Saudi Banking Sector - Aljazira Capital
Saudi Banking Sector Sector Update | KSA | Banking | March 2015
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Saudi Banking Sector Saudi Arabia by far is the largest economy in the MENA region, housing some of the largest banks in the region. Due to the strength of the local economy, the sector usually trades at a higher multiple as compared to it regional peers. •
The banking sector in 2014 saw its deposit book grow by 12.4%YoY, as it stood at SAR 1,575bn. Credit growth was slightly lower at 11.6%YoY. This is not a healthy sign as it shows either conservatism of banks or lack of suitable lending opportunities. This is evident in the sector ADR ratio, which are below the regulatory requirement.
•
Advances to Deposit ratio (ADR) decreased slightly from 79.9% to 79.4%. In contrast, GDP in 2014 grew by 1.5% YoY as it stood at SAR 2,795bn (USD 745bn).
•
Going forward, given that the government is looking to maintain its fiscal expenditures, we expect credit growth to be favorable. However, the government might look to finance its fiscal expenditure through debt financing, which can crowd out the retail loans.
•
The sector’s reliance on corporate loans is comparatively high, which provides the sector with an opportunity to improve its retail loans penetration. A higher concentration of retail loans can result in the improvement of Net Interest Margins (NIMs).
•
Mobily owes around SAR 14.0bn to the Saudi banking sector. Recent financial performance has raised a number of question marks. The company in light of its performance has broken a number of covenants, which has resulted in the company readjusting its balance sheet by transferring a part of its long term loans to short term loans. The company is undergoing review by the Capital Market Authority.
•
The United States Federal Reserve have given early indication of increase in interest rates by highlighting the strength of the US economy. This consequently will result in higher discount rates in Saudi Arabia due to the currency peg. Since the share of interest bearing deposit is very low, increase in interest rates will consequently result in higher NIMs.
•
The sector capital adequacy (CAR) ratio is above 17.5%(average), which is above the 8% required by SAMA.
•
The sector ADR is below the regulatory requirement of 85% which gives it enough room to improve its loans portfolio.
•
The sectors non-performing loans are thoroughly covered given that the net provision are higher than the nonperforming loans. NPLs (Non-performing Loans) to total loans ratio stood at 1.3% in Q3 - 2014.
•
Penetration for mortgage finance has remained limited, due to down payment requirement of 30%. Secondly the mortgage law has provide support for the demand side of the housing shortfall, however the supply side still faces number of challenges, like labor shortage and and slow real estate development.
•
Syndicated loans, in 2013, stood at SAR 237.3bn, depicting a jump of 35.3%YoY and a 2007-2013 CAGR of 45%.
•
The Saudi stock market (Tadawul ) showed strong performance in terms of its value traded. In 2014 value traded stood at SAR 2,146.51bn, as compared to SAR 1,369.67, depicting a jump of 56.7%YOY. Total market capitalization towards the end of 2014 stood at SAR 1812.9bn. Daily average value trade stood at SAR 8,586.05mn, depicting a jump of 55.46% YoY. So far the trend has continued in 2015 as value traded in February -2015 stood at SAR 194.3bn, depicting a jump of 43.7%,which will help capital market related revenue at banks.
•
The sectors profitability in 2014 stood at SAR 41.5bn, as compared to SAR 37.6bn in 2013, translating into a jump of 10.2%. Bank Alrajhi and Bank Aljazira are the only two banks which showed a decline in their profitability. However, the decline in Bank Aljazira profitability was due to extraordinary provisioning in 3Q-2014. Adjusting for Bank Alrajhi and Bank Aljaizra, the sector posted a jump of 15.3% YoY.
•
The sector overall has limited avenues to tap in order for it to improve its growth trajectory. We believe retail loans market share will remain weak, whereas public sector lending is expected to pick up, however public sector lending will be at lower rates, which will impact the sectors NIMs.
