Marmore Company Reports. National Commercial Bank

Transcription

1 Marmore Company Reports National Commercial Bank Country Sector Saudi rabia Financial Services

2 MRMORE COMPNY RESERCH National Commercial Bank ugust 2015 Research Team M.R. Raghu CF, FRM Head of Research N.C. Karthik Ramesh Manager Research Nivas Lakshminarasimhan nalyst Support Team Jenevivu Lasrado Executive Secretary, Research Nataraj Balakrishnan Manager dmin & Support Disclaimer This report has been prepared and issued by Marmore MEN Intelligence Pvt Ltd (Marmore), a fully owned research of Kuwait Financial Centre Markaz K.P.S.C. Marmore is a private limited company registered with the Registrar of Companies in India. This Report is owned by Marmore and is privileged and proprietary and is subject to copyrights. Sale of any copies of this Report is strictly prohibited. This Report cannot be quoted without the prior written consent of Marmore. ny user after obtaining Marmore's permission to use this Report must clearly mention the source as Marmore." The Report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable, but no representation or warranty, expressed or implied, is made that such information and data is accurate or complete, and therefore should not be relied upon as such. Opinions, interpretations, estimates, and projections in this report constitute the current judgment of the author as of the date of this Report. They do not necessarily reflect the opinion of Markaz or Marmore or other identified parties and are subject to change without prior notice. Neither Marmore nor Markaz have an obligation to update, modify, or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast, or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. This Report may not consider the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. ccordingly, investors may receive back less than originally invested. Past performance is not necessarily indicative of future performance. Markaz may seek to do business, including investment banking deals, with companies covered in its research reports. Markaz may have interests in the areas covered in this research report. Markaz, Markaz managed entities, its clients, or its employees may have from time to time long or short positions in any security, derivative or other types of assets referred to in this research report. s a result, investors should be aware that Markaz may have a conflict of interest that could affect the objectivity of this report. This report may provide the addresses of or contain hyperlinks to websites. Except to the extent to which the report refers to website material of Markaz and Marmore, Markaz has not reviewed the linked site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to Markaz s or Marmore s own website material) is provided solely for your convenience and information, and the content of the linked site does not in any way form part of this document. ccessing such website or following such link through this report or Markaz s or Marmore s website shall be at your own risk. For further information, please contact Markaz at P.O. Box 23444, Safat 13095, Kuwait; info@e-marmore.com; Tel: ; Fax:

3 Table of contents MRMORE COMPNY RESERCH National Commercial Bank ugust Executive Summary Business Overview... 9 Overview... 9 Porter Five Force nalysis...16 STEEPLED analysis Financial Overview Results...27 Loans & ssets...27 Non-Interest Income...33 Non-Interest Expense...33 Net Interest Income & Net Income...34 Earnings Quality (EQ) Projections Peer nalysis...41 Domestic Peers...41 Regional Peers...46 Recent Developments Share Market Overview...48 Liquidity...49 nalyst Calls...50 Credit Rating ppendix...52 Sector Overview...52 Growth Drivers...55 Corporate Governance

