Loan growth to remain strong; mortgage and SME lending will be key drivers. Mortgage lending to drive loan growth in the next two years

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1 Saudi Banking Global Research Sector - Banking June 17, 2013 Saudi Arabia Loan book to grow 13.2%YoY in 2013, led by mortgage and SME lending Interest spread to remain under pressure in 2013; likely to bottom out in 2014 Provisions to decline with improving asset quality Top picks: RJHI, ARNB and AAAL Loan growth to remain strong; mortgage and SME lending will be key drivers Loan growth in the Saudi banking sector is likely to remain strong in 2013, driven largely by newly implemented mortgage lending law and robust small and medium enterprise (SME) lending. Diversification from core oil to non-oil sectors will push the demand for finance in the SME sector. We expect lending by the banking sector to increase 13.2%YoY to SAR641.0bn in. Mortgage lending to drive loan growth in the next two years So far, Saudi banks have not aggressively focused on mortgage lending due to lack of regulations and mortgage structures. This is evident from SAMA s current mortgage penetration statistics, which reveals that less than 4% of total home purchases in KSA are financed through mortgages compared to 7 8% in the MENA region and 14% in the UAE. As per CMA annual report, with implementation of the mortgage law, real estate financing grew ~3YoY to USD10bn in. Housing loans offer a huge opportunity for KSA banks. We believe mortgage finance will be the key driver of loan growth in 14e. Interest spread to remain under pressure in 2013 SAMA s expansionary monetary policy stance is likely to keep interest rates low in 14e. This coupled with rising pricing pressure due to competition and the higher cost of tapping capital market could exert pressure on interest spread in 14e. Due to subdued growth forecast by IMF in the next two years, interest rates are expected to remain under pressure. We foresee the trend reversing after, as interest spreads in the banking sector hit a trough. An optimistic outlook The outlook for KSA s banking sector is optimistic due to a strong loan growth. Also, higher capital adequacy and lower non-performing loans (NPL) depict balance sheet strength. We recommend a STRONG BUY on Al Rajhi Bank (RJHI) and Arab National Bank (ARNB) and BUY on Riyad Bank (RIBL) and Saudi Hollandi Bank (AAAL). We recommend HOLD on Samba Financial Group (SAMBA), Banque Saudi Fransi (BSFR), and The Saudi British Bank (SABB). Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel: (965) Naveed Ahmed, CFA Manager nahmed@global.com.kw Tel: (965) Global Research Global Research - KSA Banking Bank CMP SAR M. Cap SAR mn Div Yield P/E P/B ROAE Target Price SAR Upside Rating RJHI , % % S BUY ARNB , % % S BUY RIBL , % BUY AAAL , % % BUY SAMBA , % HOLD BSFR , % % HOLD SABB , % HOLD Source: Global Research Prices & derived ratios as of 15 June 2013

2 Valuation & Recommendation Valuation methodology For arriving at the fair value of our banks, we have used a blend of two valuation methods: 1. Combination of Cash flow approach represented by the Dividend Discounting Model and Justified P/BV multiple approach using an adaptation of the Gordon Growth Model. 2. Relative valuation using peer group P/BV multiple Dividend Discount Model - DDM The DDM is based on a 4-year forecast of dividends as cash flows ( ). The terminal is calculated using the multiples approach. Long-term justified P/BV multiple is derived on the basis of an adaptation of the Gordon Growth Model. This method uses the sustainable return on average equity (ROAE), cost of equity (COE) and expected growth in earnings (g) to calculate the target P/BV of the bank using the formula: P/BV = (ROE - g) / (COE - g) The dividends for the forecasted period and the terminal value are then discounted back at the cost of equity to arrive at the total net present value (NPV) of the company. Cost of Equity is derived using the Buildup Method as the summation of the following: 1. US 10 Year Treasury Yield currently taken as 2.1% 2. US Risk Premium currently taken as 7.9% 3. Saudi risk premium over US Risk Premium as Add/subtract bank specific premium or discount Relative valuation using weighted P/BV multiple of the peer group In order to incorporate the impact of market forces into our valuation we have introduced the use of weighted P/BV multiple of a peer group as an indicator for price movement. We have selected the Saudi banks under our coverage as a peer group. To get the weighted P/BV we divided the aggregate market capitalization of all the peers by the aggregate book value to get the weighted P/BV multiple. This weighted P/BV is then multiplied with the BV/share of the bank at the next year end, in our case the BV/share at December 31, 2013 to arrive at the fair value of the bank over a medium term investment horizon. Blended Price The blended price is then calculated after applying weight of 8 to the value from DDM and 2 to the value from Relative valuation method. Valuations SAR RJHI ARNB RIBL AAAL SAMBA BSFR SABB Rating S BUY S BUY BUY BUY HOLD HOLD HOLD Upside Potential/(Downside) 23.1% 27.7% % Fair Value: Fair Value - DDM (Weight 8) Fair Value - Peer Group P/BV (Weight 2) Current Market Price as on 15 June Source: Global Research June

3 Valuations SAR mn RJHI ARNB RIBL AAAL SAMBA BSFR SABB DDM PV of dividends (SAR mn) Yr 1 5, , , Yr 2 4, , , Yr 3 4, , , Yr 4 4, , , Terminal 125,863 30,157 34,532 12,958 39,937 25,132 37,258 Terminal Assumptions LT - ROE % 14.3% 18.4% Perpetual growth rate (g) Justified P/BV Multiple (x) Source: Global Research Peer Group P/BV SAR RJHI ARNB RIBL AAAL SAMBA BSFR SABB Peer Group P/BV Multiple (x) BV/Share COE: % US Rf 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% US Risk Premium 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% Saudi Risk Premium Bank Specific Risk Premium % Source: Global Research Peer Group SAR mn M. Cap Equity Profit ROAE P/E (x) P/B (x) RJHI 103,125 41,293 8, % ARNB 25,585 19,424 2, RIBL 36,000 34,709 3, AAAL 12,225 9,275 1, SAMBA 43,740 35,556 4, BSFR 28,025 25,024 3, % SABB 38,200 22,822 3, % KSA Coverage Source: Global Research Prices & derived ratios as of 15 June 2013 June

4 ROE Relative Valuation Global GCC Banking Universe 2 RJHI QNB 2 FGB SHB CBQ SABB 1 1 UNB BSF ANB SAMBA RIBL Doha Bank QIB ADCB Bank Muscat NBAD MARK NBK CBK ENBD KFH P/BV Source: Global Research June

5 Sensitivity Analysis COE vs. Terminal Growth and ROE RJHI COE ##### g ROE COE ARNB COE COE g ROE RIBL COE COE g ROE AAAL COE COE % 12.7% 13.2% 13.7% 14.2% % 12.7% 13.2% 13.7% 14.2% g ROE Source: Global Research June

6 COE vs. Terminal Growth and ROE SAMBA COE COE ##### g ROE 15.1% BSFR COE COE % % g ROE 14.3% % % SABB COE COE % % g ROE 18.4% % % Source: Global Research June

7 ROE Our Top Picks: RJHI: Al-Rajhi Bank is currently trading at a P/B of 2.9x, almost double the industry average (1.5x). The bank can command premium valuation in the sector supported by its robust asset quality, enhanced retail reach in the Saudi market, and highest ROE within our KSA banking universe. With the largest branch network and its international presence, the bank has a wide consumer lending coverage. Over the years, Al-Rajhi has been the leading dividend-distributing bank (among the seven banks in our coverage). During 12, Al-Rajhi had an average dividend payout ratio of 73.1%, and maintained an average dividend yield of 5.1% in past five years. Enhanced dividend yield further supports the bank in commanding premium valuation. Hence, this stock remains at the top among our favourite picks. ARNB: Non-interest income, mainly fee income, is seen as the key driver of Arab National Bank s operating income for the first half of the forecast period when top-line growth for the bank in particular and the sector as a whole is seen to be muted. The bank s fee income increased 21.4%YoY in 1Q13, due to which total non-interest income grew 16.6%YoY. As of 1Q13, ARNB s non-interest income accounts for 38.9% of the total operating income. We believe that increasing transaction sales, rising trade finance, and high stock market volumes would drive fee income in the near future; we estimate a - CAGR of 17%. The bank s non-interest income is expected to increase at a CAGR of 13.1% during 16e. Led by ARNB s strong fundamentals, a slightly higher than expected sector average ROE and its ability to generate strong fee income to fill in at a time when NII is expected to be bogged down, we remain very optimistic about the stock. AAAL: Saudi Hollandi Bank (SHB) is set to capitalize on the expanding economic activity in the Kingdom through a strong presence in project finance activities. Recently, the bank received the Best SME Account and Best SME Banking Customer Service awards from the Banker Middle East. Since the Saudi government is planning to diversify from core oil to non-oil sectors, we expect SME financing to become the next growth driver for Saudi banks. As SHB has a strong presence in SME lending, we expect it to benefit from this development. In our opinion, the loan book would expand at a CAGR of 15.9% during 16e due to robust lending to SMEs. Hence, we add this stock into our favourite picks. Relative Valuation Saudi Banking Universe 2 RJHI 2 SHB SABB 1 ANB BSF RIBL SAMBA P/BV Source: Global Research June

8 SAR bn Key Theme: Loan growth to accelerate on higher mortgage and SME lending Saudi Arabia s banking sector has been on a lending spree amid favorable macroeconomic environment and high government spending. The private sector s investment increased at a CAGR of 8. to USD52.8bn over , accounting for 45.7% of the Kingdom s total Gross Fixed Capital Formation (GFCF). Even during the lean periods of and, KSA s private sector investment remained strong at USD45 46bn. We expect private sector investments to gain pace with the global economic recovery and strong domestic growth. Loans to the private sector have been increasing in tandem with the rise in private sector investments. We believe Saudi banks will continue their strong loan growth trajectory, encouraged by the Kingdom s intrinsic growth drivers and significant scope for mortgage and SME lending. The government s focus on developing the SME and housing finance segments through initiatives and regulatory reforms would provide impetus for banks to increase SME loans and mortgage financing. So far, aggregate bank lending in Saudi Arabia has increased at a CAGR of 11.2% from -. We believe total lending by Saudi banks would expand at a CAGR of 12.1% over 16e on robust government expenditure and favorable macroeconomic conditions. KSA total loan movement 1,400 1,200 1, ,104 1,261 1, Mar-13 Source: SAMA Loan growth driven by economic expansion and higher capital investments Total lending by Saudi banking sector has increased at a CAGR of 10. to SAR1.3tn during 12, led by the Kingdom s strong economic growth and government spending on infrastructure and housing. Despite the prevailing global economic gloom, Saudi Arabia s macroeconomic environment continues to display positive trends. KSA registered 8.6% GDP growth in, while the world s GDP growth remained at 3.2%. However, the IMF forecasts the Kingdom s economic growth to slow down to an annual average rate of 3.4% over 17e. Historically, Saudi Arabia s economic growth has been primarily led by the oil sector. However, going forward, the non-oil sector is likely to be the key driver of KSA s economic expansion. The government has planned massive capital investments in infrastructure and manufacturing sectors. Furthermore, the government has announced a series of financial sector reforms to encourage private sector investments in the sector. As per Zawya Projects Monitor, projects worth USD673.0bn are currently under execution in KSA to be completed over 17e.We believe, these projects would further boost loan books of Saudi banks. June

9 SAR bn Saudi Arabia and World GDP growth (%) 10 KSA government expenditure 1, Saudi Arabia World Source: IMF; Ministry of Finance In addition to the Kingdom s intrinsic growth drivers, we believe the government s initiatives to extend financing to real estate and SME will be the next trigger for loan growth. Mortgage financing, a huge opportunity to be tapped Home ownership and real estate financing in the Kingdom, particularly for low and middle-income segments, have been weak, primarily due to absence of a mortgage law. KSA experiences severe shortage of homes, with just 30 4 of the population currently owning a house. Furthermore, housing loans accounts for just 2% of the Kingdom s GDP. House ownership in KSA remains low Housing loan as a percentage of GDP % 67% 57% 46% China US UK France Germany Saudi Arabia 2 1 6% 2% Germany Malaysia MENA Saudi Arabia Source: US Census Bureau, Nationwide UK, WSJ; Capitas Group International Ltd. Although KSA witnessed a substantial increase in real estate financing, there remains ample scope for growth. Loans disbursed by the Saudi Real Estate Development Fund expanded at a CAGR of 2.1% to SAR78.9mn over Furthermore, as per SAMA s estimates, bank s consumer loan for real estate financing is expected to increase from SAR51bn in to SAR107bn in 2017e. Hence, there exists a huge demand-supply gap in real estate financing. June