Senior Analyst
Talha Nazar
1
+966 11 2256115 [email protected]
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Saudi Banking Sector Sector Update | KSA | Banking | March 2015
Please read Disclaimer on the back
Banking Sector Deposits and Credits 1 0 0 %
1 ,4 0 0
8 0 %
1 ,0 0 0
6 0 %
Millions SAR
1 ,2 0 0 8 0 0
4 0 %
6 0 0
2 0 %
4 0 0
0 %
2 0 0 -
2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 T otal D eposits ( L H S ) Banks Credit to P rivate S ector ( L H S )
2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 Banks Credit to P ub l ic AD R * S ector ( L H S ) (R H S )
-2 0 % 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 D eposit G row th Credit G row th (% ) (R H S ) (% ) (R H S ) Source: Saudi Arabia Monetary Agency
Saudi GDP growth 1 4 0 0 0 0 0
1 0 %
1 2 0 0 0 0 0
8 %
B illions SAR
1 0 0 0 0 0 0
6 %
8 0 0 0 0 0
4 %
6 0 0 0 0 0
2 %
4 0 0 0 0 0
0 %
2 0 0 0 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
Total GD P ( at constant price = 1999)
2 0 0 9
2 0 1 0
2 0 1 1
GPD grow th ( R HS)
2 0 1 2
2 0 1 3
2 0 1 4
-2 %
Source: Saudi Arabia Monetary Agency
Banking Sector ROE-2014 2 0 .0 % 1 8 .0 %
Sector R O E , 14.4%
1 6 .0 % 1 4 .0 % 1 2 .0 % 1 0 .0 % 8 .0 % 6 .0 % 4 .0 % 2 .0 % 0 .0 %
9 .3 %
7 .0 %
Alinma
Alj az ira
1 2 .1 %
1 2 .2 %
Saudi R iyadh I nvestment
1 2 .9 %
1 3 .3 %
1 3 .9 %
Samb a
Saudi Fransi
Arab AL B ilad N ational
R O E
2
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1 4 .7 %
Sector R O E
1 6 .3 %
Al R aj hi
1 6 .4 %
1 7 .0 %
SAB B
SHB
1 9 .1 %
N CB
Source:Tadawul
Saudi Banking Sector Sector Update | KSA | Banking | March 2015
Saudi Economic activity might impact credit growth
Crude Oil (Brent)
Credit growth might slowdown, as a result of cut in fiscal spending.
•
Banks might shift focus to public loans, as the government might look to finance its deficit through borrowing.
•
Retail loans growth can slow down.
1 1 0 1 0 0 9 0 8 0 7 0 6 0
-6 0 .9 5 %
J an- 1 4
Mar- 1 4
(-8 0 .4 9 %
May- 1 4
5 4 .5 2
5 0
Ann. )
J ul - 1 4
4 0
45.19
S ep- 1 4
N ov- 1 4
J an- 1 5
Source: Bloomberg
Saudi Crude Oil production 1 2
2 0 %
1 0
1 5 % 1 0 %
8
Million b b l per day
The kingdom is looking to sustain fiscal expenditures; this will potentially result in deficit financing through reserves. The kingdom has around SAR 2.7 trillion in reserves and deposits. We believe, for a single year or a couple of years there is no harm in deficit financing through reserves. However, this can be difficult to sustain for the government if this goes for a longer period. We believe the government can also finance its’ deficit through debts, in our view the government has two options:
•
1 2 0
115.71
U S D /b b l
•
Saudi Arabia’s underlying strength remains intact with strong reserves, diversification into non-oil economic sources, a strong infrastructure, and strong growth in the private sector. However, the economy is still heavily reliant on oil, since almost 90% of its export revenues are dependent on oil. Oil prices has declined 50% from its peak in 2013.
•
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5 % 6
0 % 4
-5 % 2
-1 0 % 0
2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3
Issuing Bonds or Sukuks;
B arrel per day
-1 5 %
% Change
Source: United States Energy Information Administration
Borrow directly from local banks, which could potentially
cause a “crowding-out” effect, i.e. making funds less available and affordable to private sector.
Retail Loans showing stagnated growth Towards the end of 3Q-2014, retails loans1 stood at 358bn depicting an increase of 7% YoY, as market share of retail loans stood at 28.9%, a fall of almost 150bps (basis point) from the market share realized in 2013. The overall growth in retail loans was much slower than 11.6%YoY growth in total loans . The fall in the market share for retail loans is negative for the sector given that retail loans usually provide the highest NIMs. Going forward, retail loans could face further pressure if the government decides to fund its budget deficit through borrowing, which will consequently result in some banks shifting their focus to low risk public sector lending. Retail Loans 4 0 0
4 5 %
3 5 0
4 0 % 3 5 %
3 0 0
2 9 .3 %
2 8 %
B illion SAR
2 0 0
3 0 .4 %
3 0 %
2 5 0
1 5 0
1 0 %
5 0
3
1.
