Al-Inma Bank. Summary. Investment Update May Key Financials. Key Ratios. Neutral. Recommendation

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1 Summary The fastest growing Sharia compliant bank in the kingdom. The deposit book has been growing at a steady pace, improving the banks market share. High ADR 1,along with deposit growth has resulted in strong loan growth. However deposit and loan growth in relation to the capital is slow, which is resulting in low ROE 2 Recommendation Neutral Previous Target Price (SAR) 18.9 Current Price* (SAR) 24.2 New 12 Months Target Price (SAR) Upside / (Downside) 8.4% *prices as of 21 th of May Corporate heavy loan book, leaves the bank susceptible to concentration risk. Increase in discount rate will be reflected fairly quickly on the income statement, given the floating rate based corporate loans. Low contribution of other operational income sources. Valuation Bank Alinma has been one of the fastest growing shariah compliant bank in the kingdom.. Although the ROE has been improving, however, at a slower pace due to heavy reliance on financing activities. We believe the current market price is the true reflection of the underlying fundamentals of the bank. By employing Residual valuation methodology, we arrived at a 12month price target of SAR22.16/share for Bank Alinma. This indicates the stock, at a current market price, is trading at premium of 8.4% and trading at prospective 15 PE and PBV of 23.6x and 2.0x, respectively. We, therefore, maintain our Neutral Healthy growth deposits and loan book Bank Alinma s market share in deposits has been showing steady increase. In 14 it stood at 3.8% as compared to 3.1% in 13. Since 09 Alinma s deposits have shown a 5 year CAGR of 9%. On the other hand gross loan in the same time period showed a CAGR of 117%, primarily due to high ADR ratio (129% average from 14). Alinma s ADR have been showing a decline, in 14 ADR stood at 91% as compared to 6% in 13. However it should be noted that the regulatory limit set by SAMA for ADR is 85%. The bank seems to be attracting a good degree of new clientele given the improvement in its market share; going forward we believe the bank will continue with its strategy to attract more corporate clients. Key Financials SARmn (unless specified) FY14 FY15E FY16E Revenues 2,286 2,680 3,352 Growth % 13% 17% 25% Net Income 1,264 1,536 1,967 Growth % 26% 21% 28% EPS Key Ratios Source: Company reports, Aljazira Capital SARmn (unless specified) FY14 FY15E FY16E NIMS 3.73% 3.70% 3.75% Operating Margins 55.7% 57.7% 59.1% Net Margins 55.3% 57.3% 58.7% PE (x) PB (x) Dividend Yield 2.66% 2.71% 3.47% Return On Assets 2% 2% 2% Return On Equity 7% 9% 11% Gross Loans 19.40% 14.91% 18.55% Bank Alinma Deposit, Loans & ADR Billion SAR Source: Company reports, Aljazira Capital DepositsLHS LoansLHS Depoist Growth (%)RHS 140% 1% 0% 80% 60% 40% % 0% Loans (growth (%)RHS ADRRHS Bank Alinma Deposits Market Share 70 Senior Analyst Talha Nazar t.nazar@aljaziracapital.com.sa % 3.0% 2.5% 1.5% 1.0% 0.5% 1 Advances to Deposits ratio 2 Return on Equity DepositsLHS Market Share (%)RHS Source: Company Report 1

2 Corporateheavy loan book, gives rise to concentration risk Bank Alinma Loan Book The banks loan book, shows a heavy bias towards corporate loans. In 14, corporate loans constituted almost 80% of the gross loans. In our view retail loans are less risky due to their granular nature, as compared to corporate loans, where heavy exposure is limited to a certain number of clients. In such a case a default by a single corporate client can have a much heavier impact due to the weight of the loan. Billion SAR % 90% 80% 70% 60% 50% 40% 30% % % 0% So far Alinma seems to be managing its corporate loans efficiently, in absolute term and in ratio terms. NPLs 3 for corporate loans are lower then retail loans. However, that can change quickly if one or two highprofile clents default on their payments. Retails Corporate Corporate (% Share) Retail (% Share) Bank Alinma NPLs % 250 Along with that given the maturity profile of the bank s loans, where almost 63% of net loans have maturity after 1 years while 1 to 5 year 41%; more than 5 year 22% the risk of NPL increases; and the need for term deposits increase to maintain a matching balance between loans and deposits. Million SAR NPLs, RetailLHS NPL ratio,retailrhs 1.5% 1.0% 0.5% Interest rate increase to impact earnings swiftly The US federal reserve is set to increase the interest rate in the 2H 15. We believe given the high concentration of corporate loans, normally which are issued at floating rate, the impact of interest rate increase will quickly translate positively into the income statement as compared to retails loans, which generally are issued at fixed rates, and repricing of the loans is much harder. The impact of the increase in the interest rates will result in higher NIMS for the bank, consequently resulting in higher net income. Billion SAR NPLs,CorporateLHS NPL ratio,corporaterhs Bank Alinma Loan Maturity 25 45% 40% 35% 30% 15 25% % 15% 5 % 5% 0% Within 3 Months 312 months 15 years Over 5 Years Financing,netLHS % ShareRHS Source: Company Financials 3 Nonperforming Loans 2