4 Tables and Charts MRMORE COMPNY RESERCH National Commercial Bank ugust 2015 Tables Charts 1.1 NCB Summary, Ownership structure of NCB, Feb NCB Business Review 2.2 NCB: Business lines 1.3 NCB Financial Review 2.3 Key Milestones 2.1 Top Banks in the Region, Business Mix Net Profit Contribution, NCB Subsidiaries Ownership 2.5 Business Mix Operating Expenses Breakup, NCB International Footprint 2.6 GDP per capita (in 000s), Purchasing Power Parity (2014 in Current International Dollar) 2.4 Financial Ratios 2.7 GDP growth, constant prices (average ) 2.5 Summary of Porter s Five Forces analysis 2.8 Saudi rabia Gross domestic product Y-O-Y, constant prices ( ) 2.6 Summary of STEEPLED analysis 3.1 Net Loans (USD billion) 2.7 SWOT analysis, NCB 3.2 ssets by Segments, 2010 and Earnings Quality across time periods 3.3 ssets (USD bn) 3.2 Earnings Quality Components, Mar ssets by Type 4.1 Projections for Income Statement, Balance Sheet 3.5 Total Deposits (USD billion) and Number of Branches 4.2 Largest Current/Planned Projects in KS (USD bn) 3.6 Liabilities by Sector, 2010 and NCB Key Ratios 3.7 Deposits by type, 2010 and NCB Peers, Non-Interest Income (USD mn) 5.2 Profitability Ratios, Non-Interest Expense (USD mn) 5.3 sset Quality Metrics, Net-Interest Income and Net Income (USD mn) 5.4 Capital & Liquidity Ratios, l Rajhi Bank Net Income Segmental Contribution, Rankings of Regional Peers based on Market Cap l Rajhi Bank Operating Expense Segmental 5.2 (Values in USD bn) Contribution, Returns of NCB vs. TSI Index and Saudi BFSI Samba Bank Net Income Segmental Contribution, 5.3 Index, 2014-Present NCB Liquidity Metrics 5.4 Samba Bank Operating Expense Segmental Contribution, NCB Credit Rating 5.5 NCB Net Income Segmental Contribution, Board of Directors and Designation 5.6 NCB Operating Expense Segmental Contribution, NCB vs. Saudi Tadawul Index, Rebased ( ) 6.2 NCB Volume Traded (in mn) vs. Stock Price 6.3 NCB nalyst recommendation across time periods 7.1 Sector wise breakup of Saudi rabia Economy 7.2 Gross domestic product, constant prices, ( CGR) 7.3 KS Banking Sector ( ) in USD billion 7.4 Percentage change in GDP ( ) 7.5 Gross Domestic Product break-up (in %) 4

5 MRMORE COMPNY RESERCH National Commercial Bank ugust Executive Summary Table 1.1: NCB Summary, 2014 NCB is the second largest bank in the region (after QNB), in terms of net assets. Market Capitalization USD 34.7bn Total ssets* USD 115.9bn Listings Saudi Stock Exchange % share in the index 5.27% Loan Growth, 5yr CGR* Net Interest Margin* 14.5% 3.07% Number of Employees 7,331 NPL Ratio* 1.26% Number of Countries 3 P/E (TTM) 14.98x Regional Ranking 2 out of 67 (based on Market Cap) P/B 2.88x Source: NCB, Reuters Eikon, Zawya (Data as on 14 th July 2015); * Data as of Dec 31, 2014 NCB s net-profit for 2014 stood at USD 2.3 billion representing a rise of 10.2% over the last year. National Commercial Bank (NCB), a Saudi Listed Joint Stock Company was established in 1953 following a royal decree, and is currently headquartered in Jeddah. NCB is the second largest bank in the region (after QNB), in terms of net assets. Close to two thirds of the bank s shares are owned by Public Investment Fund, General Organization for Social Insurance (GOSI) and Public Pension gency. In 2014, Corporate Banking (42%) contributed the most to net income, followed by Treasury (36%), and Retail Banking (14%). Despite the continued growth in assets NCB remains well capitalized with Capital dequacy Ratio (CR 17.2%) above the required BSEL III (10.5%) and SM norm (12.5%). NCB s net-profit for 2014 stood at USD 2.3 billion representing a rise of 10.2% over the last year, driven by 15% growth in interest income, due to 18% increase in net loans. Net Loans rose by 17.6% in 2014 to reach a value of USD 58.8bn. sset quality as determined by a low NPL ratio of 1.3% signifies presence of quality assets. 5