2 0 % 1 5 %
1 0 0
-
2 5 %
5 % 2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
R etail L oans ( L HS)
2 0 0 7
2 0 0 8
2 0 1 0
2 0 1 1
Share of R etail loans( R HS)
Includes real-estate renovation, furnishing, cars and equipment financing, credit card loans, personal finance
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2 0 0 9
2 0 1 2
2 0 1 3
2 0 1 4
0 %
Source: SAMA, AlJazira Research
Saudi Banking Sector Sector Update | KSA | Banking | March 2015
Please read Disclaimer on the back
Given the comparatively low ADR for the sector, which has been below the regulatory requirement. The sector still has room to Improve its loan book.
7 8 %
7 9 %
8 0 %
7 9 %
2 0 0 8 2 0 0 9 2 0 1 0 R egulatory L imit
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
7 8 %
2 0 0 7
7 9 %
2 0 0 4
8 8 %
2 0 0 5 2 0 0 6 AD R
7 6 %
8 3 %
2 0 0 3
8 4 %
9 2 %
R egulatory L imit , 85%
6 8 %
6 2 %
6 4 %
6 5 %
ADR of Saudi Banks 1 0 0 % 9 0 % 8 0 % 7 0 % 6 0 % 5 0 % 4 0 % 3 0 % 2 0 % 1 0 % 0 % 2 0 0 0 2 0 0 1 2 0 0 2
Source: SAMA
Credit Cards Business Credit card loans, which generates some of the highest NIMs, have also been witnessing a declining share. According to SAMA, credit card loans in 2013 stood at SAR 8.4bn, depicting a jump of 5.3%YoY; however share of credit card loans in total retail loans has declined to 2.5% in 2013 from 2.8% in 2012. Credit Card Loans % of Retail Loans (including Credit Cards) 2 0 1 8 1 6 1 4 1 2 1 0 8 6 4 2 0
% % % % % %
% % % % %
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 9
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
Source: SAMA
Revenue Per Employee- RPE The Saudi banking sector generated a revenue of SAR 1.45mn/employee, on average,in 2014, as compared to SAR 1.4mn/employee in 2013 ( a YoYgrowth of 3.5%)interestingly, the top three shariah compliant banks were below the market average. Alrajhi has the second lowest revenue/employee, followed by bank Aljazira. Bank Albilad is the least efficient on these parameters. Revenue/Employee 2 .5
Millions
2 .0
1 .5
1 .0
0 .5
-
Al b il ad
R aj h i
Al j az ira
AN B
R evenue/ empl oyee- 2 0 1 4
Al inma
S audi H ol l andi
R evenue/ empl oyee- 2 0 1 3
R iyadh
S IB
S audi Fransi
Average- 2 0 1 4
S ABB
N CB
S amb a
Average- 2 0 1 3
Source: Bloomberg, Tadawul
4
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Saudi Banking Sector Sector Update | KSA | Banking | March 2015
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Decreasing NIMs to prove challenging The low ADR as compared to the regulatory requirement has created excess liquidity in the sector, forcing banks to lower lending rates in order to attract more clientele. For 2015, the improvement in NIMs is unlikely given that the ADR situation has remained stagnant for the last couple of years where it has remained around the 80% mark. On the other hand, we do not expect any significant improvement in interest rates, since the Saudi riyal is pegged to the US dollar. The recent Fed meeting has highlighted the strength in the US economy, the underlying inflation has remained below the 2% mark; which might further go down if oil prices remain at current level. US unemployment rate stood at 5.6% in February-2015, slightly lower than 5.7% in January-2015. However this is much lower than 6.7% in February-2014 . Some economists believe that the Federal Reserve’s will start increasing interest rates in June. Given the slow paced inflation and a slight uptick in unemployment, some pundits were of the view that the increase will be delayed. The Federal Reserve is expected to issue the first increase in interest rates by June 2015. According to the Fed’s latest statement (March 2015), the rate hike projection is expected to be at a slower pace than previously estimated, stating concerns over a rising Dollar. FOMC (Federal Open Market committee) members’ median outlook for interest rates increase was reduced, currently standing at 0.625% for 2015 and 1.875% for 2016, confirming the Fed’s reserved outlook compared to previous predictions. It is worthy to note that the correlations between US and Saudi interest rate is high, at 0.95. Any rise in US interest rates would naturally be followed by a rise in Saudi rates. This would be quite beneficial for Saudi banks especially that 64% of deposits are classified as deposits that pay no interest. The NIMs of the sector however will remain under pressure as the underlying challenges to the sector are still intact.
