Bank Al-Bilad. Summary. Investment Note May Underweight. Recommendation

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1 Summary Weak market share in deposits, along with low ADR 1 hindering growth. A well diversified loan book, decreases concentration risk. Almost 50:50 contribution from core and other income sources. NIMs 2 under pressure due to low deposit penetration. Increase in discount rate will be reflected fairly quickly on the income statement, given almost 65% floating rate based corporate and other loans. Recommendation Underweight Previous Target Price (SAR) 33.1 Current Price* (SAR) 39.1 New 12 Months Target Price (SAR) 34.3 Upside / (Downside) 12.3% 1 Valuation Bank Albilad has one of the most diversified revenue source, as the bank has been able to generate strong revenues from other income source (fee and commissions, exchange income). However on the other hand its commercial banking operations have not been able to find its footing, which has resulted in stagnated weak market share. By employing residual income valuation methodology, we arrived at a 12month price target of SAR34.3/share for Bank AlBilad. This indicates the stock at current market price is trading at a premium of 12.3%. The stock is currently trading at prospective 2015 PE and PBV of 20.5x and 2.9x, respectively. We maintain our Underweight recommendation. Deposits market share on the lower side In 2014, Albilad deposits stood at SAR 36.7bn, as compared to SAR 29.1bn in 2013, depicting a rise of 26.2%. The market share, in 2014, stood at 2.6%, showing an insignificant improvement of 27bps, from 2.33% in However, it should be noted that the banks deposit book has shown healthy growth, as 6year CAGR, from , stood at 21%.In the same time period market share improved from 1.5% to 2.6%. The inability of the bank to aggressively lend is weighting heavy on the profitability. ADR in 2014, stood at 77% as compared to 8 in The low ADR in our view is a cause of concern, which is even below the industry average of around 8.The bank needs to come out with a clear strategy to enhance it loans offtake, along with that the banks needs to make a conscious effort to increase its deposits market share. Diversified loans book mitigating concentration risk The bank s loan book shows a well diversified portfolio. In 2013 and 2012, almost 5 were corporate loans, 4 retails and were others. However in 2014, concentration in corporate loans increased to 56%, whereas, retails loans share decreased to 35%. What is quite evident, is the bank s focus on corporate loans seems to be increasing, as they have shown the fastest growth, posting 2Yr CAGR of 3. Whereas, growth in retail loans is slowing down, as it posted 2 Yr CAGR of 15%. In our view, the current loan book still looks diversified, which also mitigates the concentration risk. However an increase in share of corporate loans, can result in higher concentration risk. In addition, the bank s corporate loans generally have shown higher NPLs 3 as compared 1 Advances to Deposits ratio 2 Net Interest Margins Senior Analyst Talha Nazar t.nazar@aljaziracapital.com.sa Key Financials SARmn (unless specified) FY14 FY15E FY16E Revenues; Fin & Inv 1,073 1,292 1,644 Growth % 2 27% Net Income ,130 Growth % 18% 9% 2 EPS Key Ratios SARmn (unless specified) FY14 FY15E FY16E NIMS 3.4% 3.6% 3.9% Operating Margins 80.5% 73.1% 68.7% Net Margins 80.5% 73.1% 68.7% PE (x) PB (x) Dividend Yield 1% 1% Return On Assets 2% 2% 2% Return On Equity 15% 14% 15% Gross Loans 2 16% 17% Albilad Deposits *prices as of 21 st of May 2.5% % % 0. DepositsLHS Market ShareRHS Albilad ADR ratio ADR_RHS DepositsLHS LoansLHS