10 SAR bn SAR bn Real Estate Development Fund loans 85 Saudi consumer loans to real estate Source: SAMA The Kingdom s Council of Ministers passed a mortgage law in July to address the deficiency in real estate financing. The law aims to regulate real estate financing and investment, and boost the mortgage market while establishing regulations for setting up mortgage companies and their activities. There is a set of five laws under the mortgage law. In the beginning of 2013, the Kingdom issued final regulations for three laws: Real Estate Financing, Leasing and Financial Companies supervision. The laws on Foreclosures and Mortgage Registrations are likely to be issued soon. The mortgage law would come into effect after regulations for the two remaining laws are completed and the final version of the legislation is publicized. Historically, Saudi banks have not pursued mortgage loans aggressively due to lack of regulations and mortgage structures. This is evident from the current mortgage penetration statistics, which reveal that less than 4% total home purchases in KSA are financed through mortgages 1 compared to 7 8% in the MENA region and 14% in the UAE. However, with introduction of regulations and laws, and implementation of the mortgage law, we expect real estate loans to register strong growth. Real estate financing grew ~3YoY to USD10bn in 2. Housing loans offer a huge opportunity for banks in KSA. As per The Financial Times (FT) article, Saudi Arabia will require at least 1.5mn new affordable homes in the next few years, while the ninth development plan forecasts requirement for 250,000 new units per year. Besides introducing the mortgage law, the government has taken additional initiatives to boost real estate financing. As a part of its plans to provide alternative channels for real estate investment, the government will set up Saudi Real Estate Refinancing Company, a real estate refinancing company, through Public Investment Fund with a paid up capital of SAR5bn. This entity would purchase mortgages from real estate companies, securitize them and issue mortgage-backed securities. We believe implementation of this law will increase Saudi nationals access to the real estate market and drive home ownership and mortgage financing. This is likely to result in higher mortgages and, consequently, higher retail business for banks. According to Capitas Group International Ltd., a Saudi Arabia-based Islamic finance company, mortgage law can boost residential lending by about USD32bn annually. SME funding, the next growth trigger Along with improving growth outlook for real estate financing, we see a strong pickup in SME funding in the coming years. SME financing currently forms a nascent market, with SME loans accounting for just 2% of lending by Saudi banks. This is extremely low compared to in other GCC nations, 1 in non-gcc MENA region countries and 2 in high-income OECD economies. SMEs form a significant part of KSA s economy, with the sector accounting for ~93% of total enterprises in the Kingdom and ~2 of the total employment. SMEs in KSA find it difficult to fund their expansion plans due to poor management, lack of adequate guarantees and difficulty in obtaining finance. 1 SAMA 2 CMA Annual Reports June

11 SAR mn Qatar Bahrain KSA GCC Kuwait Oman UAE Syria Egypt Palestine Jordan Non-GCC Tunisia Lebanon Yemen Morocco SME loans to total loans in MENA Source: Joint Survey of Union Arab Bank and World Bank Consequently, the Ministry of Finance in collaboration with Saudi banks established a guarantee program, Kafalah, to extend financing to SMEs. This program, with a capital of SAR200mn, is managed by the Saudi Industrial Development Fund (SIDF) to offer guarantees to financial establishments to minimize the risk of offering funds to SMEs and encourage banks to finance SMEs. Since the inception of the program in FY until March 2013, the Small and Medium Enterprises Loan Guarantee Program has approved 4,756 guarantees totaling SAR203bn against a total commercial banks financing of SAR4.8bn extended to 2,887 small and medium enterprises comprising different sectors in all administrative regions of the Kingdom. There are various other programs offering support to SMEs such as financing loans granted by Saudi Credit and Saving Bank to young people and small businesses; the Centennial Fund and Abdul Latif Jameel s Bab Rizq Jameel program, which provides material support to projects initiated by the youth and offers training courses. Moreover, Saudi Credit and Savings Bank's capital has been increased to SAR36bn to provide more loans to establish SMEs. Funding by SIDF under the Small and Medium Enterprises Loan Guarantee Program 1, ,800 1,500 1, Value of Guarantees (SAR mn) Source: Joint Survey of Union Arab Bank and World Bank Number of Guarantees - RHS The government s initiatives to boost SME lending by banks have led to a 38%YoY increase in the value of SME funding to SAR1.8mn in from SAR1.3mn in. We believe the loan guarantee schemes for bank lending to SMEs will soften the cautious approach adopted by Saudi banks toward SME lending. Moreover, it offers low risk and high yield lending opportunities for banks. Furthermore, KSA banks are likely to emphasize more on SME lending in the current scenario of low interest rates and investment returns. June

12 Agri. Manuf. Mining Electricity, Water, Gas & Health Building & Const. Commerce Transport & comm. Finance Services Misc. Government Total loans Loans to infrastructure and manufacturing sectors to increase Infrastructure and manufacturing sectors have been the major drivers of bank credit in the Kingdom. Loans to the social infrastructure sector increased at a CAGR of 41.4%, while that for transport and communications expanded 18. over The manufacturing sector s loan growth stood at 21.6% over the same period. Loan growth in these segments is attributable to increased government spending, higher private sector participation and improved financing environment. These three sectors accounted for 30.7% of incremental lending in KSA s loan growth driven by infrastructure and manufacturing sectors % 6% 22% 22% 4% 14% 41% 18% 14% 13% 14% 13% 9% 44% 7% 17% 27% 11% 14% 18% 11% % CAGR CAGR Source: SAMA We believe infrastructure and manufacturing sectors will continue to lead the lending growth over our forecast period. We expect contribution of these sectors to total loans given by Saudi banks to increase two fold by the end of. Growth in these sectors would be led by strengthening business confidence and improvement in the projects market. As per Zawya Project Monitor, out of USD673.0mn projects under execution in Saudi Arabia, USD224.8bn is related to infrastructure and power and account for 33.4% of the total. NIMs to remain under pressure in the near term Saudi Interbank Offered Rate (SIBOR), the benchmark for commercial and consumer lending rates, is largely dependent on the US policy rates. With US short-term interest rates unchanged for the past four years (near ) and a decline in long-term interest rates to historical lows, SIBOR and lending rates of Saudi banks have remained under pressure. Furthermore, stiff competition in the Kingdom s banking space has made it difficult for banks to raise interest rates. Aggregate interest yield of banks has declined to 3.4% in 1Q13 from 6.9% in 4Q09. The current scenario of low interest rates and high competition is expected to keep interest yields of KSA banks low in the near term. However, in the long run, we expect interest yields to pick up onward, boosted by improvement in US interest rates and rising demand for domestic credit. We expect average interest spread of Saudi banks to reach at 4. in from 3. in. June

13 SAR bn Saudi Banks interest yield forecast % % % 3.6% % Source: Global Research Change in deposit mix, with increasing proportion of low-cost demand deposits The deposit mix of Saudi banks has undergone significant changes over the last few years with the proportion of low-cost demand deposits to total deposits increasing tremendously. Higher proportion of low-cost demand deposits has squeezed the cost of funds of banks. The average cost of funds of KSA banks has declined from 2.3% in to 0. in 1Q13. While we expect total lending of banks to increase on abundant liquidity in the economy and growing demand, cost of funds will see upward pressure due to intense competition. We expect the average cost of funds of Saudi banks to rise to 0.9% by. Increasing proportion of demand deposits 1,200 1, Cost of funds forecast Time & Savings Deposits Demand Deposits Source: SAMA, Global Research The combination of ample liquidity in Saudi Arabia and intense competition in the banking space is expected to keep net interest margins (NIM) under pressure in We expect average interest spread of banks to decline to 3.1% in from 3.2% in. However, we expect the pressure on NIMs to ease in the long run, aided by global recovery and high loan growth. However, rising cost of fund may offset the benefit from rising interest yield. We believe average interest spread will improve to 3.3% by the end of. June

14 SAR bn SAR bn Interest spread with growth forecasts % 3.7% 3.6% 3.4% 3.2% 3.1% 3.1% 3.2% 3.3% Source: Global Research Non-interest income to compensate for slower interest income Saudi banks have started improving their income mix toward recurring non-interest sources to offset the impact of lower NIMs. For the banks under coverage, non-interest income accounted for ~37% of total income in 1Q13. We expect its contribution to increase to 40.2% in, as banks increase their focus on generating higher transaction sales, trade finance, and share trading, among others. Furthermore, most banks operate brokerage arms through subsidiaries. We expect an increase in share trading activity in Tadawul in 2013 to drive fee income for banks. We expect the aggregate non-interest income to increase at a CAGR of 10.8% from - for banks under our coverage. Aggregate non-interest incomes (with break-up if possible) Average non-interest income to total income % 4 38% 36% 34% 32% 3 Non-Interest income YoY Growth Non-interest income % of total (RHS) Source: Global Research Ample liquidity and strong capital adequacy provides scope for loan growth Stable oil prices and significant growth in budgeted income have led to ample liquidity in KSA s economy. This has enabled the banks to expand their balance sheet sizes, propelled by rising deposits. Furthermore, SAMA s stringent regulations ensured that Saudi banks have strong capital adequacy and liquidity ratios. Average capital adequacy of banks in KSA stood at 17.4% in June

15 Bahrain UAE Kuwait Egypt KSA Jordan Qatar Indonesia Turkey Oman Malaysia SAMBA Al Rajhi Riyad SHB BSF SABB ANB, higher than the SAMA s target of 8%. As per Basel III, the banks are supposed to maintain Tier I capital ratio at 6%. At present, the banks are way above their regulatory requirements in terms of capital adequacy. Comparison with other MENA region countries Capital adequacy ratio % 17.7% 17.6% % 14.8% Source: Global Research Since CAR ratio of all the Saudi banks are way above than SAMA s 8% guideline, we believe at this point of time, no Saudi bank requires equity or debt capital infusion. As per FY12 financials, SAMBA has achieved the strongest capital adequacy, followed by Al Rajhi and Riyad Bank. Arab National Bank has the lowest capital adequacy of 14.8%, which is much higher than the regulatory requirement. The loan-deposit (L/D) ratio of most KSA banks is lower than the 8 cap set by SAMA. This provides considerable opportunity for banks to expand their loan books. We expect the aggregate L/D ratio for banks under coverage in this report to increase to 8 by from 82% in, supported by healthier loan growth vis-à-vis deposits growth. L/D ratio Source: Global Research Adequate provisioning boosts confidence Saudi Arabian banks saw their asset quality deteriorate in the financial crisis of, with the NPL ratio reaching its peak of 3.2% in ; asset quality has however improved since then to 1.6% in, one of the lowest in the region. In the loan books of Saudi banks, majority of NPLs pertain to loans extended to the commerce sector. The sector accounted for around 35-4 of total NPLs in last three years. Thus, transformation in the loan mix from the commerce sector toward the June

16 ROE 3-yr Earnings CAGR consumer sector is expected to result in an improvement in asset quality. Furthermore, government initiatives like credit guarantee schemes securing loan books are also expected to bode well for the banks. We expect the asset quality of banks to stand firm with average NPLs of the banks under coverage to remain at around 1.6%. Moreover, higher provisioning by Saudi banks limits any major negative impact arising from asset quality risks. Average NPL coverage ratio of the banks under our coverage has increased to 152.6% in from 101.7% in. We expect NPL coverage to strengthen at 168.2% in. NPL ratios NPL coverage % Source: Global Research Valuations attractive as compared to GCC peers % 14% 20. KSA Qatar 12% UAE KSA Kuwait UAE Kuwait 1 8% 6% Qatar 4% 5. 2% P/BV P/E Source: Global Research June

17 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Relative price movement of Saudi Banking stocks in last two years RJHI SAMBA RIBL SABB ARNB BSFR SIBC ALBI BJAZ ALINMA AAAL Source: Bloomberg, Global Research Relative performance of TASI and Saudi Banking Index in last two years Source: Bloomberg, Global Research Tadawul Banking Index TASI GCC markets on a rise GCC equity indices rallied in recent past. All bourses gained during the 2013 with Dubai experiencing the highest growth of 44.6%YTD. The index rallied to the highest level since November buoyed by the increased institutional investor interest. The performance of Abu Dhabi index remained strong with a growth of 38.YTD. Kuwait stock index, the third best performer, gained 34.YTD. Supported by strong corporate earnings and higher dividend payouts, Qatar, Bahrain and Saudi Arabia experienced a growth of 12.7%YTD, 12.YTD, 7.8%YTD, respectively, since 2013 beginning. Considering the banking and financial services index, Saudi Banking Index has given a return of 8.7%YTD. Dubai remained the highest performer with a return of 50.1%YTD, followed by Abu Dhabi 40.4%YTD. Oman, Kuwait, Qatar and Bahrain experienced a growth of 18.YTD, 9.8%YTD, 14.4%YTD, 27.1%YTD, respectively, since 2013 beginning. Looking at the sound performance of GCC banking sector, we expect overall performance of banking sector in GCC to improve going forward. June

18 May-12 Jun-12 Jun-12 Jul-12 Jul-12 Jul-12 Aug-12 Aug-12 Sep-12 Sep-12 Oct-12 Oct-12 Nov-12 Nov-12 Dec-12 Dec-12 Jan-13 Jan-13 Jan-13 Feb-13 Feb-13 Mar-13 Mar-13 Apr-13 Apr-13 May-13 May-13 Jun-13 Relative performance of Banking Indices of GCC KSA has been the worst performer Dubai Qatar KSA Kuwait Oman Abu Dhabi Source: Bloomberg, Global Research June