Saudi Banks Net Interest Margins 7 .5 %
7 .0 %
6 .0 %
6 .0 % 4 .4 %
4 .5 %
3 .9 %
4 .2 %
3 .0 %
2 .9 %
1 .5 % 0 .0 %
2 0 0 7
3 .8 %
3 .5 %
2 .3 %
0 .9 %
2 0 0 8
2 0 0 9
N I Ms
3 .6 %
3 .6 %
3 .4 %
3 .4 %
3 .4 %
3 .3 %
3 .1 %
3 .0 %
3 .0 %
0 .4 %
0 .4 %
0 .4 %
0 .5 %
0 .5 %
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
Average Y ield on earning assets
Average Cost of funds
Source: Company Annual Reports, Aljazira research
SAIBOR Rate (Saudi Arabia Interbank Offer rates) 1 .1 5 1 .1 0 1 .0 5 1 .0 0 0 .9 5 0 .9 0 0 .8 5 0 .8 0
Feb - 1 4
Mar- 1 4
Apr- 1 4
May- 1 4
J un- 1 4
J ul - 1 4
3M
Aug- 1 4
6M
S ep- 1 4
12M
O ct- 1 4
N ov- 1 4
D ec- 1 4
J an- 1 5
Feb - 1 5
Source: Bloomberg
5
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Saudi Banking Sector Sector Update | KSA | Banking | March 2015
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Asset Quality The Sector NPL (Non-performing loans) ratio seems to have stabilized, as in 3Q-2014 it stood at 1.32% as compared to 1.31% towards the end of 2013. However it should be noted that around SAR 43bn have been allocated to the Telecommunication and Transport sectors. We believe that, in the Telecommunication segment, Mobily and Zain have been facing cash flow issues, especially Zain which on an operational level has been generating losses. Zain owes almost 2.25bn to local banks. Mobily has shown disappointing performance in the last couple of quarters, along with weak cash flows and with a heavy burden of almost SAR 14bn to the local banks. We believe, Mobily may face liquidity issues after its 2014 audited results were announced, where the company announced that it has re classified around SAR 2.0bn of its loans from long term to short , due to breach of a number of covenants. The company faces multiple issues, due to which, it will find it challenging to generate enough free cash flow to pay its creditors. Banks Claim on Private Sector Agriculture and Fishing 0.9% Mining and Quarrying 1.6% Finance 2.8% Utilities & Health Services 2.9% Transport & Communications 3.5% Government & Quasi Govt 3.7% Services 4.8% Construction 6.7% Manufacturing and Processing 12.7% Commerce 20.4% Miscellaneous
6
Banks
Loans in SAR mn
Local Banks
8899
Local and international Banks
1654
Saudi Investment Bank
1500
Samba
591
Saudi Fransi
500
Local Banks (Bayanat AlOula)
1291
Total
14435
Saudi Banking Sector-Non Performing Loans
3 .5 3
2 .5 2
1 .5 1
0 .5 40.0% Source: SAMA
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Mobily Loans
0
2 0 0 9
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
N PL s/ Gross L oans
Q 3 -2 0 1 4
Source: SAMA, *Net NPLs are Gross NPLs adjusted for provision
RESEARCH DIVISION
Syed Taimure Akhtar
+966 11 2256250 [email protected]
+966 11 2256146 [email protected]
Analyst
Analyst
+966 11 2256374 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Senior Analyst
Abdullah Alawi
Sultan Al Kadi
Senior Analyst
Talha Nazar +966 11 2256115 [email protected]
Jassim Al-Jubran +966 11 2256248 [email protected]
General Manager - Brokerage Division Ala’a Al-Yousef
AGM-Head of international
Regional Manager - West and South Regions
and institutional brokerage
Abdullah Al-Misbahi
+966 1 2256000 [email protected]
Luay Jawad Al-Motawa
+966 2 6618404 [email protected]
+966 1 2256277 [email protected]
Sales And Investment Centers Central Region
Area Manager - Qassim & Eastern Province
Manger
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 6 3617547 [email protected]
+966 1 2256364 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
AGM - Head of Research
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations. Asset Management Brokerage Corporate Finance Custody Advisory
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Saudi Banking Sector Saudi Arabia by far is the largest economy in the MENA region, housing some of the largest banks in the region. Due to the strength of the local economy, the sector usually trades at a higher multiple as compared to it regional peers. •
The banking sector in 2014 saw its deposit book grow by 12.4%YoY, as it stood at SAR 1,575bn. Credit growth was slightly lower at 11.6%YoY. This is not a healthy sign as it shows either conservatism of banks or lack of suitable lending opportunities. This is evident in the sector ADR ratio, which are below the regulatory requirement.