6 MRMORE COMPNY RESERCH National Commercial Bank ugust 2015 In the last quarter of 2014, NCB went public in what was billed as the Mother of all IPOs in the region. The Earnings Quality score 1 for NCB has declined in the last two quarters, from a high of 74 in Sep 14 dropping to 35 in Mar 15, due to significant drop in cash flow component score during the same period. In the last quarter of 2014, NCB went public in what was billed as the Mother of all IPOs in the region. The bank raised USD 6bn with the sale of 300mn shares at SR 45 each, and placed an additional 200mn shares to the state pension fund. The shares were oversubscribed 23x, in what was the largest ever IPO in the rab world. Since listing in Nov 2014, NCB has outperformed the Saudi Tadawul and BFSI indices consistently, registering a holding period return of 32%, compared to the latter indices, which posted negative returns. Table 1.2: NCB Business Review Parameter Sector ttractiveness Business Model ttractiveness Industry Competition STEEPLED nalysis Review Medium High Medium Good NCB operates primarily in domestic market of Saudi rabia, and underwent robust expansion of branch network. Economic growth in KS is underpinned by large-scale government expenditures and financial stimulus provided by the Saudi government. With the boom in construction projects; huge infrastructure financing demands; and financial stimulus provided; leading to better economic condition, demand for banking products and services is expected to increase. NCB operates primarily in domestic market of Saudi rabia, and underwent robust expansion of branch network, which increased form 284 branches in 2010 to 333 branches in 2014 in the kingdom of Saudi rabia. But decline in oil prices, shale oil development, and emphasis on renewable sources of energy are going to impact different industries of KS. NCB might need to come up with new banking products to cater to 1 Earnings Quality determines the sustainability of earnings in the future. Data collected from Reuters. 6

7 MRMORE COMPNY RESERCH National Commercial Bank ugust 2015 the new demands. With rising investment options in Islamic banking products being issued by institutions of countries like Japan, Singapore, Malaysia and others present new avenues for earning profit. t present Saudi rabia banking industry has 24 licensed banks operating; 12 local and 12 branches of foreign banks. t present Saudi rabia banking industry has 24 licensed banks operating; 12 local banks and 12 branches of foreign banks. The competition among the already established players within the industry is intense. Hence in a bid to increase its number of corporate clients and retail customers, NCB has to customise banking products to suit the changing consumer and corporate needs of KS. Table 1.3: NCB Financial Review Parameter Top-line Growth High Bottom-line Growth High Interest Margins Medium Return Ratios High Liquidity Medium Balance Sheet Strength High Earnings Quality Low NCB deposits have been growing in tandem with the loan growth. NCB s total revenue increased by 11.7%; from USD 2.7bn in 2013 to USD 3bn in ssets which have increased at a CGR of 11.1% in the past five years ( ) on back of increased loans (CGR of 14.5%) during the same period, is expected to continue its growth momentum. ssets of NCB are allocated across different segments in proportions that are dissimilar to the generation of segmental net income for the company. NCB deposits have been growing in tandem with the loan growth. For the year 2014 total deposits grew by 13.2%, and have grown at a CGR of 11% during the period Non-Interest Income has grown by a CGR of 10.8% over the period However, the growth has moderated in the last two years. The main component of Non-Interest income is Fees & Commissions from Operations which constitutes close to 66% of total non-interest income in Noninterest expense grew at a CGR of 6.9% since The main 7

8 MRMORE COMPNY RESERCH National Commercial Bank ugust 2015 Return ratios have been improving over the past few years, with growth in bottom line. component of non-interest expense is Labor & Related expense, which accounts for 50% of the total non-interest expense. Return ratios have been improving over the past few years, with growth in bottom line, and despite increases seen in assets and equity. NCB remains well capitalized with Capital dequacy Ratio (CR) above the required SM and BSEL III norm, but the bank s earnings quality lags behind the industry median, despite increase in operating efficiency. 8