19 Valuations RJHI: We decreased our net profit expectations by 5.3% for on an increase in provision expenses by 1Q13; however, we revised our net financing forecast by 2.9% upward due to a stable top-line growth in 1Q13. We expect that the bank will continue to witness a growth in loan book though at a slower rate, due to the large base. Estimates for total operating income was revised up 4.2% for the year. These revisions were based on our discussion with the management and the guidance provided by them. We also valued the bank on industry multiple, but since RJHI is already trading at a very high P/B multiple (2.9x) compared to the industry average (1.5x), we have not included the weightage of relative valuation into our stock price calculation. We have revised our fair value for the stock to SAR84.6 per share, with a potential upside of 23.1%. Hence, we recommend a STRONG BUY on the stock. ARNB: Due to increasing interest expense, we have decreased our net interest income forecast for by 5.3%. Additionally, higher provision estimates led to a decline in our net profit estimates by 5.2% from our earlier estimates. However, we expect fee income to grow 24.7%YoY in, which will become the key driver of operating income growth. We expect the bank s deposits to increase by 13.7%YoY in, easing the cost of fund. With an 80:20 weighted average of DDM and relative valuation methods, we have arrived at a target price of SAR38.4 per share. This indicates a potential upside of 27.7% for the stock from the current level. We recommend a STRONG BUY on the stock. RIBL: RIBL has witnessed a nominal growth in interest income in 1Q13 mainly due to falling interest rate and slower loan growth; however, looking at RIBL s sound fee income growth, strong capital adequacy, and stable dividend payout, we believe the stock has a good long-term prospect. We have revised our loan-book estimate for by 3.7% upward and non-interest income by 8.6% upward. However, on higher operating and provisions estimates, we have revised our net profit estimate by just 3. upward for. Our fair value estimate for the bank remains at SAR28.8 per share. This indicates a 20. upside from the current market price. Hence, we recommend BUY on the stock. AAAL: Saudi Hollandi Bank witnessed a strong loan-book growth and NII growth in 1Q13 due to higher SME lending. Also, fee income increased by 14.3%YoY in 1Q13. We expect loan book to grow by 19.9%YoY in. Since the bank has witnessed an above expected result in 1Q13, we remain bullish on the stock. We have revised our net profit estimate by 11.8% upward mainly due to low provision expenses. Our fair value estimate for the stock remains at SAR36.8 per share, which indicates a 19.3% upside from the current market price. Hence, we recommend BUY on the stock. SAMBA: In 1Q13, SAMBA s net interest income remained almost flat mainly due to falling spread. We have revised our net profit estimate of the bank by 0.1% downward for. Due to weaker-than-expected results, we have taken a conservative approach and decreased NII estimates of the bank by 5.8% in. We also expect operating expenses to increase in. Our fair value estimate for the bank remains at SAR52.5 per share. This indicates 8. upside from the current market price. Hence, we recommend HOLD on the stock. BSFR: BSFR witnessed a 0.3% decline in NII during 1Q13. Due to weaker-than-expected results, we have taken a conservative approach and made a downward revision from the top to bottom line. We revised the net profit estimate by 4.4% downward for. Additionally, we have decreased the terminal growth rate for the bank to 2. from 3. earlier, in line with the growth rate for other banks. We also expect provision expenses to increase in. Our fair value estimate for the bank remains at SAR33.5 per share. This indicates 8. upside from the current market price. Hence, we recommend HOLD on the stock. SABB: SABB s net interest income grew by 14.2%YoY in 1Q13, owing to the loans and advances growth of 11.1%YoY. Noninterest income also grew 20.1%YoY during the same period, driven by 16.3%YoY growth in fee income. However, provisions increased significantly in the same period (186.8%YoY), which prompted us to have a conservative outlook on the stock. We revised the net profit estimate by 7.6% upward for, as we expect provisions to decrease from the current levels. Our fair value estimate for the bank remains at SAR39.3 per share. This indicates 3. upside from the current market price. Hence, we recommend HOLD on the stock. June

20 SAR bn SAR bn Saudi Banking Universe Aggregate Forecast Return Ratios Profitability ROAA (LHS) ROAE (RHS) Net Profit (LHS) Growth (RHS) Top-line Growth & Recurring Income Loans & Deposits Growth % 84% 82% 8 78% 76% 74% 72% 7 68% % 83% 82% 81% 8 79% NII (LHS) Recurring/Total Inc (RHS) Total Income (LHS) Loans (LHS) Simple LDR (RHS) Deposits (LHS) Asset Quality % 172% 152% 132% 112% 92% Provisioning Requirement NPL Ratio (LHS) Coverage (RHS) Provisioning Charge (LHS) Provisioning/ Total Income (RHS) Source: Company Accounts, Global Research June

21 Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB Peer Group Assets Deposits SHB 6% ANB 12% Al Rajhi 23% SHB 6% ANB 12% Al Rajhi 24% BSF 13% BSF 13% SAMBA 17% SABB 13% Riyad 16% SAMBA 16% SABB 13% Riyad 16% Gross Loans Impaired Loans BSF 14% SHB 6% ANB 12% Al Rajhi 24% BSF 8% SHB 6% ANB 1 Al Rajhi 28% SAMBA 1 SABB 13% Riyad 16% SAMBA 19% SABB 13% Riyad 16% ROAE ROAA Source: Company Accounts, Global Research Figures are for June

22 Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB SAR mn Peer Group Asset Quality Provisioning Requirement NPL's (LHS) NPL Ratio (RHS) Coverage ratio Cost of risk Spreads Cost Efficiency 5 4% 4 3% 3 2% 2 1% 1 Yield on Earning assets Cost of funds Spread Dividend Yield 7% 6% 4% 3% 2% 1% Capital Adequacy Source: Company Accounts, Global Research Figures are for June

23 Comparative Charts June

24 Banking & Economic Statistics KSA s share in GCC GDP Population UAE 26% Kuwait 13% Oman UAE 13% Kuwait 9% Oman 7% Qatar 4% Qatar 13% Saudi Arabia 43% Saudi Arabia 67% M2 Assets Kuwait 13% Oman 4% Kuwait 12% Oman 4% UAE 29% Qatar 13% UAE 3 Qatar 16% Saudi Arabia 41% Saudi Arabia 33% Loans Deposits Kuwait 12% Oman Kuwait 13% Oman 4% UAE 3 UAE 33% Qatar 16% Qatar 13% Saudi Arabia 32% Saudi Arabia 37% Source: Company Accounts, Global Research Figures are for June

25 Banking & Economic Statistics KSA s share in GCC M2/GDP Loans/GDP Kuwait Oman Qatar Saudi Arabia UAE GCC Kuwait Oman Qatar Saudi Arabia UAE GCC Loans per capita Deposits per capita Kuwait Oman Qatar Saudi Arabia UAE GCC - Kuwait Oman Qatar Saudi Arabia UAE GCC ROAA ROAE Kuwait Oman Qatar Saudi Arabia UAE GCC 0. Kuwait Oman Qatar Saudi Arabia UAE GCC Source: Company Accounts, Global Research, Bloomberg Figures are for June

26 Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB Al Rajhi Riyad SABB SAMBA BSF SHB ANB Forecast Comparison Average ROAE Top-line Growth 2 16% 12% 8% 4% e e CAGR Profit Growth 21% 18% 1 12% 9% 6% 3% Cost Efficiency (Average Cost-Income Ratio) 46% 4 34% 28% 22% 16% e CAGR e Loans Growth Asset Quality (2013) 2 8,000 7,000 16% 6,000 12% 5,000 4,000 8% 3,000 4% 2,000 1, e CAGR Provisions NPL Ratio (%) Source: Company Accounts, Global Research June

27 Company Profiles June

28 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Al Rajhi Bank (RJHI) Market Data Bloomberg Code: RJHI AB Reuters Code: 1120.SE CMP (15 June 2013): SAR68.8 O/S (mn) 1,500 Market Cap (SAR mn): 103,125 Market Cap (USD mn): 27,493 P/E (x): 11.9 P/BV (x): 2.9 Price Performance 1-Yr High (SAR): 77.0 Low (SAR): 61.0 Average Volume: (000) 1, m 3m 12m Absolute (%) (6.8) Relative (%) Price Volume Performance 7,500 6,000 4,500 3,000 1, Growth in retail lending drives top line Mortgage law to boost retail lending Loan book to continue growing but at a slower rate Valuation looks attractive, we recommend STRONG BUY Significant size calls for availing better business opportunities Al Rajhi is the largest bank in the Kingdom and accounts for ~17% share of both the financing and deposit market of KSA. We expect the bank s asset base to increase at a CAGR of 12.7% during 16e, driven by 14.7% cumulative growth in loan book. Furthermore, the bank is continuously benefitting from emerging opportunities in Islamic banking, locally and abroad. It enjoys the best ROE from amongst its peers averaging at 26.6% over the forecast period as against the remaining banks which are not forecast to post an ROE over 2 the bank s ability to consistently deliver strong financial results as well as maintaining a sound balance sheet and asset quality portrays a positive outlook. Growth in retail lending drives top line Increased retail lending is the key driver of the bank s overall loan growth. RJHI s net interest income (NII) rose 3.YoY in 1Q13 as the loan book expanded 18.9%YoY to SAR180.4bn. In, retail lending accounted for more than 7 of the total loans. With its 497 branches across the Kingdom and overseas presence, 100 dedicated women-only branches, 3,100 ATMs, 23,000 POS terminals, and 130 remittance centers, the bank managed to retain the highest market share in retail lending. Growth in deposits has exceeded the growth in loan book (24.YoY), consequently, the net loan-to-deposit ratio declined to 77.9% in 1Q13 from 81.6% in 1Q12. We expect deposits to increase at a CAGR of 13. from to, and the loan-todeposit ratio to remain at 84.8% in. Robust credit portfolio drives growth Strong Buy Target Price SAR 84.6 The bank s net loans increased 18.9%YoY in 1Q13, exceeding the overall growth of 12.7% for the sector. We believe RJHI s wider retail network and strong brand franchise have resulted in a robust credit portfolio, ensuring a predictable and sustainable revenue stream. We expect the loan book to increase at a CAGR of 14.2% to SAR361bn in. Volume ('000) Naveed Ahmed, CFA Manager nahmed@global.com.kw Tel.: (965) RJHI (SAR) Investment Indicators Net Profit Growth 6.9% % 14.4% 17.2% NII Growth 5.6% 13.3% 13.8% 17.2% 19. Loan Growth 22.8% 18.2% % 14.9% Deposits Growth % % 15. ROE 25.3% 25.4% 26.6% 26.9% 27.6% Dividend Yield* 5.9% % 6. P/E Ratio (x)* P/BV Ratio (x)* Source: Company Reports & Global Research Market price for 2013 and subsequent years as per closing prices on Tadawul on 15 June 2013 June

29 Mortgage law to boost retail lending RJHI has the largest branch network and dominates the Saudi banking sector. Opening up of mortgage housing finance is likely to spur retail business opportunities for the bank. We estimate the bank s retail lending portfolio to grow c11% during 16e, largely driven by mortgage finance. Low cost of fund aids the bottom-line, but margin pressure persists RJHI s cost of fund is the lowest among Saudi peers. This is primarily ascribed to the bank s large demand deposit base (more than 8 of total deposit). In 1Q13, the cost of fund remained at 0.2%, much lesser than the industry average of 0.. However, interest expense increased 100.3%YoY during the quarter, exerting pressure on margin. We expect, cost of fund to remain at 0.3% in, however, due to competitive pricing pressure we believe, funding cost will increase post. We assume cost of fund to rise to 0.7% in. So far interest spread of the bank has fallen to 4. in from 6.3% in, mainly due to fall in interest yield from 6.7% to 4.7%. Due to the IMF s subdued GDP growth forecast for e, we believe interest rates would remain low, which may further exert margin pressure. However, we expect interest spread to bottom out in and start picking up from with economic revival. We expect RJHI s spread to range ~4.3% during e and reach 4. in. Declining provisions add to profit The bank s NPL ratio declined to 1.6% in 1Q13 from 1.7% in 1Q12. During the quarter, provision expense increased 3.2%YoY, but declined 25.2% on QoQ basis, reflecting the bank s decreasing need to provide for its delinquent accounts. Provision coverage remained at 147.1% in 1Q13. We expect RJHI s NPL ratio to reach 2. in, with a coverage ratio of 225.1%. Change in estimates Based on the recent performance of the bank in 1Q13, we revised our assumptions for loan and deposit growth for RJHI in. Hence, our estimates for loan and deposits increased 3. and 7.7%, respectively, for. This combined with a moderate increase in interest spreads led to a 2.9% increase in net interest income for RJHI against the previous forecast. Further, we have revised our operating income forecast up by 4.2%. We also revised up our estimates for provisions, which led to a decrease in our profit estimates by 5.3%. Change in estimates SAR mn Earlier Estimates Revised Estimates % Change Gross Loans 202, , Deposits 231, , % Net Financing and Investment Income 10,262 10, % Operating Income 14,620 15, % Provision for Loan Losses 1,283 2, % Net Profits 9,156 8, % Source: Global Research Valuation looks attractive, we recommend STRONG BUY RJHI is trading at a P/BV ratio of 2.9x at a significant premium to its Saudi peers (1.5x). However, we believe RJHI should command a higher premium due to its low cost of funding, significantly high ROE, strong capital strength, industry leading spread, and a wide retail lending base. RJHI stands to benefit the most from its large branch network and its international presence in Malaysia, Kuwait, and Jordan. The stock is trading at one of its lowest multiples of past 3 years, compared to its all time high of 3.8x in. Our valuation of SAR84.6/share indicates a 23.1% upside from the current market price of SAR68.8, translating into a STRONG BUY rating for the stock. June

