage P/E P/B Dividend Yield Dividend Payout
Source: Company Reports, Riyad Capital
November 10, 2015
|8
Stock Rating
Strong Buy
Buy
Hold
Sell
Not Rated
Expected Total Return ≥ 25%
Expected Total Return ≥ 15%
Expected Total Return < 15%
Overvalued
Under Review/ Restricted
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
Buy
12-Month Target Price SAR 31.00
Bang for the Buck
November 10, 2015
Expected Total Return Price as on Nov-09, 2015
SAR 22.17
Upside to Target Price
39.8%
Expected Dividend Yield
5.4%
Expected Total Return
45.2%
Market Data 52 Week H/L
SAR 20.90/31.00
Market Capitalization
SAR 44,340 mln
Shares Outstanding
2,000 mln
Free Float
50.29%
12-Month ADTV (000’s)
100.165
TASI Weight
2.79%
Reuters Code
1090.SE
Bloomberg Symbol
SAMBA AB
Operating with a network of 72 branches and an asset base of SAR 217 billion (as of 2014), Samba Financial Group (Samba) is the fourth largest bank in the country. Government institutions hold almost 50% stake providing an inherent sovereign backing. Although Citibank sold-off its last remaining shares in 2004, legacy brand equity continues to benefit Samba versus local peers. The bank trades at one of the most attractive relative valuations within the top five banking space in KSA. While some of this may be explained by sub-par performance on metrics such as LDR, we contend valuations need to correct upwards to reflect growth potential. Our justified P/B valuations place the stock firmly on our Buy list with a target price of SAR 31. Loan growth to lead LDR rise
We believe loan growth will trough in 2015E and start on an expansionary mode going forward. A rising interest rate environment is unlikely to impede advances. Lower appetite at comparable large banks may actually aide in loan book expansion. We do not foresee a material NPL rise at Samba given the current loan portfolio and a constricted loan to deposit ratio (LDR) of 72% (2015E). Even assuming an increase in provisions for credit losses from SAR 141 million in 2014 to SAR 537 million by 2018 keeps the NPL coverage ratio in excess of 100%. Constrained deposit growth
We expect restricted deposit growth at a CAGR of 2.8% between 2015-18 versus a CAGR of 6.1% during 2011-14 on the back of weaker economic growth for the next three years. 65% demand deposits are a blessing but fade in comparison to Rajhi’s 89% and NCB’s at 75%. We agree with management that these demand deposits are mostly inelastic.
1-Year Price Performance 120 110 100
NIMs to rebound
Falling average asset yields from 2.7% in 2011 to 2.3% in 2015 have outweighed declining cost of funds from 0.31% to 0.25% for the same period. Consequently, NIMs have shrunk by 300bps to 2.1% this year. We bet on a rebound to 2.3% by 2018 leading to a net income CAGR of 5.4% through 2018.
90 80
70 N
D
J
F
M
A
M
Samba
J
J
A
TASI
S
O
TBFSI
Enticing valuations
Source: Bloomberg
Nov-09, 2015
Samba
TASI
TBFSI
22.17
7,015
15,649
Using a 12.0% ROE, 10.4% cost of equity and 6.6% long term growth rate, we arrive at a justified P/B multiple of 1.4x. Applying it to 2016E book value of SAR 21.73/share, we arrive at our SAR 31 target price, +40% upside from current levels. Buy. Key Financials
Total Change 6-months
(25.9%)
(27.8%)
(27.6%)
FY December 31 (SAR mln) Net Comm. Income
1-Year
(22.4%)
(28.4%)
(27.2%)
2-Year
(2.5%)
(14.9%)
(10.5%)
Provisions for credit losses NIM
2014A
2015E
2016E
2017E
4,593
4,654
5,059
5,403
141
335
489
654
2.2%
2.1%
2.2%
2.3%
30.2%
28.3%
27.7%
27.2%
NPL coverage
160%
122%
112%
108%
ROAA
2.4%
2.3%
2.3%
2.4%
Cost-to-income
F2015E
SAR mln
Special Comm. Income
5,108
Special Comm. Expense
(454)
ROAE
13.6%
13.4%
13.4%
12.9%
Net Comm. Income
4,654
CAR
19.9%
18.4%
17.9%
18.1%
Total Operating Income
7,882
EPS (SAR)
2.50
2.66
2.81
2.90
Total Operating Expense
(2,566)
DPS (SAR)
1.12
1.20
1.30
1.30
32.32
20.26
21.73
23.35
P/E
9.0x
8.5x
8.0x
7.8x
P/B
0.7x
1.1x
1.0x
1.0x
Net Income
5,315
Muhammad Faisal Potrik [email protected] +966-11-203-6807
BVPS
Sultan S. Al-Abdulkarim
[email protected]
+966-11-203-6812
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
Samba Financial Group Reinstating Coverage
Reinstating Coverage We reinstate coverage on Samba Financial Group (Samba) with a Buy rating and a SAR 31 target price.