9 Research Library (Complimentary Research) Capital Markets Researches Berkshire Hathaway (2015) pple (2015) Mother of ll IPOs - National Commercial Bank (2015) Saudi rabian Markets Set to Open (2014) MEN sset Management Policy Perspectives (2013) Including in the MSCI EM Index (2012) lpha bound: Study to explore lpha generation in (2012) Kuwait Investment Sector (2012) Defensive Bellwether Stocks (2012) Kuwait 15 Index (2011) SWFs: The Golden Portfolio (2010) Persistence in performance: The Experience (2010) Will catch up with GEM? -What is left for 2009 This Too Shall Pass: What can we expect in 2009 for Markets? (2009) Missing the rally (2009) Fishing in Troubled Waters (2008) Down and Out: Saudi Stock Outlook (2008) Mr. Market-Manic Depressive (2008) To Yield or Not To Yield: Examining the Potential of Yield Stocks in (2008) China and India: Too Much Too Fast(2007) Kuwait sset Management Industry (2007) Gulf Emerging Portfolio: nd Why Not? (2007) Derivatives Market in (2007) Managing Volatility (2007) Regulatory Researches Regulatory Digest (Semi-nnual) Kuwait s new Law on Preference Shares (2015) Kuwait's BOT law (2014) Land Reforms in Kuwait (2014) Kuwait s PPP Law (2013) Bankruptcy Law in the (2013) Got a CM (Kuwait): What Next? (2012) The New Regulations for Kuwait Investment Sector (2010) Wanted: Kuwait Capital Market uthority (2010) To Leap or To Lag: Choices before Regulators (2007) Economic Researches Kuwait Dealing with Construction Permits (2015) Dubai Government Summit 2015 (2015) Negative Interest Rates (2015) Central Bank Shocks (2015) Fiscal Breakeven Oil Price (2015) Kuwait starting Business (2015) Kuwait Electricity Tariff Hikes (2015) Basel III Norms (2015) Kuwait Real Estate (2015) Swiss Franc (2015) Cheaper Oil (2015) Rising Fuel Prices in Kuwait (2015) Research Knowledge Gap (2014) Cloud Computing (2014) Free Trade Zones (2014) Disruptive Technology: Bitcoins (2014) The Internet of Things! Big Data (2014) Kuwait Credit Growth (2014) Kuwait SME s (2014) FIF World Cup 2022 (2013) Multiple directorships in KS (2013) Demographic Shift (2012) How is preparing for a + World? (2011) Policy Researches Kuwait Reforms (Series) - Education Oil & Gas Markets and the Emergence of New Resources (2014) Countries & sia: Bolstering Energy Ties (2014) Energy Strategies: The Way Forward (2014) Blueprint for Public Sector Good Governance in Kuwait (2013) Kuwait - Private Labor Market (2013) Kuwait - lternatives for Power Generation (2013) Kuwait - Sustainable Power Strategy (2012) Tools to Strengthen & Support Kuwait's Private Sector (2012) Daily Morning Brief Kuwait Daily Monthly MEN Markets Review International Market Update Quarterly Marmore Bulletin Half yearly Regulatory Digest Corporate Earnings nnual Periodic Reports Markets Outlook Equity Risk Premium Fixed Income Update

10 Research Library (Paid Research) Infrastructure Researches* Industry Researches* Company Reports* Power Egypt MEN (Ex- ) Offsets in the Healthcare KS l Rajhi Bank lmarai Group Kuwait Ports KS Kuwait viation Low Cost Carriers KS UE UE Oman Full Service Carriers Kuwait, KS Education, KS Family Business Wealth Management Banking Kuwait, KS, UE, Hospitality Retail, KS; Luxury -, Kuwait, UE; Online sset Management Company for Cooperative Insurance (Tawuniya) Jarir Marketing Co. National Commercial Bank (NCB) Riyad Bank SBIC Samba Saudi rabian Fertilizers Co. Saudi rabian Mining Company Saudi British Bank Saudi Cement Company Saudi Electricity Co Saudi Telecom Savola Group TSNEE National Industrialization Company KS Water Kuwait ICT UE KS MEN, KS, UE, Egypt Islamic Finance Investment Banking, UE Insurance, KS The National Shipping Co. of Saudi rabia BHRI Barwa Real Estate Co QSC Commercial Bank of Ooredoo Electricity and Water Company Insurance Co UE KS Media - Print, TV, Digital National Bank UE Roads and Railways Kuwait Social Media, UE Petrochemicals bu Dhabi Commercial Bank bu Dhabi National Hotels Co ir rabia Real Estate Office RE Residential RE KS ffordable Housing, Kuwait, KS Contracting Kuwait, KS, UE Metals & Mining Women Investors ldar Properties PJSC rab National Bank rabtec Holding Company ramex Dubai Islamic Bank EMR Properties Emirates NBD Emirates Telecom First Gulf Bank National Bank of bu Dhabi *Paid reports ranging from US$100-$500

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