30 RJHI in Charts Loans Classification Istisnaa & others 0.3% Murabaha 8% Mutajara 2 Deposits Classification Time investments 12% Other customer accounts 2% Installmen t Sales 72% Demand deposits 86% Funding Mix Interbank 1% Investment Mix Equities & Mutual funds 4% Customer Deposits 99% Debt securities 96% Loans & Deposits Growth Return Ratios Loans (LHS) Simple LDR Deposits (LHS) ROAA (LHS) ROAE (RHS) Source: Company Accounts, Global Research June

31 SAR mn SAR mn Top-line Growth & Recurring Income Profitability 18% 9 16, % 14,000 12% 93% 12, % 6% 3% 92% 91% 10,000 8,000 6, , % 89% 2,000-6% 88% 0-2 NII (LHS) Total Income (LHS) Recurring/Total Inc. (RHS) Net Profit Growth Asset Quality Provisioning , , ,000 10,000 8,000 6,000 4, , NPL Ratio- LHS Provisioning Coverage - RHS Provisioning charge Provisioning/ Total Income Spreads Cost Efficiency % % % -0.6% -0.9% % -1.2% % 0.2% % -2.1% % Yield on Earning Assets Cost of Funds Spreads (RHS) Cost to Income Ratio OPEX/Average Assets Source: Company Accounts, Global Research June

32 Ratio Analysis Balance Sheet Income Statement Financial Statements (SAR mn) Gross Financing Income 9,091 8,944 9,408 10,687 12,198 14,358 17,231 Investment Income Income paid (230) (254) (346) (593) (928) (1,491) (2,389) Financing and Investment income, net 9,122 9,070 9,501 10,558 11,763 13,390 15,396 Fees from banking services, net 1,634 2,298 3,086 3,530 3,978 4,341 5,018 Other Investment Income (Sale of vehicles) Dividend, Other and Forex Income 737 1,134 1,396 1,142 1,239 1,343 1,457 Total Non-Commission Income 2,383 3,432 4,482 4,672 5,216 5,684 6,475 Total Operating Income 11,506 12,502 13,983 15,230 16,980 19,074 21,871 Total Operating Expenses (2,981) (3,479) (3,779) (4,258) (4,806) (5,425) (6,228) Impairment charge for financing & other, net (1,754) (1,645) (2,319) (2,298) (2,106) (2,132) (2,143) Total operating profit after PFIs, net 6,771 7,378 7,885 8,675 10,068 11,517 13,499 Minority interest Net Income 6,771 7,378 7,885 8,675 10,068 11,517 13,499 Cash & balances w ith SAMA 19,475 20,419 30,804 28,129 32,744 41,674 53,803 Due from banks & other FIs 11,118 14,600 16,557 18,213 20,034 22,038 24,241 Investments 28,247 38,802 40,880 43,997 46,347 48,838 51,479 Financing, net 120, , , , , , ,657 Property & equipment, net 3,395 3,624 3,818 4,149 4,451 4,721 4,925 Other Assets, net 2,542 2,973 3,382 3,712 3,926 3,995 4,066 Total Assets 184, , , , , , ,172 Due to banks & other FIs 5,414 2,717 2,235 2,365 2,720 3,241 3,999 Customer Deposits (inc. other customer accounts) 143, , , , , , ,231 Other Liabilities 6,045 6,792 7,336 7,483 7,632 7,785 7,941 Total Liabilities 154, , , , , , ,171 Share capital 15,000 15,000 15,000 15,000 15,000 15,000 15,000 Statutory reserve 12,112 13,956 15,000 15,867 16,874 18,026 19,376 Other Reserve ,470 1,470 1,470 1,470 1,470 General reserve Retained earnings ,148 3,317 6,740 11,117 16,516 Proposed gross dividends 3,000 3,750 3,850 5,638 5,638 5,638 5,638 Total Shareholders' Equity 30,318 33,489 36,469 41,293 45,723 51,251 58,001 Total Liabilities & Shareholders' Equity 184, , , , , , ,172 Return on Average Assets 3.8% 3.6% 3.2% 3.1% 3.2% 3.3% 3.3% Return on Average Equity 25.3% 25.9% 25.3% 25.4% 26.6% 26.9% 27.6% Non Financing Income/ Operating Income 20.7% % 30.7% 30.7% 29.8% 29.6% Recurring Income/ Operating Income % % % Financing Assets Return % 4.7% 4.6% 4.6% 4.9% 5.2% Cost of Funds 0.2% 0.2% 0.2% 0.3% 0.4% % Net Spread 5.9% 5.2% % 4.3% 4.4% 4. Cost to Income Ratio 25.9% 27.8% % 28.4% 28. OPEX/Average Assets 1.7% 1.7% Net Financing to Customer Deposits 83.9% 78.9% 77.7% 81.1% 81.4% 81.2% 81. Non Performing Financing 2,662 2,396 3,530 4,497 5,037 5,481 6,003 Financing Loss Reserve 3,616 3,638 4,833 7,131 9,237 11,369 13,512 NPFs to Gross Financing 2.2% 1.7% % 2.2% 2.1% 2. NPF Coverage 135.8% 151.8% 136.9% 158.6% 183.4% 207.4% 225.1% Cost of Risk (bps) Equity to Gross Financing % 20.6% 19.8% % 18.9% Equity to Total Assets 16.4% 15.2% 13.6% 13.8% 13.8% 13.6% 13. Dividend Payout Ratio % 72.6% Adjusted EPS (SAR) Adjusted BVPS (SAR) Market Price (SAR)* Dividend Yield 4.2% 5.4% 5.9% % 6. P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research* * Market price for 2013 and subsequent years as per closing prices on June 15, 2013 June

33 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Arab National Bank (ARNB) Market Data Bloomberg Code: ARNB AB Reuters Code: 1080.SE CMP (15 June 2013): SAR30.1 O/S (mn) 850 Market Cap (SAR mn): 25,585 Market Cap (USD mn): 6,821 P/E (x): 9.6 P/BV (x): 1.4 Price Performance 1-Yr High (SAR): 31.5 Low (SAR): 25.0 Average Volume: (000) Slow NII growth is a concern Non-interest growth drives operating income Increasing provisions dent bottom line Valuation looks attractive, we recommend STRONG BUY Slow NII growth is a concern Strong Buy Target Price SAR 38.4 ARNB s interest income rose 8.8%YoY in 1Q13, whereas interest expense increased 66.4%YoY, mainly due to growth in time deposits and competitive market pressure; NII remained flat during the quarter. However, time deposits are coming down on a quarterly basis and demand deposits are growing, so we expect there will be some relief in terms of interest expense in the upcoming quarters. Gradual change in deposit mix will also help to tame the funding cost of the bank. 1m 3m 12m Absolute (%) Relative (%) Price Volume Performance 1, NII growth is expected to remain low during due to pressure on spreads and slower growth in loans. In 1Q13, spreads fell 15bps, where as the bank s NIM decreased to 2.8% in 1Q13 from 2.9% in 1Q12. We expect interest rates to remain sluggish over the next two years; hence, margin pressure would persist. However, we expect spreads to improve onward as interest rates increase. We expect interest spread to reach 3.1% in after touching 2.9% in 2013 and NII to increase at a CAGR of 12. during 16e. 1, Non-interest to drive growth when NII is losing steam Non-interest income, mainly fee income, is the one of the key driver of ARNB s operating income growth. The bank s fee income increased 21.4%YoY in 1Q13, due to which total non-interest income grew 16.6%YoY. As of 1Q13, ARNB s non-interest income accounts for 38.9% of the total operating income. We believe increasing transaction sales; rising trade finance and high stock market volumes would drive fee income in the near future. The bank s non-interest income is expected to increase at a CAGR of 13.1% during 16e bringing in significant revenue at a time when NII is expected to be bogged down Volume ('000) Naveed Ahmed, CFA Manager nahmed@global.com.kw Tel.: (965) ARNB (SAR) Investment Indicators Net Profit Growth 9.2% 12.1% 15.8% 19.8% 17.1% NII Growth % % 15.2% Loan Growth Deposits Growth 22.4% 13.7% 11.8% 11.8% 13.8% ROE % 16.8% 17. Dividend Yield* % 3.9% 4.6% 4.7% P/E Ratio (x)* P/BV Ratio (x)* Source: Company Reports & Global Research Market price for 2013 and subsequent years as per closing prices on Tadawul on 15 June 2013 June

34 High deposit growth provides adequate liquidity The bank s total deposits increased 20.3%YoY in 1Q13, led by 31.7%YoY growth in time deposits. Demand deposits account for 50.6% of the total followed by time deposits (46.4%). The bank s loan-to-deposit ratio remained at 76.2% in 1Q13, much lower than the SAMA s guideline of 8, reflecting adequate liquidity for loan growth. We expect deposit growth to slow down during 14e due to the overly liquid position of the bank. We understand that the bank will focus on shifting its deposit mix towards demand deposits and shed off expensive time deposits to rein in its cost of funds. As a result deposit growth will slow down while deposit costs would improve simultaneously. We assume deposit growth would pick up onward, as the economy revives and the hunger for aggressive lending sets in, and increase at an average rate of 12.8% during 16e. Increasing operating cost to be outpaced by revenues In 1Q13, the bank s operating cost grew 9.2%YoY, mainly due to increase in salary expenses. Notably, ARNB increased its headcount by 9.YoY in, which remained the key reason behind the increasing salary expense. Increasing operating cost dents the bottom-line; however, we believe due to rising operating income, operating expenses would remain at a similar range in relative terms. The cost-to-income ratio is expected to reach 37.8% in from 39.8% in. We expect the bank s operating cost to, increase at a CAGR of 11.3% during 16e. Increasing provisions dent bottom line ARNB s total provisions increased 18.2%YoY in 1Q13; however, the NPL ratio decreased significantly to 1.6% from 2.1% in 1Q12 yet increased by 10bps over 4Q12. The bank s NPL coverage rose to 199.6% in 1Q13 from 159. in 1Q12; Given the recent rise in NPLs, we have taken a conservative approach over the bank s impairment rate and expect it to touch 1.9% during the current year before easing off gradually to 1.7% by. So far provision coverage of the bank has increased to 205.3% in from 75.9% in. We assume provisions would decrease and the coverage ratio would reach 192.2% by (from 205.3% in ). Change in estimates: Based on the stable 1Q13 results, we have rationalized our assumptions of loan and deposit growth for ARNB in. Hence, our estimates for loans and deposits have been increased by 3.6% and 9., respectively, for. However, we believe interest rates will remain low during 14e, having a slightly more pronounced effect on the top-line than what we previously thought; we have decreased our forecast for net interest income by 5.3%. We also revised up our estimates for provisions, which led to a decline of 5.2% in our profit estimates. Change in estimates SAR mn Earlier Estimates Revised Estimates % Change Gross Loans 98, , % Deposits 112, , NII 3,661 3, % Operating Income 5,328 5, % Provision for Loan Losses % Net Profits 2,802 2, % Source: Global Research Valuation looks inexpensive, we recommend STRONG BUY ARNB is trading at a P/BV ratio of 1.4x which is at a discount of 9. to its KSA peers. However, we believe ARNB should command a premium due to its strong capital strength, adequate liquidity, and stable loan growth. The stock is fundamentally strong which makes it a very attractive pick. Our valuation of SAR38.4/share indicates a 27.7% upside from the current market price of SAR30.1, translating into a STRONG BUY rating for the stock. June

35 ARNB in Charts Loans Classification Deposits Classification Credit cards Other 3% Consumer loans 2 Demand 49% Time 48% Commercia l loans & overdrafts 7 Saving Funding Mix Investment Mix Borrowings 1% Interbank 6% Equities& Mutual funds 4% Customer Deposits 93% Debt securities 96% Loans & Deposits Growth Return Ratios Loans (LHS) Simple LDR Deposits (LHS) ROAA (LHS) ROAE (RHS) Source: Company Accounts, Global Research June

36 SAR mn SAR mn Top-line Growth & Recurring Income Profitability , ,500 4, ,500 3, , ,000 1, , NII (LHS) Total Income (LHS) Recurring/Total Inc. (RHS) Net Profit Growth Asset Quality Provisioning NPL Ratio- LHS Provisioning Coverage - RHS Provisioning charge Provisioning/ Total Income Spreads Cost Efficiency Yield on Earning Assets Spreads (RHS) Cost of Funds Cost to Income Ratio OPEX/Average Assets Source: Company Accounts, Global Research June