3 Relatively high NIMs, in spite of high corporate loans concentration Bank Alinma NIMs 4.5% Despite of the heavy corporate loan portfolio, the bank has been posting strong NIMs. Corporate loans, because of their risk profile are issued at a lower rate as compared to retail loans. Given the high share of corporate loans, Alinma is expected to issue loans at a lower rate, which should result in low NIMs. Alinma however, has been making NIMs higher than the industry average of around 3%. This brings into question the quality of the loan book, where in order to achieve higher return, the bank might have compromised on the financial strength of the debt holder. Low ROE a cause of concern Bank Alinma has the lowest ROE as compared its peer banks that are operating in the kingdom. We believe this is the result of the low market share of 3.8%, along with that the bank also has a very low share of other income sources. Approximately the bank generate 80% of its revenues from its core operations of financing and investments. However, what is quite evident is that the bank has shown a constant improvement in ROE, as it has improved from 4% in 12 to 7% in 14. We believe the improvement in ROE is due to the increase in the banks market share, as it has improved from 2.6% in 12 to 3.8% in 14. We believe, for the bank to improve its ROE, it will need to constantly improve its market share along with a conscious effort to improve contribution from other income sources. 3.5% 3.0% 2.5% % 16.0% 1 1.0% 8.0% 6.0% NCB NIMsIndustry NIMsAlinma ROE Peer Analysis Hollandi Alinma ROE 8.0% 7.0% 6.0% 5.0% 3.0% SABB Q3 Q4 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q % 1.0% Dark blue bars show, sharia compliant peer banks Rajhi ROE (TTM) Sector ROE(TTM), 14.4% Bilad ANB Fransi Q213 Alinma Operating Income % Share Samba SAIB ROE (Average) Riyadh Al Jazira Alinma Q313 Q413 Q114 Q214 Q314 Q414 Q115 2% 3% 1% 15% Financiang and Investment,net Fee Income,net Exchange income, net 79% Gain on sale of available for sale investments, net Others Source: Company Financials 4 Return on Equity 3

4 Key Financials Income Statement in SAR mn Income from investments and financing 1,635 2,021 2,286 2,680 3,352 4,156 5,167 Return on time investments (118) (186) (211) (289) (541) (745) (1,227) Income from investment and financing activities, net 1,517 1,835 2,075 2,390 2,811 3,411 3,940 YoY Growth 36% 21% 13% 15% 18% 21% 16% Fees from banking services, net YoY Growth 5% 12% 45% 11% 15% 9% 12% Exchange income, net YoY Growth 82% 44% 86% 19% 23% % 18% Income from FVIS financial instruments, net 3 17 (3) Gain on sale of available for sale investments, net Dividend income Other operating income Total operating income 1,826 2,279 2,6 3,051 3,621 4,307 4,931 YoY Growth 32% 25% 15% 16% 19% 19% 14% Salaries and employee related expenses Rent and premises related expenses Depreciation and amortization Other general and administrative expenses Charge for impairment of assets Total operating expenses 1,079 1,264 1,347 1,504 1,640 1,739 1,933 Net operating income 747 1,015 1,273 1,547 1,981 2,568 2,999 YoY Growth 73% 36% 25% 21% 28% 30% 17% Share of loss from associate (14) () (9) (11) (14) (18) (21) Net income for the year 733 1,005 1,264 1,536 1,967 2,550 2,978 YoY Growth 70% 37% 26% 21% 28% 30% 17% Balance Sheet in Mn SAR ASSETS Cash and balances with Saudi Arabian Monetary Agency 2,765 4,972 6,066 7,835,371 12,991 13,475 Due from banks and other financial institutions 9,008 4,972,318,318,318,318,318 Investments 1,960 5,399 8,036 9,525 11,555 13,746 16,070 YoY Growth 43% 175% 49% 19% 21% 19% 17% Financing, net 37,187 44,924 53,637 61,634 73,070 85,909 1,619 YoY Growth 47% 21% 19% 15% 19% 18% 18% Property and equipment, net 1,448 1,475 1,544 1,615 1,628 1,631 1,626 Other assets 1,647 1,259 1,261 1,541 1,681 1,804 2,236 TOTAL ASSETS 54,014 63,001 80,862 92,469 8, , ,344 YoY Growth 47% 17% 28% 14% 17% 16% 15% LIABILITIES AND SHAREHOLDERS EQUITY LIABILITIES Due to banks and other financial institutions 2, Customers deposits 32,214 42,762 59,428 70,441 85,452 1, ,840 YoY Growth 81% 33% 39% 19% 21% 19% 17% Other liabilities 2,722 3,6 3,462 4,314 4,750 5,412 6,097 TOTAL LIABILITIES 37,350 46,169 62,923 74,788 90,235 7, ,970 YoY Growth 79% 24% 36% 19% 21% 19% 17% SHAREHOLDERS EQUITY Share capital 15,000 15,000 15,000 15,000 15,000 15,000 15,000 Statutory reserve ,014 1,398 1,889 2,527 3,271 Net change in fair value of available for sale investments (21) (21) (21) (21) (21) Other reserves Retained earnings 1,335 1,198 1,268 1,436 1,651 1,930 2,256 Proposed Dividend 8 Treasury shares (155) (155) (155) (155) (155) (155) (155) TOTAL SHAREHOLDERS EQUITY 16,660 16,832 17,939 17,681 18,388 19,304,374 YoY Growth 5% 1% 7% 1% 4% 5% 6% TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 54,0 63,001 80,862 92,469 8, , ,344 Source: Company Financials, Aljazira Research 4

