Saudi Banking Sector. Saudi Banking Sector 4Q2017. Saudi banking Sector Balance Sheet Growth. Saudi Banking Sector Balance Sheet Growth 4Q-2017

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1 Saudi ing Sector Saudi ing Sector 4Q217 In 4Q217, the Saudi banking sector s balance sheet grew 2.2% YoY and 1. QoQ to SAR 2,36bn. Total loans accounted for 73. of total assets, whereas deposits formed 7.2% of total liabilities. The banking sector s balance sheet advanced at a 1year CAGR of 7.9%. Saudi banking Sector Balance Sheet Growth 2,5 3 Saudi ing Sector Balance Sheet Growth 4Q217 2,5 2. 2, 2 2, 2.2% 2.2% 2. 1,5 1 1, Saudi ing AssetsLHS % GrowthRHS ing Sector Assets Breakdown 4Q Saudi ing AssetsLHS % Growth (YoY)RHS ing Sector Liabilities & Capital Breakdown 4Q217 1% 1% 4% 1% Cash In Vault 13% 11% Deposits with SAMA Deposits SAMA Bills Foreign Assets 16% Foreign Liabilities Loans to Private Sector 4% Capital accounts Loan to Gov & Quasi Gov 6 Fixed Assets OtherAssets 7 Other Liabilities The Saudi banking sector has 12 listed and other nonlisted banks. In terms of the balance sheet size, National Commercial () (with assets of more than SAR 443.9bn) is the largest bank in the Kingdom, accounting for 2 of the total market, followed by (asset base of SAR 343.1bn and 15.4% market share). (asset base of SAR 227.6bn) and h (total assets worth SAR 216.3bn) account for 1.2% and 9.7% of total banking assets, respectively. Of the 12 banks,,,, and AlJazira are Shariahcompliant and account for 26. of total banking assets. is the largest Shariahcompliant bank in the Kingdom, accounting for 58.2% of the total market share in 4Q217 (marginally down from 58.3% in 3Q217). Market Share of Total ing Assets 4Q217 Asset Market Share of Shariahcompliant s 4Q217 4% 8% 3% 3% Saudi 12% 11% 9% 8% 1 Alawwal Aljazira 19% 58% Aljazira Source: Bloomberg Head of Research Talha Nazar t.nazar@aljaziracapital.com.sa 1

2 Saudi ing Sector Deposits Saudi banking deposits and money supply rose steadily at a 1year CAGR of 8. each. Total deposits edged up.1% YoY to SAR 1.619tn in 4Q217 from SAR 1.617tn in 4Q216. Demand deposits advanced 2.7% YoY to SAR.1bn in 4Q217 from SAR 974.1bn in 4Q216. Of the total deposits, demand deposits accounted for 61.8% (up from 61. in 3Q217), whereas time and savings deposits made up only 27.7%. Deposits Growth 1, 1, 1, 1, DepositsLHS Money Supply(M3)LHS % Growth in depositsrhs 2 1 The breakdown of deposits shows that individuals held 76.4% of total deposits, while government entities Deposit Growth 4Q217 1,.9% accounted for 21.6%. Businesses and individuals hold 89.3% of the demand deposits, while the government holds the remaining 1.7% (up from 9. in 3Q217). With regard to time and savings deposits, businesses and individuals held nearly 55.2%, while government entities accounted for 44.8% (down from 47.1% in 3Q217). Bn SAR 1, 1, 1,.8% 4Q216.1% 4Q217.8%.7%.6%..4%.3%.2%.1% DemandLHS QuasiMonetaryLHS Time & SavingsLHS % Growth (YoY)RHS Demand Deposits Break Down Deposits Break Down 1.7% 1.6% Business and Individuals Government Entities 27.7% 61.8% Demand Time & Savings QuasiMonetary 89.3% Times & Savings Deposit Break Down Deposits by Sector 2% 21.6% 44.8% 55.2% Business and Individuals Government Entities Business and Individuals Government Entities Others 76.4% 2