•
Advances to Deposit ratio (ADR) decreased slightly from 79.9% to 79.4%. In contrast, GDP in 2014 grew by 1.5% YoY as it stood at SAR 2,795bn (USD 745bn).
•
Going forward, given that the government is looking to maintain its fiscal expenditures, we expect credit growth to be favorable. However, the government might look to finance its fiscal expenditure through debt financing, which can crowd out the retail loans.
•
The sector’s reliance on corporate loans is comparatively high, which provides the sector with an opportunity to improve its retail loans penetration. A higher concentration of retail loans can result in the improvement of Net Interest Margins (NIMs).
•
Mobily owes around SAR 14.0bn to the Saudi banking sector. Recent financial performance has raised a number of question marks. The company in light of its performance has broken a number of covenants, which has resulted in the company readjusting its balance sheet by transferring a part of its long term loans to short term loans. The company is undergoing review by the Capital Market Authority.
•
The United States Federal Reserve have given early indication of increase in interest rates by highlighting the strength of the US economy. This consequently will result in higher discount rates in Saudi Arabia due to the currency peg. Since the share of interest bearing deposit is very low, increase in interest rates will consequently result in higher NIMs.
•
The sector capital adequacy (CAR) ratio is above 17.5%(average), which is above the 8% required by SAMA.
•
The sector ADR is below the regulatory requirement of 85% which gives it enough room to improve its loans portfolio.
•
The sectors non-performing loans are thoroughly covered given that the net provision are higher than the nonperforming loans. NPLs (Non-performing Loans) to total loans ratio stood at 1.3% in Q3 - 2014.
•
Penetration for mortgage finance has remained limited, due to down payment requirement of 30%. Secondly the mortgage law has provide support for the demand side of the housing shortfall, however the supply side still faces number of challenges, like labor shortage and and slow real estate development.
•
Syndicated loans, in 2013, stood at SAR 237.3bn, depicting a jump of 35.3%YoY and a 2007-2013 CAGR of 45%.
•
The Saudi stock market (Tadawul ) showed strong performance in terms of its value traded. In 2014 value traded stood at SAR 2,146.51bn, as compared to SAR 1,369.67, depicting a jump of 56.7%YOY. Total market capitalization towards the end of 2014 stood at SAR 1812.9bn. Daily average value trade stood at SAR 8,586.05mn, depicting a jump of 55.46% YoY. So far the trend has continued in 2015 as value traded in February -2015 stood at SAR 194.3bn, depicting a jump of 43.7%,which will help capital market related revenue at banks.
•
The sectors profitability in 2014 stood at SAR 41.5bn, as compared to SAR 37.6bn in 2013, translating into a jump of 10.2%. Bank Alrajhi and Bank Aljazira are the only two banks which showed a decline in their profitability. However, the decline in Bank Aljazira profitability was due to extraordinary provisioning in 3Q-2014. Adjusting for Bank Alrajhi and Bank Aljaizra, the sector posted a jump of 15.3% YoY.
•
The sector overall has limited avenues to tap in order for it to improve its growth trajectory. We believe retail loans market share will remain weak, whereas public sector lending is expected to pick up, however public sector lending will be at lower rates, which will impact the sectors NIMs.