5 Key Financials Cash Flow in SAR mn Asset Quality Ratios Growth of Gross Loans 47% 21% % 15% 19% 18% 18% Impaired Loans(NPLs)/ Gross Loans 0.3% 0.7% 0.6% 0.7% 0.7% 0.7% 0.7% Reserves for Impaired Loans/ Gross loans 1% 1% 1% 1% 2% 2% 2% Reserves for Impaired Loans/ Impaired Loans 64% 61% 80% 80% 80% 80% 80% Impaired Loans less Reserves for Imp Loans/ Equity 0% 1% 0% 0% 1% 1% 1% Profitability Ratios Interest Income/ Earning Assets 3.4% 3.7% 3.2% 3.3% 3.5% 3.8% Interest Expense/ Interestbearing Liabilities 0.9% 0.9% 0.8% 0.9% 1.4% 1.6% 2.2% Net Interest Income/Earning Assets 3.2% 3.3% 2.9% 2.9% 3.0% 3.1% 3.1% NonInterest Income/ Gross Revenues 17% 19% 21% 22% 22% 21% % NonInterest Expense/ Gross Revenues 6% 8% 8% 9% 15% 17% 25% Loans and securities impairment charges/ Preimpairment Operating profit 13% 18% 11% 15% 17% 16% 18% Return On Assets (ROA) 1% 2% 2% 2% 2% 2% 2% Return On Equity (ROE) 4% 6% 7% 9% 11% 13% 15% Leverage ratio (ROE/ROA) Operating Profit / Risk Weighted Assets 4% 4% 4% 4% 4% 4% 4% Capital Ratios Equity/ Total Assets 31% 27% 22% 19% 17% 15% 14% Cash Dividends Paid & Declared/ Net Income 0% 0% 0% 64% 64% 64% 64% Net Income Cash Dividends/ Total Equity 4% 6% 3% 3% 4% 5% 5% Funding Ratios Loans/ Customer Deposits 116% 6% 91% 88% 86% 85% 86% Liquid Assets / Total Assets 25% 24% 30% 30% 30% 29% 27% Net Loans / Total Assets 69% 71% 66% 67% 67% 68% 70% Valuation Ratios Dividend Yield 0% 0% 3% 3% 3% 5% 5% Book Value Per Share (BVPS) Market Capitalization(in SAR Mn) 19,275 22,350 30,450 36,300 36,300 36,300 36,300 PE (x) PB (x) EPS Price No of Shares Source: Company Financials, Aljazira Research 5

6 RESEARCH DIVISION AGM Head of Research Abdullah Alawi Analyst Jassim AlJubran Senior Analyst Talha Nazar Analyst Sultan Al Kadi BROKERAGE AND INVESTMENT CENTERS DIVISION General manager brokerage services and sales Ala a AlYousef a.yousef@aljaziracapital.com.sa AGMHead of Sales And Investment Centers Central Region Sultan Ibrahim ALMutawa s.almutawa@aljaziracapital.com.sa AGMHead of international and institutional brokerage Luay Jawad AlMotawa lalmutawa@aljaziracapital.com.sa AGMHead of Qassim & Eastern Province Abdullah AlRahit aalrahit@aljaziracapital.com.sa AGM Head of Western and Southern Region Investment Centers & ADC Brokerage Abdullah Q. AlMisbani a.almisbahi@aljaziracapital.com.sa AGM Head of Institutional Brokerage Samer Al Joauni s.aljoauni@aljaziracapital.com.sa RESEARCH DIVISION AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further valueadded services, brokerage across MENA and International markets, as well as offering a full suite of securities business. RATING TERMINOLOGY 1. Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated Overweight will typically provide an upside potential of over % from the current price levels over next twelve months. 2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. 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