3 Saudi ing Sector Deposits Breakdown by National Commercial (deposit base of SAR 39bn) is the largest bank in Saudi Arabia, followed by (deposit base of SAR 273bn). recorded highest growth (18.8% YoY) in deposits and improved its market share to 2.9% in 4Q217 from 2.4% in 4Q216. stood second, increasing the deposit base 1. YoY and market share to 5.4% in 4Q217 from 4.8% in 4Q216. Alawwal registered the biggest decline of 8.3% YoY in its deposit base to SAR 78bn in 4Q217 from SAR 85bn in 4Q216. Market share fell to 4.7% in 4Q217 from 5.1% in 4Q216. It was followed by Banque Saudi, which saw its deposits fall 4.7% YoY to SAR 151bn, causing its market share to fall to 9.1% in 4Q217 from 9. in the previous corresponding period., the largest Shariahcompliant bank, recorded a.2% YoY rise in the deposit base, and its market share edged up to 16.4% in 4Q217. Meanwhile, s market share fell to 18.6% in 4Q217 from 18.8% in 4Q216, as its deposits witnessed a decline of 2.1% YoY. Loans The total loan book of Saudi Arabia s banking sector declined 1.3% YoY to SAR 1.38tn in 4Q217, registering a 1year CAGR of 8.8%. About 5.2% (down from 51.8% QoQ) of the loans extended have a maturity of less than a year. Loans with a maturity of one to three years edged up marginally by.3% YoY, due to which its share expanded from 18.9% in 4Q216 to 19.2% in 4Q217. High concentration of shortterm loans in a rising interest rate environment makes it easy for banks to reprice new loans. Deposit Growth by % 1..1% Aljazira Saudi 4Q216 Deposits Market Share Comparison AlJazira Alawwal Saudi Loans Growth 1, 1, 1, 18.8% 2.6% 2.9% 2.4% % % 5.4% 4.8% 4.7% 5.1% 4.7% 2.1% Alawwal % Growth 4Q % 8.1% 8.4% 8.4% 9.1% % 9.4% 1.1% 1.3% %.3% 8.3% 2. 4Q217 4Q % 16.3% % 18.8% Loans Source: Company Financials, Bloomberg % GrowthRHS Loans Maturity Growth 1, 1, 1, Decline Growth.3% Decline 1.4% Q216 4Q217 Less than 1 Year 1 to 3 Years Over 3 Years Loans Share According to Maturity Profile % 3.9% % 19.2% % 49.9% 4Q216 4Q217 Less than 1 Year 1 to 3 Years Over 3 Years 3

4 Saudi ing Sector Loan Breakdown Loan Distribution by Sector The commerce sector is the largest borrower among all sectors, accounting for 22.6% of total loans, followed by the manufacturing sector (11.6% of total loans). The construction sector, which ranks third, witnessed a decline in borrowing, due to which its share fell to 6.4% in 4Q217 from 7.4% in 4Q216. Retail Loans (SAMA disclosure available till 3Q 217 only) The sector s retail loans [excluding real estate financing, finance leasing, and financing against shares (margin lending)] contracted 1.4% YoY (down.3% QoQ) to SAR 339.1bn in 3Q217. Loans for vehicles are the biggest constituent of retail loans, accounting for almost 1.1% in 3Q217. Loans for home renovation financing accounted for 7.9% of total retail loans. Retail loans acquired through credit cards accounted for 3.4% in 3Q217, a jump from 3.3% in 3Q216. Real Estate Loans Real estate loans grew at a CAGR of 19.7% to SAR 211.5bn during In 217, the retail and corporate sectors accounted for 57.4% and 42.6% of the total real estate loans, respectively. However, real estate loans in the corporate sector fell 6. YoY to SAR 9.1bn in 217 after witnessing 14.3% YoY growth in 216. Retail loans advanced 9.8% YoY to SAR 121.4bn in 217 after increasing 8.2% YoY in 216. Market Share in Loans by, the sector s biggest lender, witnessed a decline in market share to 18.1% in 4Q217 from 18.2% in 4Q216., with the second largest market share, advanced to 16.9% in 4Q217 from 16.2% in 4Q216. was the biggest gainer in terms of market share in the loans market, whereas Alawwal declined the most. Shariahcompliant banks market share rose to 28.7% in 4Q217 from 26.9% in 4Q216, primarily led by. Among other Shariahcompliant banks, s market share increased to 5.7% in 4Q217 from 5. in 4Q216. In addition, s market share grew to 3.2% in 4Q217 from 2.6% in 4Q216. However, AlJazira s market share declined to 2.9% in 4Q217 from 3. in 4Q % Retail LoansBreak down Real Estate Loans % 5.1% 3.4% 6.4% 8.7% 7.9% 9.6% 1.1% 22.6% Market Share in Loans by 81.7% 82.1% Manufacturing Construction Commerce Services Gov & Quasi Gov Miscellaneous Credit Card Includes Retail Loans, acquired through credit cards Home Renovation Vehicles Others Credit Cards/ Total Retail Loans % GrowthRetail 4Q216 4Q217 % GrowthCorporate % GrowthTotal Corporate 3.32% 3.41% Retail AlJazira 2.9% % 4Q % 4Q % Alawwal 4.7% 5.3% 5.7% % 8.3% % 8. %8.9 Saudi 8.9% 9.3% 1 1.2% 16.9% 16.2% 18.1% 18.2% Source: Company Financials 4