Senior Analyst
Talha Nazar
1
+966 11 2256115 [email protected]
© All rights reserved
Saudi Banking Sector Sector Update | KSA | Banking | March 2015
Please read Disclaimer on the back
Banking Sector Deposits and Credits 1 0 0 %
1 ,4 0 0
8 0 %
1 ,0 0 0
6 0 %
Millions SAR
1 ,2 0 0 8 0 0
4 0 %
6 0 0
2 0 %
4 0 0
0 %
2 0 0 -
2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 T otal D eposits ( L H S ) Banks Credit to P rivate S ector ( L H S )
2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 Banks Credit to P ub l ic AD R * S ector ( L H S ) (R H S )
-2 0 % 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 D eposit G row th Credit G row th (% ) (R H S ) (% ) (R H S ) Source: Saudi Arabia Monetary Agency
Saudi GDP growth 1 4 0 0 0 0 0
1 0 %
1 2 0 0 0 0 0
8 %
B illions SAR
1 0 0 0 0 0 0
6 %
8 0 0 0 0 0
4 %
6 0 0 0 0 0
2 %
4 0 0 0 0 0
0 %
2 0 0 0 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
Total GD P ( at constant price = 1999)
2 0 0 9
2 0 1 0
2 0 1 1
GPD grow th ( R HS)
2 0 1 2
2 0 1 3
2 0 1 4
-2 %
Source: Saudi Arabia Monetary Agency
Banking Sector ROE-2014 2 0 .0 % 1 8 .0 %
Sector R O E , 14.4%
1 6 .0 % 1 4 .0 % 1 2 .0 % 1 0 .0 % 8 .0 % 6 .0 % 4 .0 % 2 .0 % 0 .0 %
9 .3 %
7 .0 %
Alinma
Alj az ira
1 2 .1 %
1 2 .2 %
Saudi R iyadh I nvestment
1 2 .9 %
1 3 .3 %
1 3 .9 %
Samb a
Saudi Fransi
Arab AL B ilad N ational
R O E
2
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1 4 .7 %
Sector R O E
1 6 .3 %
Al R aj hi
1 6 .4 %
1 7 .0 %
SAB B
SHB
1 9 .1 %
N CB
Source:Tadawul
Saudi Banking Sector Sector Update | KSA | Banking | March 2015
Saudi Economic activity might impact credit growth
Crude Oil (Brent)
Credit growth might slowdown, as a result of cut in fiscal spending.
•
Banks might shift focus to public loans, as the government might look to finance its deficit through borrowing.
•
Retail loans growth can slow down.
1 1 0 1 0 0 9 0 8 0 7 0 6 0
-6 0 .9 5 %
J an- 1 4
Mar- 1 4
(-8 0 .4 9 %
May- 1 4
5 4 .5 2
5 0
Ann. )
J ul - 1 4
4 0
45.19
S ep- 1 4
N ov- 1 4
J an- 1 5
Source: Bloomberg
Saudi Crude Oil production 1 2
2 0 %
1 0
1 5 % 1 0 %
8
Million b b l per day
The kingdom is looking to sustain fiscal expenditures; this will potentially result in deficit financing through reserves. The kingdom has around SAR 2.7 trillion in reserves and deposits. We believe, for a single year or a couple of years there is no harm in deficit financing through reserves. However, this can be difficult to sustain for the government if this goes for a longer period. We believe the government can also finance its’ deficit through debts, in our view the government has two options:
•
1 2 0
115.71
U S D /b b l
•
Saudi Arabia’s underlying strength remains intact with strong reserves, diversification into non-oil economic sources, a strong infrastructure, and strong growth in the private sector. However, the economy is still heavily reliant on oil, since almost 90% of its export revenues are dependent on oil. Oil prices has declined 50% from its peak in 2013.
•
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5 % 6
0 % 4
-5 % 2
-1 0 % 0
2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3
Issuing Bonds or Sukuks;
B arrel per day
-1 5 %
% Change
Source: United States Energy Information Administration
Borrow directly from local banks, which could potentially
cause a “crowding-out” effect, i.e. making funds less available and affordable to private sector.
Retail Loans showing stagnated growth Towards the end of 3Q-2014, retails loans1 stood at 358bn depicting an increase of 7% YoY, as market share of retail loans stood at 28.9%, a fall of almost 150bps (basis point) from the market share realized in 2013. The overall growth in retail loans was much slower than 11.6%YoY growth in total loans . The fall in the market share for retail loans is negative for the sector given that retail loans usually provide the highest NIMs. Going forward, retail loans could face further pressure if the government decides to fund its budget deficit through borrowing, which will consequently result in some banks shifting their focus to low risk public sector lending. Retail Loans 4 0 0
4 5 %
3 5 0
4 0 % 3 5 %
3 0 0
2 9 .3 %
2 8 %
B illion SAR
2 0 0
3 0 .4 %
3 0 %
2 5 0
1 5 0
1 0 %
5 0
3
1.