Sector well placed versus global peers We continue to believe that Saudi banks are at a strong footing in terms of capitalization levels, CARs and regulated by a very proactive central bank (SAMA). Any upcoming stress is likely to be addressed appropriately. On a sector level, a rise in interest rates (most probably in the next Fed meeting in December) can expand net interest margins. The SAR peg to the USD will ensure a pass-through of rates. Standard & Poor’s (S&P) has taken a negative view on KSA and the local banking sector changing ratings. They downgraded 5 Saudi banks with a negative outlook citing increased economic risks and tougher operating conditions on November 5th. S&P had cut Saudi Arabia’s long-term foreign and local currency ratings “A-plus/A-1” with a negative outlook on October 30th. In early November, Fitch changed the outlook on SABB, ANB and Saudi Fransi to negative citing “a deteriorating operating environment could be characterized by slowing loan growth, reduction in earning and profitability growth, a deterioration in asset quality metrics, and subsequent impact on capital, as well as tighter liquidity, and could result in a downgrade of the banks’ long-term IDRs”. Moody’s has been more measured in its approach weighing the strengths of the country (such as high foreign exchange reserves, low debt to GDP ratio) against the stress caused by subdued international crude prices and opting to maintain ratings and a stable outlook. It said “Saudi Arabia's fiscal position is weakening but is still relatively strong”. Comparative valuation of the 12 local banks in terms of relative multiples (P/B and P/E) and dividend yield reveals valuations have narrowed. Despite a dividend yield of 3.3% and 3.6% in 2013 and 2014 respectively, Samba trades at a 2015E P/B and P/E of just 1.1x and 8.9x respectively based on Bloomberg consensus data. Table 1: Local Ban ks Comparativ e Valu ation s Company RB BJAZ SAIB SHB BSF SABB ANB SAMBA Rajhi Bilad Alinma NCB AVERAGE
Price (SAR) 12.55 17.98 18.05 29.60 28.03 26.38 25.87 22.17 50.82 24.01 14.42 51.65
2013 9.5x 11.0x 9.1x 11.3x 14.0x 10.5x 10.3x 9.9x 12.0x 16.4x 21.2x 9.8x 12.1x
P/E 2014 8.7x 12.6x 8.2x 9.3x 9.6x 9.3x 9.0x 8.9x 12.1x 13.9x 17.0x 11.9x 10.9x
2015E 8.5x 6.2x 9.1x 8.6x 8.8x 9.0x 8.3x 8.8x 12.1x 13.9x 14.6x 11.8x 10.0x
2013 1.1x 1.3x 1.1x 1.8x 1.5x 1.7x 1.4x 1.3x 2.1x 2.4x 1.3x 1.9x 1.6x
P/B 2014 1.1x 1.2x 1.0x 1.6x 1.3x 1.5x 1.3x 1.1x 2.0x 2.0x 1.2x 2.3x 1.5x
2015E 1.0x 0.9x 0.9x 1.4x 1.1x 1.4x 1.2x 1.1x 1.9x 1.9x 1.2x 2.0x 1.3x
Dividend Yield 2013 2014 2015E 5.8% 5.8% 6.1% 3.8% 4.1% 4.3% 2.8% 3.6% 3.2% 1.2% 3.2% 2.8% 2.7% 2.9% 1.6% 3.9% 4.5% 3.3% 3.7% 4.6% 4.5% 3.4% 3.3% 1.7% 3.5% 4.0% 3.7% 2.8% 3.2% 3.3% 3.7% 3.7%
Source: Bloomberg
November 10, 2015
|2
Samba Financial Group Reinstating Coverage
Advances growth to slow We believe loan growth will trough in 2015 and commence an expansionary mode going forward. LDR is expected to gradually rise from 72% in 2015 to 74% through 2018. Were it not for a forecasted relatively difficult external operating environment, we would have expected an even greater rise given a meek last couple of years as LDR has not done justice to the banks size and status. Gross advances growth has waned over the last 3 years, dropping from 16.6% in 2012 to an estimated 