37 Ratio Analysis Balance Sheet Income Statement Financial Statements (SAR mn) 2013E 2014E 2015E 2016E Special commission income 3,454 3,463 3,748 4,092 4,598 5,450 6,507 Special commission expense (297) (283) (488) (627) (717) (915) (1,280) Net Special Commission Income 3,158 3,181 3,260 3,465 3,881 4,535 5,226 Fees from banking services, net ,133 1,289 1,466 1,696 Exchange income, net Investment income Dividend, other and forex income Total Non-Commission Income 1,346 1,360 1,496 1,816 1,994 2,194 2,449 Total Operating Income 4,504 4,541 4,757 5,281 5,876 6,730 7,675 Total Operating Expenses (1,644) (1,775) (1,892) (2,071) (2,279) (2,581) (2,903) Impairment charge for financing & other, net (964) (618) (522) (574) (543) (486) (481) Total operating profit after PFIs, net 1,895 2,149 2,343 2,636 3,054 3,663 4,291 Share in earnings (losses) of associate Loss attributed to non-controlling interest Net Income 1,911 2,171 2,371 2,657 3,078 3,687 4,317 Cash & balances w ith SAMA 11,997 13,353 20,334 20,584 23,402 26,665 31,462 Due from banks & other FIs 1,381 1,572 2,241 2,420 2,553 2,681 2,802 Investments 32,841 26,082 24,323 23,232 25,014 27,408 30,025 Net Loans and advances 66,203 72,844 86,329 99, , , ,624 Property & equipment, net 1,261 1,284 1,307 1,546 1,820 2,136 2,499 Investment in associate Other Assets, net 2,025 2,090 1,675 1,725 1,760 1,795 1,831 Total Assets 116, , , , , , ,789 Due to banks & other FIs 12,097 8,824 6,550 2,123 2,165 2,209 2,253 Customer Deposits 84,199 87, , , , , ,988 Debt securities in issue 1,688 1,688 1,688 1,688 1,688 1,688 1,688 Other Liabilities 2,655 2,474 2,932 3,474 3,648 3,830 4,022 Total Liabilities 100, , , , , , ,951 Share capital 6,500 8,500 8,500 8,500 8,500 8,500 8,500 Statutory reserve 5,480 6,030 6,630 7,294 8,064 8,986 10,065 General and Other Reserves (45) ,678 3,188 Retained earnings 2,706 1,066 1,580 2,227 3,065 4,151 5,707 Proposed gross dividends ,062 1,272 1,274 Non-controlling interest Total Shareholders' Equity 15,397 16,730 17,910 19,529 21,679 24,692 28,838 Total Liabilities & Shareholders' Equity 116, , , , , , ,789 Return on Average Assets 1.7% 1.9% 1.9% 1.9% % 2.2% Return on Average Equity % % 16.8% 17. Non Commission Income/ Operating Income 29.9% % 33.9% 32.6% 31.9% Fees from Banking Services/ Operating Income 12.1% % % 21.8% 22.1% Yield on Average Earning Assets % % 3.4% 3.6% 3.9% Cost of Funds 0.3% 0.3% % 0.8% Net Spread 3.2% 3.1% % 2.9% % Cost to Income Ratio % 39.8% 39.2% 38.8% 38.3% 37.8% OPEX/Average Assets % 1.4% Net Loan to Customer Deposits 81.2% 85.9% 82.8% 83.7% 83.9% % Non Performing Loans 2,029 1,784 1,315 1,945 2,179 2,312 2,489 Provision for Loan Losses 2,194 2,605 2,699 3,273 3,816 4,302 4,783 NPLs to Gross Loans % % 1.9% 1.8% 1.7% NPL Coverage 108.1% % 168.3% 175.1% 186.1% 192.2% Cost of Risk (bps) Equity to Gross Loans % 20.1% 19.1% 18.9% 19.2% 19.7% Equity to Total Assets 13.3% 14.2% 13.1% 13.1% 13.1% 13.3% 13.7% Dividend Payout Ratio % 35.8% 35.3% Adjusted EPS (SAR) Adjusted BVPS (SAR) Market Price (SAR)* Dividend Yield 1.9% 3.4% % 3.9% 4.6% 4.7% P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research* * Market price for 2013 and subsequent years as per closing prices on June 15, 2013 June

38 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Banque Saudi Fransi (BSFR) Market Data Bloomberg Code: BSFR AB Reuters Code: 1050.SE CMP (15 June 2013): SAR31.0 O/S (mn) 904 Market Cap (SAR mn): 28,025 Market Cap (USD mn): 7,471 P/E (x): 8.9 P/BV (x): 1.2 Price Performance 1-Yr High (SAR): 35.4 Low (SAR): 28.9 Average Volume: (000) m 3m 12m Absolute (%) Relative (%) Price Volume Performance 2,500 2, Slow NII growth is a concern Rising cost of fund exerts margin pressure Higher provision is a key concern Current valuation suggests HOLD Slow NII growth is a concern Banque Saudi Fransi has one of the largest shares in corporate lending in KSA. Due to low margins in the corporate segment, the bank s net interest income remained stagnant with a trivial decline of 0.3%YoY in 1Q13. Interest expenses grew 44.6%YoY during the quarter, which remained the key reason for margin contraction. Due to a highly competitive environment and perhaps a late shed-off in expensive time deposits, the cost of funding remained high. We expect BSFR s NII to increase at a CAGR of 11.3% during 16e. Rising cost of fund exerts margin pressure The cost of fund rose by 17bps during the quarter, exerting pressure on net interest margin. The yield on assets declined by 24bps during the same period; consequently, spreads fell by 41bps. We believe the bank would continue to face margin pressure until due to a low interest rate environment; however, we expect the rates to rebound onward. Higher provision expense is a key concern Hold Target Price SAR ,500 1, BSFR s provision expenses grew 90.3%YoY in 1Q13, due to which net profit declined 13.3%YoY. The bank has ~SAR1.0bn of exposure to Zain KSA which is facing financial difficulties and is believed to have major exposure to Mohammad Al- Mojil Group (MMG). We understand that BSF s provisions would remain high over the next four to six quarters, but decline thereafter. We expect provision cover to remain in the comfortable vicinity of 14 throughout the forecast period as against 149% in. Volume ('000) Naveed Ahmed, CFA Manager nahmed@global.com.kw Tel.: (965) BSFR (SAR) Investment Indicators Net Profit Growth 3.6% 4.4% 12.3% 15.6% 15.7% NII Growth 5.4% 7.2% 11.3% 12.1% 14.9% Loan Growth 11.2% Deposits Growth 5.1% 13.3% 9.7% 9.9% 13.7% ROE % 13.9% % Dividend Yield* 2.7% 2.9% 3.2% 3.9% 4.6% P/E Ratio (x)* P/BV Ratio (x)* Source: Company Reports & Global Research * Market price for 2013 and subsequent years as per closing prices on Tadawul on 15 June 2013 June

39 Loan growth to pick up onward The bank s net loan increased 8.6%YoY in 1Q13, much lesser than the overall growth of 12.7%YoY in the industry. We believe that loans growth will pick up pace in the remaining quarters of the year as the bank looks to deploy its liquidity in order to maintain a decent top-line growth amidst pressure on spreads. We expect loans and advances to increase at a CAGR of 11.6% during 16e. BSF s loan-to-deposit ratio stood at 88.7% in 1Q13, and we expect the ratio to remain high (~88%) in our forecast period. Corporate lending to grow as SME lending increases Corporate lending accounts for the major part of BSF s lending portfolio (82.9% as of FY12). Since SMEs form a significant part of the Saudi economy the sector accounts for ~93% of all enterprises and ~2 of the total employment in the Kingdom, we expect SME financing to become the next trigger for Saudi banks loan growth. As BSFR has strong presence in the corporate sector, we assume the bank would benefit from this development. No significant benefit from the newly implemented Mortgage law Opening up of mortgage housing finance is likely to spur retail business opportunities for Saudi banks. Since BSF has a major exposure into corporate lending and has a very nominal exposure into retail segment, we believe the bank will benefit least from this new law, from amongst its peers given that it will at best be a very late entrant. Notably, retail lending constitutes just 9.6% of the bank s total loan portfolio (as of FY12). We expect that, the bank will increase its retail exposure going forward to benefit from this development. Higher capital adequacy to provide cushion BSFR has sound capital adequacy. The bank issued subordinated sukuk worth SAR1.9bn in, which improved its CAR to 16. in from 14. in. We believe the bank would achieve a sound asset base with growth in loans and deposit onward. Total assets are expected to increase at a CAGR of 10.1% during 16e. NPL ratio is expected to remain at a comfortable level We expect BSFR s NPL ratio to remain at 1. in. With improvement in asset quality, the coverage ratio is expected to come down. Rising provisions remain a key concern for the bank; however, this is expected to decline as asset quality improves. We believe the bank would maintain its NPL coverage ratio at 137.8% in vis-à-vis 148.6% in. Change in estimates Looking at the 1Q13 result, which remained below our expectations, we decreased our NII forecast of by 3.6%. Although we have increased our loan book forecast by 1., we believe a subdued interest rate environment will exert pressure on interest spread. Similarly, we decreased our deposit forecast by 1.. We expect the bank s operating expenses to remain high; hence, we have increased the operating expenses forecast, which led to a 4.4% decrease in net profit forecast. Change in estimates SAR '000 Earlier Estimates Revised Estimates % Change Gross Loans 115,114, ,858, Deposits 132,992, ,991, NII 3,676,122 3,545, % Operating Income 5,450,427 5,302, % Provision for Loan Losses 517, , % Net Profits 3,292,318 3,147, % Source: Global Research Valuation looks inexpensive, but being conservative we recommend HOLD BSFR is trading at a P/BV ratio of 1.2x at a discount of 23.6% to its Saudi peers. The stock has performed well historically, but looking at its current financials, we believe there is no significant upside trigger for the stock at present. However, we believe that the stock is fundamentally strong due to large size and sound capital adequacy. Our valuation of SAR33.5/share indicates a 8. upside from the current market price of SAR31.0, translating into a HOLD rating for the stock. June

40 BSFR in Charts Loans Classification Deposits Classification Others 7% Credit cards 1% Other 3% Consumer loans 9% Demand 54% Time 43% Commercial loans & overdraft 83% Saving Funding Mix Investment Mix Borrowings 7% Interbank 4% Equities & Mutual funds 14% Customer Deposits 89% Debt securities 86% Loans & Deposits Growth Return Ratios Loans (LHS) Simple LDR Deposits (LHS) ROAA (LHS) ROAE (RHS) Source: Company Accounts, Global Research June

41 SAR mn SAR mn Top-line Growth & Recurring Income Profitability 2 94% 5, % 9 88% 86% 84% 82% 8 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, % 0-2 NII (LHS) Total Income (LHS) Recurring/Total Inc. (RHS) Net Profit Growth Asset Quality Provisioning 1.6% 20 4, % 1.2% % 0.6% 0.4% ,500 3,000 2,500 2,000 1,500 1, % NPL Ratio- LHS Provisioning Coverage - RHS Provisioning charge Provisioning/ Total Income Spreads Cost Efficiency Yield on Earning Assets Cost of Funds Spreads (RHS) Cost to Income Ratio OPEX/Average Assets Source: Company Accounts, Global Research June

42 Ratio Analysis Balance Sheet Income Statement Financial Statements (SAR mn) Special commission income 3,537 3,631 4,069 4,463 4,947 5,787 6,873 Special commission expense (471) (494) (764) (918) (1,000) (1,363) (1,792) Special Commission Income, Net 3,066 3,137 3,306 3,545 3,947 4,424 5,081 Fees from banking services, net 887 1,050 1,173 1,261 1,415 1,595 1,793 Exchange income, net Investment income Dividend, other and forex income Total Non-Commission Income 1,329 1,448 1,704 1,757 1,877 2,091 2,327 Total Operating Income 4,395 4,585 5,010 5,302 5,824 6,515 7,408 Total operating expenses (1,259) (1,500) (1,541) (1,638) (1,798) (2,019) (2,296) Impairment charge for loans (339) (158) (455) (520) (493) (412) (385) Share in earnings /(losses) of associates, net 4 (16) Total Operating Profit after Provisions, Net 2,801 2,911 3,015 3,147 3,535 4,086 4,729 Gain/Loss attributed to non-controlling interest Net Income 2,801 2,911 3,015 3,147 3,535 4,086 4,729 Cash & balances w ith SAMA 10,864 18,116 15,233 18,201 19,865 21,940 25,665 Due from banks & other FIs 5,192 7,009 5,435 5,164 5,448 5,720 5,977 Investments 19,841 16,669 27,498 29,332 30,817 28,665 33,252 Loans and advances, net 80,977 92, , , , , ,349 Property & equipment, net Investment in associates Other assets, net 5,573 5,609 6,012 6,132 6,255 6,380 6,508 Total Assets 123, , , , , , ,596 Due to banks & other FIs 2,313 2,064 5,662 6,229 6,727 7,265 7,774 Customer deposits 93, , , , , , ,400 Term loans 2,466 1,767 1,778 1,814 1,850 1,887 1,925 Debt securities 2,428 2,463 7,130 5,348 5,348 2,888 2,888 Other liabilities 4,459 4,568 4,948 5,047 5,148 5,251 5,356 Total Liabilities 105, , , , , , ,342 Share capital 7,232 7,232 9,040 9,040 9,040 9,040 9,040 Statutory reserve 6,072 6,800 7,554 8,340 9,224 10,246 11,428 General & other reserves 1,730 1,859 1,875 1,875 1,875 1,875 1,875 Retained earnings 2,170 3,764 3,408 4,862 6,516 8,363 10,468 Proposed dividend ,218 1,442 Total Shareholders' Equity 18,004 19,655 22,687 25,024 27,653 30,742 34,254 Non controlling interest Total Liabilities & Shareholders' Equity 123, , , , , , ,596 Return on Average Assets 2.3% 2.2% % 1.9% 2.1% 2.2% Return on Average Equity % % 13.9% % Non Commission Income/ Operating Income 30.2% 31.6% % 32.2% 32.1% 31.4% Fees from Banking Services/ Operating Income 20.2% 22.9% 23.4% 23.8% 24.3% % Yield on Average Earning Assets % 3.3% 3.2% 3.2% 3.4% 3.7% Cost of Funds % 0.7% 0.7% 0.8% 1. Net Spread % 2.7% % 2.7% Cost to Income Ratio 28.6% 32.7% 30.8% 30.9% 30.9% OPEX/Average Assets % Net Loan to Customer Deposits 86.6% % 87.6% % 88.8% Non Performing Loans 1,016 1,128 1,045 1,402 1,686 2,034 2,441 Provision for Loan Losses 1,493 1,539 1,552 2,072 2,565 2,978 3,363 NPLs to Gross Loans 1.2% 1.2% % 1.3% 1.4% 1. NPL Coverage % 148.6% 147.8% 152.1% 146.4% 137.8% Cost of Risk (bps) Equity to Gross Loans 21.9% 20.9% 21.7% 21.4% 21.3% 21.2% 21.1% Equity to Total Assets 14.6% % 14.3% % 14.8% Dividend Payout Ratio 28.6% 18.7% 26.9% 28.8% 28.2% 29.8% 30. Adjusted EPS (SAR) Adjusted BVPS (SAR) Market Price (SAR)* Dividend Yield 1.9% % 2.9% 3.2% 3.9% 4.6% P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research* * Market price for 2013 and subsequent years as per closing prices on June 15, 2013 June