2 0 % 1 5 %
1 0 0
-
2 5 %
5 % 2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
R etail L oans ( L HS)
2 0 0 7
2 0 0 8
2 0 1 0
2 0 1 1
Share of R etail loans( R HS)
Includes real-estate renovation, furnishing, cars and equipment financing, credit card loans, personal finance
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2 0 0 9
2 0 1 2
2 0 1 3
2 0 1 4
0 %
Source: SAMA, AlJazira Research
Saudi Banking Sector Sector Update | KSA | Banking | March 2015
Please read Disclaimer on the back
Given the comparatively low ADR for the sector, which has been below the regulatory requirement. The sector still has room to Improve its loan book.
7 8 %
7 9 %
8 0 %
7 9 %
2 0 0 8 2 0 0 9 2 0 1 0 R egulatory L imit
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
7 8 %
2 0 0 7
7 9 %
2 0 0 4
8 8 %
2 0 0 5 2 0 0 6 AD R
7 6 %
8 3 %
2 0 0 3
8 4 %
9 2 %
R egulatory L imit , 85%
6 8 %
6 2 %
6 4 %
6 5 %
ADR of Saudi Banks 1 0 0 % 9 0 % 8 0 % 7 0 % 6 0 % 5 0 % 4 0 % 3 0 % 2 0 % 1 0 % 0 % 2 0 0 0 2 0 0 1 2 0 0 2
Source: SAMA
Credit Cards Business Credit card loans, which generates some of the highest NIMs, have also been witnessing a declining share. According to SAMA, credit card loans in 2013 stood at SAR 8.4bn, depicting a jump of 5.3%YoY; however share of credit card loans in total retail loans has declined to 2.5% in 2013 from 2.8% in 2012. Credit Card Loans % of Retail Loans (including Credit Cards) 2 0 1 8 1 6 1 4 1 2 1 0 8 6 4 2 0
% % % % % %
% % % % %
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 9
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
Source: SAMA
Revenue Per Employee- RPE The Saudi banking sector generated a revenue of SAR 1.45mn/employee, on average,in 2014, as compared to SAR 1.4mn/employee in 2013 ( a YoYgrowth of 3.5%)interestingly, the top three shariah compliant banks were below the market average. Alrajhi has the second lowest revenue/employee, followed by bank Aljazira. Bank Albilad is the least efficient on these parameters. Revenue/Employee 2 .5
Millions
2 .0
1 .5
1 .0
0 .5
-
Al b il ad
R aj h i
Al j az ira
AN B
R evenue/ empl oyee- 2 0 1 4
Al inma
S audi H ol l andi
R evenue/ empl oyee- 2 0 1 3
R iyadh
S IB
S audi Fransi
Average- 2 0 1 4
S ABB
N CB
S amb a
Average- 2 0 1 3
Source: Bloomberg, Tadawul
4
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Saudi Banking Sector Sector Update | KSA | Banking | March 2015
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Decreasing NIMs to prove challenging The low ADR as compared to the regulatory requirement has created excess liquidity in the sector, forcing banks to lower lending rates in order to attract more clientele. For 2015, the improvement in NIMs is unlikely given that the ADR situation has remained stagnant for the last couple of years where it has remained around the 80% mark. On the other hand, we do not expect any significant improvement in interest rates, since the Saudi riyal is pegged to the US dollar. The recent Fed meeting has highlighted the strength in the US economy, the underlying inflation has remained below the 2% mark; which might further go down if oil prices remain at current level. US unemployment rate stood at 5.6% in February-2015, slightly lower than 5.7% in January-2015. However this is much lower than 6.7% in February-2014 . Some economists believe that the Federal Reserve’s will start increasing interest rates in June. Given the slow paced inflation and a slight uptick in unemployment, some pundits were of the view that the increase will be delayed. The Federal Reserve is expected to issue the first increase in interest rates by June 2015. According to the Fed’s latest statement (March 2015), the rate hike projection is expected to be at a slower pace than previously estimated, stating concerns over a rising Dollar. FOMC (Federal Open Market committee) members’ median outlook for interest rates increase was reduced, currently standing at 0.625% for 2015 and 1.875% for 2016, confirming the Fed’s reserved outlook compared to previous predictions. It is worthy to note that the correlations between US and Saudi interest rate is high, at 0.95. Any rise in US interest rates would naturally be followed by a rise in Saudi rates. This would be quite beneficial for Saudi banks especially that 64% of deposits are classified as deposits that pay no interest. The NIMs of the sector however will remain under pressure as the underlying challenges to the sector are still intact.