2 to retails loans. NPL ratio for retail loans in 2014 stood at 1.1%, as compared to 1.5% for corporate loans. NPL ratio for retail loans peaked at 1.3% in 2013, whereas, NPLs for corporate loans in 2010 stood at 7.3%. A higher concentration of corporate loans can also result in higher absolute NPLs. The other area of concern in the loan portfolio are the others loans, which constituted almost 8.4% of the total loans in 2014 ( in 2013). They have the highest NPL ratio of 2.5% ( 8% in 2013). However due to a write down, in other loans, in 2014, the share of other loans and the NPLs also showed a decline. Other income sources supporting profitability The bank has been able to show strong earnings from its fee and commission earnings along with remittance income. In 2014 more than 5 of the income was generated through other income sources. The bank s remittance services has shown strong growth as it has increased its share from 8% in 2009 to 14% in With the banks focus towards remittance and investment banking services, the bank looks set to capitalize on the future opportunities. We believe this provides Albilad the support that it needs to maintain a healthy ROE 4. AlBilad Loans Portfolio % 26% AlBilad NPLs % 11% 12% 8% 54% % 35% 38% % Retail Corporate Others 14% 12% 8% 6% 4% 2% Retail NPLsLHS Corporate NPLsLHS Other NPLsLHS NPL ratioretail (%)RHS NPL ratiocorporate (%)RHS NPL ratioother (%)RHS NIMs under pressure In 2014, return on deposits increased by 91%YoY, consequently, net financing margins from financing & investment activity dropped from 97% in 2013 to 95% in 2014, this we believe is due to the following reasons; Increase in share of time deposits from 9% to 16%; Whereas, share of demand deposits dropped to 73% in 2014, as compared to 78% in 2013: This phenomena, we believe, is due to the fact that the bank is trying to capture higher market share, which is pushing its hand towards increasing the deposit rate, this is quite evident from the fact that deposit rates have increased from 0.1% in 2013 to 0.15% in The bank s lending rates have also showed a decline, this, we believe, is due to the following reasons; The bank has low loans offtake, which it is trying to correct by lending aggressively at the cost of its profit rate; The higher share of corporate loans are also compressing the profit rates. The above reason have resulted in lower NIMs, as they have fallen from 3.8% in 2013 to 3.4% in We believe, going forward given that the US Federal reserve is expected to increase the discount rate during 2H2014. The banks margin are expected to improve, given the healthy share of corporate loans, which are generally issued at floating rates. 12% Income Source (% Share) % 1% 2% 1% 3% 3% 8% 11% 14% 13% 13% 14% 31% 31% 6 57% 33% 37% 35% 34% 51% 48% 49% 49% Financ. & investing Fee & Commision Exchange income Others AlBilad Loans Portfolio % 2% 1% 2% 2% 2% 7% 5% 7% 9% 16% 16% 13% 13% 11% 22% 9% 15% 69% 67% Growth in Albilad NIMs 81% 78% 78% 73% Demand Saving Time Others % % % 0.12% % % % 0.02% Lending RateLHS NIMLHS Deposit RateRHS 3 Nonperforming loans 4 Return on Equity 2

3 Key Financials Income Statement in SAR mn 2012A 2013A 2014A 2015E 2016E 2017E 2018E Income from investing and financing assets ,073 1,292 1,644 2,045 2,537 YoY Growth (%) 18% 13% 2 27% 24% 24% Return on deposits and financial liabilities (21) (28) (54) (60) (95) (132) (183) Net income from investing and financing assets ,019 1,232 1,549 1,913 2,354 YoY Growth (%) 19% 13% 8% 21% 26% 24% 23% Fee and commission income, net ,140 1,303 YoY Growth (%) 41% 3% 8% 18% 16% 15% 14% Exchange income, net YoY Growth (%) 24% 5% 2 9% Dividend income Gains on nontrading investments, net Other operating income Total operating income 1,737 1,917 2,097 2,459 2,960 3,503 4,161 YoY Growth (%) 26% 9% 17% 2 18% 19% EXPENSES: Salaries and employee related benefits ,002 1,099 Rent and premises related expenses Depreciation and amortization Other general and administrative expenses Impairment charge for financing, net (8) Reversal of impairment charge on other financial assets (5) Total operating expenses 1,169 1,188 1,233 1,513 1,830 1,947 2,138 Net operating income for the year ,130 1,556 2,023 Nonoperating income 373 Net income for the year ,130 1,556 2,023 YoY Growth (%) 186% 23% 18% 9% 2 38% 3 EPS EPS (diluted) Balance Sheet in mn SAR ASSETS Cash and balances with SAMA 2,933 4,187 4,468 8,066 10,173 12,970 15,713 Due from banks and other financial institutions, net 6,575 6,155 8,785 6,600 6,700 6,800 6,900 Investments, net 1,537 1,667 2,635 4,838 5,081 5,528 5,952 YoY Growth (%) 62% 8% 58% 84% 5% 9% 8% Financing, net 18,256 23,415 28,355 32,887 38,494 44,077 50,765 YoY Growth (%) 32% 28% 21% 16% 17% 15% 15% Property and equipment, net Other assets Total assets 29,778 36,323 45,230 53,350 61,435 70,390 80,377 7% 22% 25% 18% 15% 15% 14% LIABILITIES AND SHAREHOLDERS EQUITY Liabilities Due to banks and other financial institutions ,191 1,200 1,200 1,200 1,200 Customers deposits 23,742 29,108 36,724 43,978 50,812 58,185 66,135 YoY Growth (%) 3% 23% 26% 2 16% 15% 14% Other liabilities 1,094 1,139 1,424 1,515 1,862 2,200 2,619 Total liabilities 25,407 31,222 39,339 46,693 53,874 61,585 69,954 YoY Growth (%) 5% 23% 26% 19% 15% 14% 14% Shareholders equity Share capital 3,000 4,000 4,000 5,000 5,000 5,000 5,000 Statutory reserve ,005 1,287 1,676 2,182 Other reserves Retained earnings 1, , ,326 2,181 3,293 Employee share plan (37) (42) (95) (95) (95) (95) (95) Total shareholders equity 4,371 5,101 5,891 6,657 7,561 8,805 10,423 YoY Growth (%) 28% 17% 15% 13% 14% 16% 18% Total liabilities and shareholders equity 29,778 36,323 45,230 53,350 61,435 70,390 80,377 Source: Company Financials, Aljazira Research 3