43 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Riyad Bank (RIBL) Market Data Bloomberg Code: RIBL AB Reuters Code: 1010.SE CMP (15 June 2013): SAR24.0 O/S (mn) 1,500 Market Cap (SAR mn): 36,000 Market Cap (USD mn): 9,598 P/E (x): 9.4 P/BV (x): 1.1 Price Performance 1-Yr High (SAR): 25.8 Low (SAR): 22.7 Average Volume: (000) m 3m 12m Absolute (%) Relative (%) Price Volume Performance 7,500 6,000 4,500 3,000 1, Strong branch network to support retail lending Growth in corporate lending to add to top line Provisioning may dampen profits Current valuation suggests BUY A perfect blend of corporate and retail lending With strong presence in the Saudi banking space, RIBL accounts for nearly 16% of the total banking assets in the Kingdom (as of 1Q13). Although corporate loans constitute the major part of total loans, the bank is significantly expanding presence in retail banking (25.3% of total loans in FY12). Due to the new Saudi mortgage law, retail lending is expected to grow significantly in the next two years. With the second largest retail branch network in the Kingdom, RIBL is well positioned to tap the growing demand for retail finance. We expect the bank s loan book to expand at a CAGR of 10. during 16e. Corporate lending accounts for the major part of the bank s lending portfolio (66.2% as of FY12). Since SMEs form a significant part of the Saudi economy the sector accounts for ~93% of all enterprises and ~2 of the total employment in the Kingdom, we expect SME financing to become the next trigger for Saudi banks loan growth. As RIBL has strong presence in corporate sector, we assume the bank would benefit from this development. Since mortgage lending and SME lending are being viewed as the next driving force behind loans growth in KSA during the next few years, we believe RIBL will benefit the most out of these developments. Robust growth in non-interest income Buy Target Price SAR 28.8 The share of non-interest income in total operating income increased to 36.8% in 1Q13 from 24.8% in. Non-interest income grew 5.4%YoY during the quarter, led by rising brokerage income. Expanding retail clientele in addition to the bank s existing corporate presence is expected to bolster non-interest income; moreover, strong presence in investment banking is likely to support it further. Volume ('000) Naveed Ahmed, CFA Manager nahmed@global.com.kw Tel.: (965) RIBL (SAR) Investment Indicators Net Profit Growth 10.1% % 13.9% 15.7% NII Growth 4.4% % Loan Growth 4.4% Deposits Growth 4.6% 6.1% 7.9% 8.9% 12.1% ROE 11.6% % 13.6% 14. Dividend Yield* 5.9% 5.6% 5.6% 6.4% 6. P/E Ratio (x)* P/BV Ratio (x)* Source: Company Reports & Global Research * Market price for 2013 and subsequent years as per closing prices on Tadawul on 15 June 2013 June

44 Flattish NII despite strong growth in loan book RIBL s NII increased only 2.YoY in 1Q13, despite strong growth in loan book. The loan book grew 6.8%YoY during the quarter, as retail loans increased 14.7%YoY and corporate lending grew 4.YoY. Interestingly, the spreads increased by 13bps (as per our calculation) against 1Q12, which should have resulted in a better performing top-line. However, it seems that total interest earning assets fell around 2.6%YoY largely due to drop in HTM investments. This anomalous behavior may also be explained further by late (near quarter end) growth in loans which reflects in the balance sheet but the effects are not reflected in the income. Upcoming quarters will even out this behavior which is likely to validate our assumption that in the worst case scenario spreads held ground. Superior asset quality RIBL successfully restricted its NPLs to 1.6% vis-à-vis the peer group average of 2. during 1Q13. Gross loan book grew 6.8%YoY during the same period, with NPL declining 2.2%YoY. Nonetheless, adequate provisioning is likely to limit credit losses. Although RIBL has significant exposure to the building and construction sector (9.4% in FY12), we assume the bank is sound enough to maintain its asset quality. The average NPL coverage ratio is expected to be ~19 during e. Accordingly, we expect the NPL ratio to range 1.6% 1.7% during the same period. Higher provisioning may dampen profits Impairment charges of the bank grew 10.6%YoY in 1Q13 to SAR191mn from SAR153mn in 1Q12. In our view, higher provisioning may dampen profitability in the next 3-4 quarters. However, with the gradual improvement in asset quality, we expect provision expenses to decline at a CAGR of 6.2% from -16e period. Change in estimates: We have revised our NII estimates down by 2.1% for RIBL, primarily due to lower-than-expected spread resulting from a sustained high cost of funds. We have also revised our provision expenses up 12.1% considering the bank s increase in provision in 1Q13. Net profit estimate has increased by 3., Loan and deposit forecasts have also been revised upward by 3.7% and 4.1%, respectively. Change in estimates SAR '000 Earlier Estimates Revised Estimates % Change Gross Loans 127,301, ,013, % Deposits 148,972, ,125, % NII 4,630,273 4,532, % Operating Income 7,016,444 7,124, Provision for Loan Losses 798, , % Net Profits 3,702,898 3,813, Source: Global Research We recommend BUY We maintain our recommendation on RIBL, as the stock is attractively priced at current levels. The stock currently trades at a P/BV of 1.1x, which is at a 27.4% discount to its peers. The stock has sound fundamentals, strong capital adequacy, and remains a constant dividend payer. Moreover, the dividend yield for the stock is expected to remain high in the foreseeable future at 5.3%. Based on our valuation, we arrived at a fair value of SAR28.8/share for the stock; this offers an upside potential of 20. from the current market price of SAR24.0 per share, translating into a BUY rating. June

45 RIBL in Charts Loans Classification Deposits Classification Consumer loans 21% Others 1% Overdrafts 7% Credit cards 2% Other 6% Demand 3 Commercial loans 69% Time 59% Saving Funding Mix Interbank 17% Investment Mix Equities & Mutual funds 1 Customer Deposits 83% Loans & Deposits Growth Return Ratios Debt securities Loans (LHS) Simple LDR Deposits (LHS) ROAA (LHS) ROAE (RHS) Source: Company Accounts, Global Research June

46 SAR mn SAR mn Top-line Growth & Recurring Income Profitability , ,000 4, ,000 2,000 1, NII (LHS) Total Income (LHS) Recurring/Total Inc. (RHS) Net Profit Growth Asset Quality Provisioning 6, % 1.6% 1.4% 1.2% % 0.6% 0.4% 0.2% ,000 4,000 3,000 2,000 1, NPL Ratio- LHS Provisioning Coverage - RHS Provisioning charge Provisioning/ Total Income Spreads Cost Efficiency Yield on Earning Assets Cost of Funds Spreads (RHS) Cost to Income Ratio OPEX/Average Assets Source: Company Accounts, Global Research June

47 Ratio Analysis Balance Sheet Income Statement Financial Statements (SAR mn) 2013E 2014E 2015E 2016E Special commission income 4,873 4,915 5,163 5,362 5,813 6,907 8,272 Special commission expense (731) (718) (782) (829) (874) (1,326) (1,860) Net Special Commission Income 4,142 4,197 4,381 4,533 4,940 5,580 6,412 Fees from banking services, net 1,418 1,589 1,777 1,973 2,336 2,568 2,870 Exchange income, net Investment income Dividend, other and forex income Total Non-Commission Income 1,839 2,079 2,405 2,592 2,917 3,178 3,512 Total Operating Income 5,980 6,276 6,786 7,125 7,856 8,759 9,924 Total operating expenses (2,306) (2,510) (2,350) (2,499) (2,745) (3,046) (3,431) Impairment charge for financing & other, net (850) (662) (1,050) (895) (892) (898) (914) Total Operating Profit after Provisionss, Net 2,825 3,104 3,387 3,730 4,219 4,815 5,579 Share in earnings of associates, net Net Income 2,825 3,149 3,466 3,814 4,306 4,906 5,675 Cash & balances w ith SAMA 23,179 17,623 26,271 24,706 26,585 27,917 31,472 Due from banks and other FI's 4,689 6,085 3,191 3,670 4,220 4,515 4,741 Trading investments Non-trading investments 33,822 36,616 36,254 37,635 39,753 42,735 46,732 Net loans and advances 106, , , , , , ,460 Net fixed assets 1,863 1,807 1,738 1,750 1,763 1,801 1,869 Investment in associates Other assets 3,969 5,443 4,847 4,944 5,043 5,143 5,246 Total Assets 173, , , , , , ,965 Due to banks and other financial institutions 10,637 6,242 6,163 5,855 5,562 5,840 6,132 Customers' deposits 126, , , , , , ,394 Other liabilities 6,741 4,665 5,840 5,957 6,076 6,197 6,321 Total Liabilities 144, , , , , , ,847 Share capital 15,000 15,000 15,000 15,000 15,000 15,000 15,000 Statutory reserve 11,688 12,475 13,342 14,295 15,146 15,146 15,146 Other reserves ,125 1,181 1,222 1,265 1,310 Proposed dividend 1,121 1,275 1,125 2,098 2,106 2,404 2,406 Retained earnings ,372 2,135 3,485 5,987 9,256 Total Shareholders' Equity 29,233 30,158 31,964 34,709 36,959 39,802 43,117 Total Liabilities & Shareholders' Equity 173, , , , , , ,965 Return on Average Assets 1.6% 1.8% 1.9% 1.9% 2.1% 2.2% 2.3% Return on Average Equity 10.2% 11.1% 11.6% % 13.6% 14. Non Commission Income/ Operating Income 30.7% 33.1% 35.4% 36.4% 37.1% 36.3% 35.4% Fees from Banking Services/ Operating Income 23.7% 25.3% 26.2% 27.7% 29.7% 29.3% 28.9% Yield on Average Earning Assets 3.4% 3.3% 3.3% 3.3% 3.3% 3.6% 3.9% Cost of Funds % 0.9% Net Spread 2.8% 2.8% 2.8% 2.8% 2.8% 2.9% 3. Cost to Income Ratio 38.6% % 35.1% 34.9% 34.8% 34.6% OPEX/Average Assets 1.3% 1.4% 1.3% 1.3% 1.3% 1.4% 1.4% Net Loan to Customer Deposits % 80.3% 82.9% 82.6% 83.2% 82.9% Non Performing Loans 1,813 1,879 2,037 2,307 2,491 2,505 2,806 Provision for Loan Losses 2,288 1,999 2,542 3,487 4,379 5,277 6,192 NPLs to Gross Loans 1.7% 1.6% 1.7% 1.7% 1.7% 1.6% 1.6% NPL Coverage 126.2% 106.3% 124.8% 151.1% 175.8% 210.7% 220.7% Cost of Risk (bps) Equity to Gross Loans % 26.6% 26.3% 25.9% 25.4% 24. Equity to Total Assets 16.8% 16.7% 16.8% 17.2% 17.1% % Dividend Payout Ratio % 60.6% % % Adjusted EPS (SAR) Adjusted BVPS (SAR) Market Price (SAR)* Dividend Yield 4.9% 5.8% 5.9% 5.6% 5.6% 6.4% 6. P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research* * Market price for 2013 and subsequent years as per closing prices on June 15, 2013 June