Saudi Banks Net Interest Margins 7 .5 %
7 .0 %
6 .0 %
6 .0 % 4 .4 %
4 .5 %
3 .9 %
4 .2 %
3 .0 %
2 .9 %
1 .5 % 0 .0 %
2 0 0 7
3 .8 %
3 .5 %
2 .3 %
0 .9 %
2 0 0 8
2 0 0 9
N I Ms
3 .6 %
3 .6 %
3 .4 %
3 .4 %
3 .4 %
3 .3 %
3 .1 %
3 .0 %
3 .0 %
0 .4 %
0 .4 %
0 .4 %
0 .5 %
0 .5 %
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
Average Y ield on earning assets
Average Cost of funds
Source: Company Annual Reports, Aljazira research
SAIBOR Rate (Saudi Arabia Interbank Offer rates) 1 .1 5 1 .1 0 1 .0 5 1 .0 0 0 .9 5 0 .9 0 0 .8 5 0 .8 0
Feb - 1 4
Mar- 1 4
Apr- 1 4
May- 1 4
J un- 1 4
J ul - 1 4
3M
Aug- 1 4
6M
S ep- 1 4
12M
O ct- 1 4
N ov- 1 4
D ec- 1 4
J an- 1 5
Feb - 1 5
Source: Bloomberg
5
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Saudi Banking Sector Sector Update | KSA | Banking | March 2015
Please read Disclaimer on the back
Asset Quality The Sector NPL (Non-performing loans) ratio seems to have stabilized, as in 3Q-2014 it stood at 1.32% as compared to 1.31% towards the end of 2013. However it should be noted that around SAR 43bn have been allocated to the Telecommunication and Transport sectors. We believe that, in the Telecommunication segment, Mobily and Zain have been facing cash flow issues, especially Zain which on an operational level has been generating losses. Zain owes almost 2.25bn to local banks. Mobily has shown disappointing performance in the last couple of quarters, along with weak cash flows and with a heavy burden of almost SAR 14bn to the local banks. We believe, Mobily may face liquidity issues after its 2014 audited results were announced, where the company announced that it has re classified around SAR 2.0bn of its loans from long term to short , due to breach of a number of covenants. The company faces multiple issues, due to which, it will find it challenging to generate enough free cash flow to pay its creditors. Banks Claim on Private Sector Agriculture and Fishing 0.9% Mining and Quarrying 1.6% Finance 2.8% Utilities & Health Services 2.9% Transport & Communications 3.5% Government & Quasi Govt 3.7% Services 4.8% Construction 6.7% Manufacturing and Processing 12.7% Commerce 20.4% Miscellaneous
6
Banks
Loans in SAR mn
Local Banks
8899
Local and international Banks
1654
Saudi Investment Bank
1500
Samba
591
Saudi Fransi
500
Local Banks (Bayanat AlOula)
1291
Total
14435
Saudi Banking Sector-Non Performing Loans
3 .5 3
2 .5 2
1 .5 1
0 .5 40.0% Source: SAMA
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Mobily Loans
0
2 0 0 9
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
N PL s/ Gross L oans
Q 3 -2 0 1 4
Source: SAMA, *Net NPLs are Gross NPLs adjusted for provision
RESEARCH DIVISION
Syed Taimure Akhtar
+966 11 2256250 [email protected]
+966 11 2256146 [email protected]
Analyst
Analyst
+966 11 2256374 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Senior Analyst
Abdullah Alawi
Sultan Al Kadi
Senior Analyst
Talha Nazar +966 11 2256115 [email protected]
Jassim Al-Jubran +966 11 2256248 [email protected]
General Manager - Brokerage Division Ala’a Al-Yousef
AGM-Head of international
Regional Manager - West and South Regions
and institutional brokerage
Abdullah Al-Misbahi
+966 1 2256000 [email protected]
Luay Jawad Al-Motawa
+966 2 6618404 [email protected]
+966 1 2256277 [email protected]
Sales And Investment Centers Central Region
Area Manager - Qassim & Eastern Province
Manger
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 6 3617547 [email protected]
+966 1 2256364 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
AGM - Head of Research
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations. Asset Management Brokerage Corporate Finance Custody Advisory
Head Office: Madinah Road, Mosadia، P.O. Box: 6277, Jeddah 21442, Saudi Arabia، Tel: 02 6692669 - Fax: 02 669 7761
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