3.0% this year. However, we expect the trend to reverse from next year with loan growth rising to 4.0% by 2018. Lower crude price expectations going forward leading to weaker GDP growth would keep the upside potential in check, in our view. IMF has recently revised upwards its 2015E GDP growth rate estimates from 2.8% to 3.4% versus 3.5% in 2014 with a slower growth forecast of 2.2% in 2016. Loan growth has been fueled by government spending which is likely to slow down going forward. Ex h ibit 1: Net Adv an ces (SAR bln ) an d Growth (%) 160 8.9%
140
7.9%
Ex h ibit 2: Loan to Deposit Ratio (%) 10%
77%
9%
76%
75.8%
8% 120
75% 7%
100
6%
74%
80
5%
73%
60
4%
72%
3.0%
3.5%
3.5%
40
4.0%
74.2% 73.4% 73.1% 72.3% 71.7%
3% 71% 2%
20 2013
2014
2015E
Net Advances
Source: Company Reports, Riyad Capital
2016E
2017E
2018E
1%
70%
0%
69% 2013
2014
2015E
Advances Growth
2016E
2017E
2018E
LDR
Source: Company Reports, Riyad Capital
In absolute terms, we forecast gross advances to rise from SAR 127 billion in 2014 to SAR 145 billion by 2018. At the same time, we expect provisioning to be strengthened with provisions for credit losses charge (net of recoveries) rising from SAR 141 million last year to SAR 537 million by 2018. We believe it is wise to expect a rise in non-performing loans (NPLs) for the next few years as lower economic growth and more careful government spending may put pressure on corporates, particularly smaller ones. Exhibit 3 below illustrates our expectations of an increase in NPLs from SAR 1.66 billion to SAR 2.71 billion through 2018. While NPL coverage may also decline from a high of 145% in 2014, it is likely to remain above 100% through 2018.
November 10, 2015
|3
Samba Financial Group Reinstating Coverage Ex h ibit 3: NPLs an d NPL cov erag e 3.00
2.71 2.54
2.50
180% 160%
2.32
140%
2.12
2.01
2.00
120% 1.66
100% 1.50 80% 1.00
60% 40%
0.50 20% 0.00
0% 2013
2014
2015E
2016E
NPLs (SAR bln)
2017E
2018E
NPL Coverage (5)
Source: Company Reports, Riyad Capital
Deposit growth to slowdown For the past two years (2013-14), demand deposits have constituted an average 65% of total customer deposits. These non-interest bearing (NIB) deposits are one of the lifelines for most banks in the country. For some of its larger peers, the proportion is even higher such as Al Rajhi at 89% and NCB at 75% although they have different dynamics. These deposits feed into better margins for the banks. Ex h ibit 4: Deposits (SAR bln ) an d Growth (%) 250
9% 8%
8.0%
200
7% 6%
6.5%
150
5% 4%
3.4%
100
2.5%
50
3.0%
3%
3.0%
2% 1%
-
0% 2013
2014
2015E Total Deposits
2016E
2017E
2018E
Deposits Growth
Source: Company Reports, Riyad Capital
Deposits growth Y/Y has been volatile ranging between 2.8% to 8.4% over the last four years. Despite lower oil prices, we expect deposits to reach SAR 177 billion by December-end 2015 (SAR 175 billion at September-end) corresponding to a Y/Y growth of 8.0%, one of the highest in recent years. We expect the growth to ease going forward to 3.0% by 2018. Tight liquidity with corporates and retail clients would be one of the contributing factors in our view. We may also witness a trend within the banking sector where interest bearing deposits start to replace non-interest bearing deposits if rates rise significantly. However, this remains to be tested.