48 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 SAMBA Financial Group (SAMBA) Market Data Bloomberg Code: SAMBA AB Reuters Code: 1090.SE CMP (15 June 2013): SAR48.6 O/S (mn) 900 Market Cap (SAR mn): 43,740 Market Cap (USD mn): 11,661 P/E (x): 9.0 P/BV (x): 1.3 Price Performance 1-Yr High (SAR): 52.5 Low (SAR): 43.0 Average Volume: (000) m 3m 12m Absolute (%) Relative (%) Price Volume Performance 2,500 2,000 1,500 1, Expansion in non-oil sector to drive loan book Lower funding cost aids margin improvement High provisions may dampen profitability Valuation at current level suggests HOLD Expansion in non-oil sector to drive loan book SAMBA s corporate credit portfolio accounted for 81.4% of the total lending as of 1Q13. With such huge exposure, SAMBA has become a well-positioned name in the corporate segment. Given the aggressive government spending on infrastructure and plans to develop the non-oil sector, demand for corporate loans is expected to increase significantly. With adequate capital base (Tier 1 ratio of 19. in FY12) and high liquidity (loan-to-deposit ratio of 70.2% in 1Q13 vs. industry average of 79.9%), we believe SAMBA is well equipped to exploit this opportunity and record strong growth in loan book during 16e (CAGR of 10.7%). Lower funding cost aids margin improvement Hold Target Price SAR 52.5 SAMBA enjoys the lowest cost of funds among conventional peers due to a large share of demand deposits (62.9% as of 1Q13) in its deposit mix. This would benefit the bank in a competitive environment where other banks move toward costly time deposits to increase their loan books. Furthermore, SAMBA s strong treasury would enable it to generate better yields on investments as interest rates pick up. We believe that controlled interest payments, along with a growing loan book, would assist the bank in successfully expanding interest spread. We forecast SAMBA s spread to expand to 2.96% in from 2.83% in, aiding a CAGR of 9.4% in net special commission income. Growth in non-interest income to support operating income growth Strong presence in corporate, investment banking and treasury services coupled with rising net loans has fueled growth in fee and commission income. We expect noninterest income to increase at a CAGR of 11.9% during 16e; this would boost its contribution to operating income amid a stable corporate clientele. Volume ('000) Naveed Ahmed, CFA Manager nahmed@global.com.kw Low Tel.: cost-to-income (965) ratio SAMBA (SAR) Investment Indicators Net Profit Growth 0.6% 11.7% 5.8% 12.1% 13.3% NII Growth -0.8% 4.6% 7.7% 12.3% 13.4% Loan Growth 16.6% 9.3% % 11.8% Deposits Growth 8.4% 9.3% ROE 14.9% % 14.7% 15.1% Dividend Yield* 4.6% 4.2% 4.2% 4.6% 5.1% P/E Ratio (x)* P/BV Ratio (x)* Source: Company Reports & Global Research * Market price for 2013 and subsequent years as per closing prices on Tadawul on 15 June 2013 June

49 Due to its corporate focus, SAMBA has been able to maintain lowest cost of fund in the industry. We believe spreads would remain under pressure until due to a low interest rate environment; however, low cost of fund would protect the downside. High provisions expected for SAMBA s overall asset quality remains in line with that of the industry; however, the bank s supposedly significant exposure to Mohammad Al Mojil Group (MMG AB) remains a concern. SAMBA s provision expenses increased 58.6%YoY in 1Q13. NPL ratio remained at 2.3% during the quarter, while NPL cover increased to 135. from 126. in 1Q12. Due to the bank s deteriorating asset quality, we expect SAMBA s NPL ratio to increase by a hefty 30bps in. However, we believe the asset quality to improve onwards. We assume the coverage ratio to increase at 133.8% in. Stable dividends SAMBA s payout ratio stood at 42.3% in. As SAMBA s capital adequacy ratio is much higher than SAMA requirements and no substantial erosion of profits is expected on account of impairments, we believe payout would remain on the higher side in the medium to long term. We expect the bank to gradually increase its dividend per share to SAR2.5 by the end of, assuming an average payout ratio of ~36% during the forecast period. Change in estimates We have increased loan and deposits estimates up 2.8% and 5., respectively, based on our stable outlook on loans and deposit growth. We believe, in a declining interest rate scenario, the bank will see a faster drop in yield on assets than a drop in cost of fund, leading to weaker spreads, given its already low cost of funds. Hence, we remain conservative about the top-line growth. We have revised our top-line and bottom-line estimates downward for by 5.8% and 0.1%, respectively, while our estimate for operating income increased 0.. We expect provisions to reduce due to improvement in the bank s asset quality. Hence, we have revised our provisions forecast downward by 15.2% for. Change in estimates SAR mn Earlier Estimates Revised Estimates % Change Gross Loans 114, , % Deposits 154, , NII 4,742 4, % Operating Income 7,469 7, Provision for Loan Losses % Net Profits 4,841 4, % Source: Global Research We recommend HOLD We remain cautious on exposure of the bank to the distressed MMG group. We adopt a wait-and-watch approach to see if the bank increases exposure to the real estate and retail sector or is able to increase low-risk corporate lending. However, a key positive about the bank is its dividend yield. Currently, the stock trades at a P/BV multiple of 1.3x, 14.9% discount to the industry average of 1.5x. Based on our valuation, we arrived at a fair value of SAR52.5/share for the stock; this offers an upside potential of 8. from the current market price of SAR48.6 per share. The stock is a good pick but since there is no upside trigger, it looks expensive at current levels, hence, we recommend HOLD on the stock. June

50 SAMBA in Charts Loans Classification Deposits Classification Credit cards 2% Other 4% Time 33% Demand 6 Commercial loans 98% Saving 3% Funding Mix Interbank 7% Investment Mix Equities & Mutual funds 11% Customer Deposits 93% Debt securities 89% Loans & Deposits Growth Return Ratios Loans (LHS) Simple LDR Deposits (LHS) ROAA (LHS) ROAE (RHS) Source: Company Accounts, Global Research June

51 SAR mn SAR mn Top-line Growth & Recurring Income Profitability 2 98% 8, % 94% 92% 9 88% 86% 84% 82% 8 7,000 6,000 5,000 4,000 3,000 2,000 1, % 0-1 NII (LHS) Total Income (LHS) Recurring/Total Inc. (RHS) Net Profit Growth Asset Quality Provisioning , ,500 4,000 3,500 3,000 2,500 2,000 1, , NPL Ratio- LHS Provisioning Coverage - RHS Provisioning charge Provisioning/ Total Income Spreads Cost Efficiency Yield on Earning Assets Cost of Funds Spreads (RHS) Cost to Income Ratio OPEX/Average Assets Source: Company Accounts, Global Research June

52 Ratio Analysis Balance Sheet Income Statement Financial Statements (SAR mn) Special commission income 5,195 4,775 4,768 4,983 5,397 6,283 7,309 Special commission expense (658) (466) (495) (515) (585) (880) (1,185) Special Commission Income, Net 4,536 4,308 4,273 4,469 4,812 5,403 6,124 Fees from banking services, net 1,258 1,399 1,693 2,071 2,278 2,552 2,858 Exchange income, net Investment income Other operating income Total Non-Commission Income 2,364 2,254 2,421 3,042 3,141 3,452 3,798 Total Operating Income 6,901 6,562 6,694 7,510 7,953 8,855 9,922 Total operating expenses (1,910) (1,956) (2,063) (2,282) (2,421) (2,726) (3,063) Impairment charge for loans (559) (301) (299) (389) (415) (392) (357) Total Operating Profit after Provisions, Net 4,432 4,305 4,332 4,839 5,117 5,737 6,503 Loss attributed to non-controlling interest 3 (2) (2) Net Income 4,435 4,303 4,330 4,839 5,117 5,737 6,503 Cash & balances w ith SAMA 32,581 33,509 30,916 35,023 36,467 38,816 42,771 Due from banks & other FIs 2,491 2,732 3,642 4,371 5,245 6,294 7,553 Investments 64,883 60,175 52,576 53,627 54,700 55,978 58,700 Loans and advances, net 80,251 89, , , , , ,592 Property & equipment, net 970 1,169 1,548 1,623 1,703 1,864 2,123 Other assets, net 6,240 6,078 5,756 6,792 7,811 8,982 10,329 Total Assets 187, , , , , , ,068 Due to banks & other FIs 19,801 20,628 11,957 10,761 10,223 9,712 9,226 Customer deposits 133, , , , , , ,381 Other liabilities 8,549 6,631 6,792 6,860 6,929 6,998 7,068 Total Liabilities 161, , , , , , ,675 Share capital 9,000 9,000 9,000 9,000 9,000 9,000 9,000 Statutory reserve 9,000 9,000 9,000 9,000 9,000 9,000 9,000 General & other reserves (361) (597) Retained earnings 8,328 11,051 13,577 16,577 19,852 23,564 27,816 Proposed dividend ,839 1,842 2,025 2,250 Treasury shares (1,268) (1,156) (1,114) (1,114) (1,114) (1,114) (1,114) Non-controlling interest Total Shareholders' Equity 25,603 28,257 31,739 35,658 38,961 42,884 47,393 Total Liabilities & Shareholders' Equity 187, , , , , , ,068 Return on Average Assets 2.4% 2.3% 2.2% 2.3% 2.3% 2.4% 2.4% Return on Average Equity % % 14.7% 15.1% Non Commission Income/ Operating Income 34.3% 34.3% 36.2% % Fees from Banking Services/ Operating Income 18.2% 21.3% 25.3% 27.6% 28.6% 28.8% 28.8% Yield on Average Earning Assets 3.7% 3.3% 3.1% 3.1% 3.1% 3.3% 3. Cost of Funds 0.4% 0.3% 0.3% 0.3% 0.3% % Net Spread 3.2% % 2.8% 2.8% 2.9% 3. Cost to Income Ratio 27.7% 29.8% 30.8% 30.4% 30.4% 30.8% 30.9% OPEX/Average Assets % 1.1% 1.1% 1.1% 1.2% Net Loan to Customer Deposits 62.9% 67.4% % 75.1% 75.3% Non Performing Loans 3,139 2,764 2,341 2,877 3,164 3,402 3,493 Provision for Loan Losses 3,707 3,439 3,119 3,508 3,923 4,315 4,672 NPLs to Gross Loans 3.9% 3.1% 2.2% % 2.2% NPL Coverage 118.1% 124.4% 133.2% 121.9% % 133.8% Cost of Risk (bps) Equity to Gross Loans % 30.2% % Equity to Total Assets 13.7% 14.7% 15.9% % Dividend Payout Ratio 36.2% 37.3% 42.3% % 34.6% Adjusted EPS (SAR) Adjusted BVPS (SAR) Market Price (SAR)* Dividend Yield 2.9% 3.8% 4.6% 4.2% 4.2% 4.6% 5.1% P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research* * Market price for 2013 and subsequent years as per closing prices on June 15, 2013 June

53 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 The Saudi British Bank (SABB) Market Data Bloomberg Code: SABB AB Reuters Code: 1060.SE CMP (15 June 2013): SAR38.2 O/S (mn) 1,000 Market Cap (SAR mn): 38,200 Market Cap (USD mn): 10,184 P/E (x): 10.2 P/BV (x): 1.8 Price Performance 1-Yr High (SAR): 41.0 Low (SAR): 28.3 Average Volume: (000) m 3m 12m Absolute (%) Relative (%) Price Volume Performance 2,500 2,000 1,500 1, Strong growth in loan book to drive top line Non-interest income drives operating income growth Decline in interest expenses aids margins Positives priced in, current price suggest HOLD Strong growth in loan book to drive top line In 1Q13, SABB reported strong growth in the loan book (11.1%YoY) due to increase in exposure to the corporate segment. Commercial loans accounted for 79.3% of the total loans in 1Q13. Operating income rose 16.4%YoY during 1Q13 on higher lending activity. With a rise in corporate activity in the Kingdom, we expect SABB s loan book to register a CAGR of 13.7% over 16e. Non-interest income drives operating income growth In 1Q13, SABB s non-interest income expanded 20.1%YoY, primarily due to the 16.3%YoY growth in fee income. Non-interest income was driven by the bank s strengthening presence in the corporate segment. With growth in corporate lending, SABB s fee income base is also expected to increase. The bank is leveraging on HSBC s brand name and focusing on enhancing brokerage revenues. Improvement in the stock market will likely boost trading income. In our opinion, non-interest income would grow at a CAGR of 10.1% during 16e, with fee income expanding at a CAGR of 11.9% during the same period. Decline in interest expenses due to change in deposit mix Hold Target Price SAR 39.3 In 1Q13, SABB s interest expenses declined 3.7%YoY mainly due to change in deposit mix. During the quarter time deposit decreased by 6.8%YoY and demand deposit rose by 20.YoY. However, spreads declined 6bps during the same period due to drop in interest yield on assets by13 bps against 1Q12. Though the cost of fund dropped to 0.42% in 1Q13 but we see it increasing to 0.48% for the full year Volume ('000) Naveed Ahmed, CFA Manager nahmed@global.com.kw Tel.: (965) SABB (SAR) Investment Indicators Net Profit Growth 12.2% 15.9% % 16.4% NII Growth % % 17. Loan Growth 13.4% Deposits Growth 14.1% 11.4% % 12.9% ROE 18.2% 18.4% % 18.6% Dividend Yield* 3.2% % 3. P/E Ratio (x)* P/BV Ratio (x)* Source: Company Reports & Global Research Market price for 2013 and subsequent years as per closing prices on Tadawul on 15 June 2013 June