4 Ratios Analysis Ratios 2012A 2013A 2014A 2015E 2016E 2017E 2018E Asset Quality Ratios Growth of Gross Loans 32% 26% 2 16% 17% 15% 15% Impaired Loans(NPLs)/ Gross Loans 4% 2% 1% 2% 2% 2% 2% Reserves for Impaired Loans/ Gross loans 6% 4% 3% 3% 3% 3% 3% Reserves for Impaired Loans/ Impaired Loans 145% 194% 192% 149% 148% 157% 146% Impaired Loans less Reserves for Imp Loans/ Equity 8% 9% 7% 5% 5% 5% 5% Profitability Ratios Interest Income/ Earning Assets 3.1% 2.9% 2.6% 2.8% 3.2% 3.5% 3.9% Interest Expense/ Interestbearing Liabilities 0.1% 0.1% 0.1% 0.1% 0.2% 0.2% 0.3% Net Interest Income/Earning Assets % 2.4% 2.7% % 3.6% NonInterest Income/ Gross Revenues 52% 51% 51% 5 48% 45% 43% NonInterest Expense/ Gross Revenues 67% 62% 59% 62% 62% 56% 51% Loans and securities impairment charges/ Preimpairment Operating profit 33% 19% 1% 2 13% Return On Assets (ROA) 3% 2% 2% 2% 2% 2% 3% Return On Equity (ROE) 22% 14% 15% 14% 15% 18% 19% Leverage ratio (ROE/ROA) Operating Profit / Risk Weighted Assets 2% 2% 2% 2% 2% 3% 3% Capital Ratios Equity/ Total Assets 15% 14% 13% 12% 12% 13% 13% Cash Dividends Paid & Declared/ Net Income 21% Net Income Cash Dividends/ Total Equity 13% 14% 15% 17% 18% 21% 23% Funding Ratios Loans/ Customer Deposits 77% 8 77% 75% 76% 76% 77% Liquid Assets / Total Assets 37% 33% 35% 37% 36% 36% 36% Net Loans / Tot Assets 61% 64% 63% 62% 63% 63% 63% Valuation Ratios Dividend Yield 1% 1% 2% 2% Book Value Per Share (BVPS) Market Capitalization(in SAR Mn) 6,139 18,160 14,280 19,540 19,540 19,540 19,540 PE (x) PB (x) EPS Current Price No of Shares Source: Aljazira Research 4

5 RESEARCH DIVISION AGM Head of Research Abdullah Alawi Analyst Jassim AlJubran Senior Analyst Talha Nazar Analyst Sultan Al Kadi BROKERAGE AND INVESTMENT CENTERS DIVISION General manager brokerage services and sales Ala a AlYousef a.yousef@aljaziracapital.com.sa AGMHead of Sales And Investment Centers Central Region Sultan Ibrahim ALMutawa s.almutawa@aljaziracapital.com.sa AGMHead of international and institutional brokerage Luay Jawad AlMotawa lalmutawa@aljaziracapital.com.sa AGMHead of Qassim & Eastern Province Abdullah AlRahit aalrahit@aljaziracapital.com.sa AGM Head of Western and Southern Region Investment Centers & ADC Brokerage Abdullah Q. AlMisbani a.almisbahi@aljaziracapital.com.sa AGM Head of Institutional Brokerage Samer Al Joauni s.aljoauni@aljaziracapital.com.sa RESEARCH DIVISION 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 valueadded services, brokerage across MENA and International markets, as well as offering a full suite of securities business. RATING TERMINOLOGY 1. 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 from the current price levels over next twelve months. 2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. 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