November 10, 2015
|4
Samba Financial Group Reinstating Coverage
Special commission income to grow at 7.1% CAGR Despite sluggish loan growth, rising interest rates and expanding margins is expected to result in a 7.1% CAGR growth in total special commission income between 2015 and 2018 versus a CAGR of 1.3% between 2011 and 2014. Income from loans will likely remain the largest contributor, 77% in 2018 as compared to 79% in 2014. At the same, we anticipate a 6.1% CAGR rise in total special commission expenses. Ex h ibit 5: Total In come Growth to Win d-down 7,000
8.0%
6,000
7.0% 6.0%
5,000
5.0%
4,000 4.0%
3,000 3.0%
2,000
2.0%
1,000
1.0%
0
0.0%
2013
2014
2015E
Tot al Sp Comm Inc om e
2016E
Income from loans
2017E
2018E
Tot al Income Growth
Source: Company Reports, Riyad Capital
Fee-income has risen at an impressive CAGR of 8.3% between 2011 and 2014 but may moderate to 4.5% through 2018. As the bank raises its investment book mainly on the back of increase in government bonds, we forecast investment income to grow at a CAGR of 6.0% until 2018. Although returns on sovereign bonds are typically lower, the zero risk weighting make them an attractive proposition.
NIMs likely to expand albeit marginally Cost of deposit for Samba stood at just 0.24% in 2014, which we expect to marginally decline to 0.23% this year. Despite higher interest rates, increase in cost of deposits is likely to be marginal with our expectations at 0.25% by 2018. Net Interest Margins (NIMs) have generally been falling over the last few years. From 2.9% in 2009, they have come down to 2.2% in 2014 and likely to make a low of 2.1% in 2015. However, we expect a change in course from 2016 with a rise to 2.2% and then to 2.3% in 2018 as higher interest rates benefit. Average asset yield is also forecasted to grow from 2.3% in 2015 to 2.5% in 2018 as higher rates are passed on to consumers.
November 10, 2015
|5
Samba Financial Group Reinstating Coverage Ex h ibit 6: Net In terest Marg in s & Av g Asset Yield (%)
2.6% 2.3%
2.5% 2.2%
2013
2.4%
2.3%
2.1%
2.1%
2014
2015E NIMs
2016E
2.5%
2.4% 2.2%
2017E
2.3%
2018E
Avg Asset Yield
Source: Company Reports, Riyad Capital
67% bonus in 2014 Amid a flurry of bonus issues within the banking sector, Samba did not fall behind and issued its own 67% bonus for the year 2014 taking paid up capital to SAR 20 billion. The previous bonus was announced for the year 2013 when paid up capital was raised from SAR 9 billion to SAR 12 billion. Ex h ibit 7: Stable Div iden d Pay ou ts 1.6
50% 45%
1.4 1.30
1.2
1.0
1.12
1.40
1.30
1.20
40% 35% 30%
0.98
0.8
25%
0.6
20% 15%
0.4 10% 0.2
5%
0.0
0% 2013
2014
2015E
DPS
2016E
Dividend Payout
2017E
2018E
Dividend Yield
Source: Company Reports, Riyad Capital
With an average payout of 44% for the last three years, Samba has been paying out stable dividends. Our model assumes an average payout of 45% going forward. The bank has already announced a SAR 0.60 DPS for 1H2015 and a similar dividend can be expected for the second half taking the full year payout to SAR 1.20.
November 10, 2015
|6
Samba Financial Group Reinstating Coverage
Valuation and Recommendation We prefer the P/B valuation method for Samba. We find this a suitable valuation tool for financial firms given a stable book value that effectively captures returns. As illustrated in the table below, we have calculated a justified P/B multiple using a 12.0% ROE, 10.4% cost of equity and 6.6% growth rate. The growth rate stems from a long term ROE of 12.0% and a long term retention rate of 55%. Table 2: P/B Valuation Assumptions Risk-free rate Equity risk premium Beta CoE LT retention rate
3.70% 6.75% 0.99 10.4% 55.0%
Book Value per share (SAR)
2015E
2016E
2017E
2018E
20.26
21.73
23.35
25.07
LT ROE LT growth rate Cost of Equity Justified P/B
12.0% 6.6% 10.4% 1.4x
Per Share Fair Value
31.03
Source: Riyad Capital
Our justified P/B multiple for Samba comes out to 1.4x which we apply to our 2016E book value per share forecast of SAR 21.73 to arrive at a SAR 31.03 fair value. As a cross‐check we carried out a P/E valuation assuming a target P/E multiple of 10.0x, the average 2015E P/E for all banks based on Bloomberg consensus estimates. We applied this multiple to our average EPS forecast between 2016 and 2018 of SAR 2.94 leading to a fair value of SAR 29.42. Table 3: P/E Valu ation
EPS
2015E
2016E
2017E
2018E
2.66
2.81
2.90
3.12
Target P/E multiple Avg EPS (2016E-2018E)
10.0x 2.94
Fair value per share
29.42
Source: Riyad Capital
We reinstate coverage on Samba Financial Group (Samba) with a 12-month target price of SAR 31.00 representing 1.5x P/B and 11.7x P/E. With an upside of 40% to our target price, we recommend a Buy.