5 Saudi ing Sector Of the 12 banks in the sector, three registered YoY increases in gross loans. s loan book registered the strongest rise of 2.2% YoY in 4Q217, which strengthened its market share., with a 13.1% YoY jump in gross loans, was the second best performer. Alawwal declined the most, with gross loans contracting 11.3% YoY in 4Q217, followed by Financial Group (down 5.9% YoY). Loan Distribution by % 13.1% 1.2% 2.2% % 1.3% 3.1% 5.9% 2.7% 11.3% % 5. 1 Shariahcompliant banks gross loans grew 7.7% YoY on average in 4Q217. Aljazira Saudi Alawwal 4Q216 4Q217 % growth 15. NonPerforming Loans The sector s nonperforming loan ratio stood at 1.4 in 4Q217 compared with 1.24% in 4Q216. The NPL coverage ratio fell to 156% in 4Q217 from 176% in 4Q216. and, with NPL ratios of.74% and.94%, respectively, are leaders in the industry. The NPL coverage of and stood at 314% and 17, respectively, in 4Q217. Alawwal had the highest NPL ratio of 2.99%, while its NPL coverage ratio stood at 14 in 4Q217. s NPL coverage improved the most to 314% in 4Q217 from 231% in 4Q216, while Arab National posted the biggest drop in NPL coverage ratio from 27 in 4Q216 to 161% in 4Q217. Performing Loans to NPLs % 1.1% 1.2% NPLsIndustry Average 4Q217, 1.4% 1.19% 1.2% 2.73% Aljazira Saudi 1.9% %.94% NPLsIndustry Average 4Q216, 1.2% Alawwal Performing Loans 4Q217 Nonperforming Loans4Q217 % Share of NPLsRHS NPLsIndustry Average 4Q217 NPLsIndustry Average 4Q % AdvancestoDeposit Ratio ADR ratio The industry ADR ratio fell to 84.8% in 4Q217 from 85.1% in 1 4Q216, as total gross loans declined 1. YoY and deposits declined.7% YoY % % % 91.3% 71.2% % 9.6% posted the highest ADR of 93., followed by at 91.3% in 4Q217. recorded the lowest ADR of 71.2% in 4Q217 compared with 73.9% in 4Q216. Notably, the Saudi Arabian Monetary Agency (SAMA) had increased the regulatory ADR limit to 9 from % % % 82.2% 92.9% 73.9% 88.1% 87.7% 93.3% AlJazira Saudi Alawwal 4Q217 ADR 4Q216 ADR Source: Company Financials 5

6 Saudi ing Sector NIMs Remain Under Pressure NIM Of the 12 banks, only recorded a drop in NIM to a negative.1% in 4Q217 from.32% in 4Q216. Alawwal registered the largest increase in NIM (up.56%) to.92% in 4Q217 from.3 in 4Q216. Overall, the sector s return on savings and time deposits decreased 29% YoY in 4Q217 compared with a 19% YoY decline in 3Q217. reported the highest cost of SAR 996mn on savings deposits in 4Q217 compared with SAR 1,92mn in 4Q216, an 8.8% YoY decrease. None of the banks recorded growth in return on deposit. AlJazira recorded the highest return on time and savings deposits at 1.82%, followed by at 1.71%. Saudi British s return on time and saving deposits of.44% was the lowest in the market, followed by (.4). Operating Income Breakdown The sector s operating income jumped 9.6% YoY to SAR 22.3bn in 4Q217 from SAR 2.3bn in 4Q216. Retail accounted for 45.2% of the total operating income in 4Q217 compared with 41.4% in 4Q216. Retail income increased 19.6% YoY. The corporate sector s contribution declined from 32.2% in 4Q216 to 31. in 4Q217. Earnings from the corporate sector stood at SAR 6.9bn (up 5.4% YoY). Treasury income fell 4. YoY, whereas investment income increased 22. YoY. Meanwhile, other income declined 4.7% YoY., with an operating income of SAR 4.5bn, contributed 2.3% to total sector earnings in 4Q217, followed by s contribution of 18.8% (earnings of SAR 4.2bn) AlJazira Saudi Absolute Return on Savings and Time Deposits IN Mn SAR 1, 24% 34% Lending rates % 7% 4Q 216 4Q % 3 Alawwal 4 48% AlJazira Saudi 5 Riy ad Sam ba Ala wwal Fra nsi 4Q216 4Q217 % Change 1.37% % 1.28% 2.36% 1.27% 9% 1.71% 4Q216 4Q % 24% Source: Company Financials, Bloomberg 1.32% 1.52% 1.27% 1.44% %. 1.44% % 2.23% 1.21% % 1.41% 1.29% 1.28% 1.39% Alin ma Albi lad AlJazira Sau di Riya d SAA B Alawwal Ban k Operating Income by Company (4Q 217) In M N SAR 5, 4, 3, 2, Operating Income Breakdown 4Q % 4.7% % % 15.8% 41.4% 45.6% 44.4% 4Q % Retail Corporate Treasury () AlJazira Saudi Retail Corporate Treasury Investment Services and Brokerage Others Alawwal % Investment Services and Brokerage Others Source: Company Financials 6

7 RESEARCH DIVISION Head of Research Talha Nazar Waleed Aljubayr Sultan Al Kadi, CAIA Muhanad AlOdan Jassim AlJubran BROKERAGE AND INVESTMENT CENTERS DIVISION General Manager Brokerage Services & sales Alaa AlYousef AGMHead of Sales And Investment Centers Central Region Sultan Ibrahim ALMutawa AGMHead of international and institutional brokerage Luay Jawad AlMotawa AGMHead of Qassim & Eastern Province Abdullah AlRahit AGM Head of Western and Southern Region Investment Centers Mansour Hamad Alshuaibi RESEARCH DIVISION AlJazira Capital, the investment arm of 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. Stocks rated Underweight would typically decline by over from the current price levels over next twelve months. 3. 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