54 With loan growth of 13.7%, NII is expected to register a CAGR of 15.2% over 16e. Cost of fund is expected to remain at an average rate of 0.6% during our forecast period. In our opinion, spread would improve from 2.7% in to 2.9% in. Improving asset quality; exposure to MMG a cause for concern SABB s asset quality has improved recently, evident from a 7bps and 24bps drop in its NPL ratio against 4Q12 and 1Q12 respectively. The bank s NPL ratio of 1.6% is also below the industry average of 2., in 1Q13. Provision for loan losses rose 186.8%YoY to SAR104.6mn in 1Q13 from SAR36.6mn in 1Q12leading to a coverage ratio of 151%. However, the bank has the highest exposure to MMG debt (SAR 310mn) as per market news which in our opinion warrants caution. Overall, we expect average NPL ratio to be 1.6% during the forecast period (2013 ). Change in estimates Our loan book and deposit estimates have been revised down by 1.3% and 3.8%, respectively, on lower-than-expected growth in loan book as well as deposit base for the bank in 1Q13. We have revised down our estimates for net interest income by 0.3% for on declining interest spreads. Our non-interest income estimates have been revised up on higher-than-expected fees and commission income in 1Q13. Provision expenses have been revised down by 47.1% on superior-than-expected asset quality. Net profit estimates have been increased by 7.6%. We estimate RoE to reach 18.6% by. Also, the net income is projected to increase at a CAGR of 15. over. Change in estimates SAR '000 Earlier Estimates Revised Estimates % Change Gross Loans 117,825, ,243, % Deposits 139,532, ,166, % NII 3,695,433 3,683, % Operating Income 5,953,342 5,834, Provision for Loan Losses 710, , % Net Profits 3,477,207 3,741, % Source: Global Research Positives priced in, recommend HOLD Although SABB is foreseen to witness a robust growth, driven by strong fundamentals and its strong foothold in the corporate sector, we believe that the current price already reflects the positive in the bank has to offer. Nonetheless, we are keeping a close eye on recent developments and watching for any potential upside trigger. Currently, the stock is trading at a P/BV of 1.8x, at a premium of 15.2% to its peers, which makes the stock expensive than other stocks in our coverage universe, except RJHI. We believe that the premium is justified at the present level, but it may decrease going forward as prices rationalize; noteworthy, the banking stock is trading at its 1 year high currently. Our fair valuation of SAR39.3/share indicates a potential upside of 3. from the current market price of SAR38.2, which translates into a HOLD rating for the stock. June

55 SABB in Charts Loans Classification Deposits Classification Consumer loans 18% Credit cards 2% Other 1% Time 41% Demand 53% Funding Mix Borrowings 4% Interbank 4% Commercial loans 8 Investment Mix Equities & Mutual funds 3% Saving Customer Deposits 92% Debt securities 97% Loans & Deposits Growth Return Ratios Loans (LHS) Simple LDR Deposits (LHS) ROAA (LHS) ROAE (RHS) Source: Company Accounts, Global Research June

56 SAR mn Top-line Growth & Recurring Income Profitability 2 92% 7, % 9 89% 88% 87% 86% 8 84% 6,000 5,000 4,000 3,000 2,000 1, % 0-4 NII (LHS) Total Income (LHS) Recurring/Total Inc. (RHS) Net Profit Growth Asset Quality Provisioning NPL Ratio- LHS Provisioning Coverage - RHS Cost to Income Ratio OPEX/Average Assets Spreads Cost Efficiency Yield on Earning Assets Spreads (RHS) Cost to Income Ratio OPEX/Average Assets Cost of Funds Source: Company Accounts, Global Research June

57 Ratio Analysis Balance Sheet Income Statement Financial Statements (SAR mn) Special commission income 3,725 3,516 4,000 4,338 4,947 5,988 7,112 Special commission expenses (482) (494) (736) (655) (713) (1,074) (1,363) Financing and Investment Income, Net 3,243 3,022 3,264 3,683 4,234 4,914 5,749 Fees from banking services, net 1,181 1,215 1,322 1,487 1,656 1,844 2,071 Investment income Exchange income, net Dividend, Other and Forex Income Total Non-Commission Income 1,596 1,877 1,902 2,151 2,298 2,526 2,798 Total Operating Income 4,839 4,899 5,166 5,835 6,533 7,440 8,548 Total operating expenses (1,754) (1,606) (1,598) (1,717) (1,927) (2,194) (2,503) Impairment charge for financing & other, net (1,243) (469) (439) (466) (385) (427) (435) Total Operating Profit after Provisions, Net 1,842 2,824 3,129 3,651 4,221 4,819 5,610 Share in earnings of associates, net Net Income 1,883 2,888 3,240 3,756 4,339 4,958 5,770 Cash & balances w ith SAMA 15,144 22,381 20,404 19,395 19,464 22,453 26,245 Due from banks & other FIs 7,042 4,347 8,091 4,046 3,641 3,823 3,995 Investments 24,972 22,200 27,587 31,676 34,991 38,484 42,324 Loans and advances, net 74,248 84,811 96, , , , ,765 Property & equipment, net Investment in associates Other assets, net 3,185 3,816 3,255 3,385 3,520 3,661 3,808 Total Assets 125, , , , , , ,553 Due to banks & other FIs 4,661 5,894 5,932 6,644 7,308 7,929 8,564 Customer deposits 94, , , , , , ,146 Debt securities in issue 5,476 3,979 4,506 3,785 3,028 3,028 3,028 Borrow ings Other liabilities 5,204 5,870 5,575 5,686 5,800 5,916 6,034 Total Liabilities 110, , , , , , ,912 Share capital 7,500 7,500 10,000 10,000 10,000 10,000 10,000 Statutory reserve 5,459 6,181 6,991 7,930 9,015 10,255 11,697 Other reserve 106 (226) (4) (5) (5) (5) (6) Retained earnings 1,545 3,148 2,079 3,897 6,153 8,622 11,548 Proposed gross dividends , ,249 1,402 Total Shareholders' Equity 15,172 17,166 20,066 22,822 26,161 30,121 34,641 Total Liabilities & Shareholders' Equity 125, , , , , , ,553 Return on Average Assets % 2.2% 2.3% 2.4% % Return on Average Equity 13.6% % 18.4% % 18.6% Non Commission Income/ Operating Income % 36.8% 36.9% 35.2% 33.9% 32.7% Fees from Banking Services/ Operating Income 24.4% 24.8% 25.6% % 24.8% 24.2% Yield on Average Earning Assets % 3.3% 3.1% 3.1% 3.4% 3.6% Cost of Funds % 0.6% % 0.7% Net Spread % 2.7% 2.6% 2.6% 2.7% 2.9% Cost to Income Ratio 36.2% 32.8% 30.9% 29.4% % OPEX/Average Assets 1.4% 1.2% 1.1% % 1.1% 1.1% Net Loan to Customer Deposits 81.2% 82.3% 81.8% 86.6% 88.2% 88.4% 88. Non Performing Loans 2,614 1,678 1,599 1,944 2,148 2,260 2,472 Provision for Loan Losses 2,614 2,081 2,413 2,789 3,159 3,573 4,008 NPLs to Gross Loans 3.4% 1.9% 1.6% 1.7% 1.7% 1.6% 1. NPL Coverage % % 162.2% Cost of Risk (bps) Equity to Gross Loans 19.7% 19.8% 20.4% 19.6% 20.1% 20.7% 21. Equity to Total Assets 12.1% 12.4% 12.8% 13.2% 13.8% 14.2% 14. Dividend Payout Ratio 29.9% % 26.6% % 24.3% Adjusted EPS (SAR) Adjusted BVPS (SAR) Market Price (SAR)* Dividend Yield 1.8% 2.3% 3.2% % 3. P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research* * Market price for 2013 and subsequent years as per closing prices on June 15, 2013 June

58 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Saudi Hollandi Bank (AAAL) Market Data Bloomberg Code: AAAL AB Reuters Code: 1040.SE CMP (15 June 2013): SAR30.8 O/S (mn) 397 Market Cap (SAR mn): 12,225 Market Cap (USD mn): 3,259 P/E (x): 8.6 P/BV (x): 1.3 Price Performance 1-Yr High (SAR): 32.0 Low (SAR): 25.4 Average Volume: ( 000) 85.4 Strong growth in loan book to drive top-line growth Loans growth estimates jacked up significantly Decline in provisions seen Current valuation looks attractive, current price suggests BUY Strong growth in loan book to drive top-line With robust growth of 21.1%YoY in net loans during 1Q13, Saudi Hollandi Bank (SHB) became the fastest growing bank in the Kingdom, surpassing the industry average of 12.7%. Growth was primarily led by an expansion in corporate loans, which account for majority of the loans and advances. Consumer loans have also augmented the lending momentum. Due to significant growth in the loan portfolio, the loan-to-deposit ratio touched 86. in 1Q13. Higher lending to SMEs to bolster loan growth Buy Target Price SAR m 3m 12m Absolute (%) Relative (%) Price Volume Performance 2,500 2, SHB is well placed to capitalize on the expanding economic activity in the Kingdom through a strong presence in project finance activities. Recently, the bank received the Best SME Account and Best SME Banking Customer Service awards from the Banker Middle East. Some major projects financed include Jabal Omar Development s Mecca project and Tasnee s factories. Growth in the small and medium enterprise project financing market provides attractive opportunities. In our opinion, the loan book would expand at a CAGR of 15.9% during 16e due to robust lending to SMEs. Deposits growth driven by growth in time deposits 1,500 1, SHB s deposits grew 18.YoY to SAR56.6bn in 1Q13 from SAR47.3bn in 1Q12. Time deposits (55.6% in 1Q13) account for a major share in total deposits followed by demand deposits (42.4% in 1Q13). Though high time deposit increased the funding cost by 1bps against 1Q12, we believe the bank is well equipped to manage its cost of funding at 0.7% in -14e. However, we expect cost of funding to increase post and remain at 0.9% due to competitive pricing pressure and rising interest rates. Volume ('000) Naveed Ahmed, CFA Manager nahmed@global.com.kw Tel.: (965) AAAL (SAR) Investment Indicators Net Profit Growth 21.4% 12.8% 16.3% % NII Growth 6.4% % 20.2% 18.4% Loan Growth % % 14. Deposits Growth 20.6% 18.6% 11.9% 12.9% 14.1% ROE 16.8% % 18.6% 19.1% Dividend Yield* 4.1% 3.9% 4.2% 4.9% 5.7% P/E Ratio (x)* P/BV Ratio (x)* Source: Company Reports & Global Research Market price for 2013 and subsequent years as per closing prices on Tadawul on 15 June 2013 June

59 Non-interest income drives strong operating income growth SHB s fee and commission income grew 14.3%YoY in 1Q13, driven by higher income from trade finance, advisory fee and brokerage income. Non-interest income s contribution improved from 24.1% in 4Q09 to 39.8% in 1Q13. We expect SHB to benefit from cross-border trade due to its strong presence in trade financing; also, an improvement in the outlook for brokerage income would support growth in fee-based income. We expect non-interest income to grow at a CAGR of 12.9% from -16e. Decline in provision to boost profitability In 1Q13, SHB s provision declined 50.7%YoY on an improvement in asset quality. The bank s NPL ratio fell to 1.4% in 1Q13 from 1.8% in 1Q12. On the other hand, SHB increased its NPL cover to 158.2% in 1Q13 from 144.2% in 1Q12. With a sound asset base, we expect the NPL ratio to decline to 1.4% in. NPL coverage ratio is expected to reach 162.7% in visà-vis 152.8% in. Change in estimates Loan book and deposit estimates for have been revised up 10. and 10.1%, respectively, based on strong growth witnessed in 1Q13. We have revised up our estimates for net interest income for by 0.8% on higher loan growth estimates owing to strong SME lending; however, we expect spreads to remain under pressure. Non-interest income for the year has also been revised up and provision expenses have been revised down by 23.3% due to improving asset quality of the bank. Consequently, net profit estimate for 2013 has been revised up by 11.8%. Change in estimates SAR mn Earlier Estimates Revised Estimates % Change Gross Loans 50,307 55, Deposits 58,094 63, % NII 1,497 1, % Operating Income 2,417 2, % Provision for Loan Losses % Net Profits 1,264 1, % Source: Global Research Valuation looks attractive at current level, recommend BUY Due to its robust loan growth as a result of sound SME coverage, we expect loan book to grow significantly in. We believe the bank possesses strong fundamentals with high loan growth capabilities; we also see the bank posting the strongest growth in the NII from amongst its peers. High dividend payout ratio remains one of the key strengths of this stock. The stock currently trades at a P/BV of 1.3x, at a 13.3% discount to the industry average of 1.5x. Looking at its high ROE generating strength, we believe the bank deserves a higher premium in terms of valuation. Our valuation of SAR36.8/share suggests 19.3% potential upside for the stock from the current market price of SAR30.8, which translates into a BUY rating. June

60 SHB in Charts Loans Classification Deposits Classification Consumer loans & credit cards 12% Others 7% Govt. 3% Banks & other FI Agri. & 3% fishing 1% Other 1% Services 7% Transport & commu. 1% Commerce 29% Building & const. 13% Manuf. 19% Mining & quarrying 1% Electricity, water, gas and health services 4% Time 56% Saving 1% Demand 42% Funding Mix Interbank 3% Investment Mix Equities & Mutual funds Customer Deposits 97% Debt securities 10 Loans & Deposits Growth Return Ratios Loans (LHS) Simple LDR Deposits (LHS) ROAA (LHS) ROAE (RHS) Source: Company Accounts, Global Research June