November 10, 2015
|7
Samba Financial Group Reinstating Coverage
Summary Financials Table 4: Samba Su mmary Fin an cials Income Statement (SAR mln) Special Comm Income Special Comm Income Net Special Comm Income Other Income Operating Income Operating Expense Profit/Loss minority shareholder Net Income Shares Outstanding (mln) EPS (on current shares) DPS
Balance Sheet (SAR mln) Assets Cash & Bank Bal. with SAMA Due from Banks Total Investments Net Loans and Advances Other Assets Net Fixed Assets Total Assets
2014 5,041 448 4,593 2,792 7,385 2,374 (5) 5,005 1,200 2.50 1.12
2015E 5,108 454 4,654 3,228 7,882 2,566
2016E 5,545 485 5,060 3,386 8,446 2,826
2017E 5,913 510 5,403 3,462 8,865 3,066
5,316 2,000 2.66 1.20
5,620 2,000 2.81 1.30
5,799 2,000 2.90 1.30
2014
2015E
2016E
2017E
14,679 7,406 64,516 124,079 4,652 2,067 217,399
21,351 11,257 69,032 127,971 4,419 3,100 237,129
14,445 12,382 74,554 132,516 4,508 4,171 242,577
11,463 13,620 78,282 137,101 4,598 5,262 250,326
Liabilities & Equity Customer Deposits Due to Banks Debt Sec. in Issue Borrowings Total Liabilities
163,795 9,385 5,307 178,487
176,898 14,547 5,042 196,487
181,321 12,365 5,294 198,979
186,761 11,128 5,611 203,500
Capital Statutory Reserves Retained Earnings Total Shareholders Equity Total Liab & Equity
12,000 12,000 12,926 38,784 217,399
20,000 12,000 7,842 40,514 237,129
20,000 12,000 10,862 43,469 242,577
20,000 12,000 14,061 46,698 250,326
Cash Flows (SAR mln) Cash at Beg. of Year Net Income Dividends Paid Depreciation & Impairment Due from Banks Operating Cash Flow Change in Investments Loans and Advances Debts Inc./Dec. Capital Expenditure Cash at year end
2014 20,383 5,005 (2,061) 134 (2,548) (2,175) (4,648) (10,624) (1,494) 14,679
2015E 14,679 5,316 (2,400) 146 (3,851) 13,556 (6,884) (3,892) (1,182) 21,351
2016E 21,351 5,620 (2,600) 187 (1,126) (51) (6,854) (4,545) (1,267) 14,445
2017E 14,445 5,799 (2,600) 224 (1,238) 2,046 (5,027) (4,584) (1,330) 11,463
Ratios Growth (YoY) Net Special Comm. Income Total Income Net Income Gross Loans Total Investments Customer Deposits Earning Assets
2014
2015E
2016E
2017E
1.4% 5.5% 11.0% 8.9% 6.9% 3.4% 5.8%
1.3% 6.7% 6.2% 3.0% 7.0% 8.0% 9.0%
8.7% 7.2% 5.7% 3.5% 8.0% 2.5% 1.9%
6.8% 5.0% 3.2% 3.5% 5.0% 3.0% 2.8%
6.0% 11.4%
9.1% 4.5%
2.3% 7.3%
3.2% 7.4%
2.4% 13.6% 2.2%
2.3% 13.4% 2.1%
2.3% 13.4% 2.2%
2.4% 12.9% 2.3%
19.9% 160.7% 9.0x 1.2x 5.0% 44.8%
18.4% 121.5% 8.5x 1.1x 5.3% 45.0%
17.9% 112.0% 8.0x 1.0x 5.8% 45.0%
18.1% 108.0% 7.8x 1.0x 5.8% 45.0%
Total Assets Total Equity Profitability RoAA RoAE NIMs Others CAR NPL Coverage P/E P/B Dividend Yield Dividend Payout
Source: Company Reports, Riyad Capital
November 10, 2015
|8
Stock Rating
Strong Buy
Buy
Hold
Sell
Not Rated
Expected Total Return ≥ 25%
Expected Total Return ≥ 15%
Expected Total Return < 15%
Overvalued
Under Review/ Restricted
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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
