Al Rajhi Banking & Investment Corp. (RJHI)

Transcription

1 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 Global Research Result Update Equity - Saudi Arabia Banking Sector 30 March, 2011 Market Data Bloomberg Code: RJHI AB Reuters Code: 1120.SE CMP (29 March 2011): SAR77.3 O/S (mn) 1,500.0 Market Cap (SARmn): 115,950.0 Market Cap (USDmn): 30,920.0 P/E 2011e (x): 14.7 P/BV 2011e (x): 4.0 Price Performance 1-Yr High (SAR): 85.5 Low (SAR): 65.8 Average Volume (000): 1, m 3m 12m Absolute (%) Relative (%) Price Volume Performance 6,000 5,000 4,000 3,000 2,000 1, HOLD Target Price SAR78.9 Marginally improved 2010 profitability, forecast to grow 16.4% in 2011 Cost of funds reduction by 59.6% drives net financing income Provisions expected to decline at CAGR( ) 25.3% Bank s spreads at 5.8%, highest in the sector Annual profit grew marginally despite encouraging 4Q10 result RJHI s net profit remained stagnant in 2010, inching up by just 0.1% during the year. The results were in line with our expectations. The bank was able to post profitability growth trend for the third consecutive year. The net income in 4Q10 recorded an encouraging rise of 13.5% YoY (mainly linked to overall improved performance, despite provisions increase of 6.4%). Global Research believes that the majority of impairment charges are already accounted for, so going forward the reduced provisions coupled with improved operating income will lead to net income increase of 16.4% in Net financing income growth led by reduced income expenses A higher gross financing income, coupled with significant decrease in cost of funds resulted in net financing income growth of 5.6% YoY in The increase in net fin. income was driven mainly by the reduction of 59.6% in income paid during the year. During 2010, the return on earning assets (including investment income) decreased by 69bps that, accompanied by 28bps reduction in the cost of funds, led to around 40bps drop in the bank s spreads. RJHI s spreads at around 5.8% are still one of the highest in the sector. RJHI having low cost of funding between 0.1% to 1.0% (with demand deposits 90% of total) is expected to benefit greatly from any escalation in interest rates. We forecast the bank s spreads to reach 6.4% by Even in the absence of any immediate change in policy rates, which seems likely in second half of 2011, we expect the interest rates to firm up linked to increased lending activity. Global Research expects net fin. income to rise by 10.3% in 2011 and record CAGR ( ) of 16.5%. Non-financing income posts muted results The decline in the bank s non-financing income by 10.1% in 2010 was attributed to 74.1% YoY drop in investment income (chiefly associated to the low interest rate environment that led to lower return on investments). We expect investment income to gradually pick up starting from The fees from banking services (constituting 58% of total) continued to grow and posted an increase of 14.5% in Global Research expects fees from banking services and non-financing income to record CAGR ( ) of 12.4% and 9.9%, respectively. Source: Zawya Volume (000) Mohammad Ali Shah Senior Financial Analyst mashah@globalinv.com.sa Tel.: (966) Global Investment House - Saudia RJHI (SAR) Healthy credit cushion maintained RJHI continues to maintain NPF coverage ratio above 100% (currently at 135.8% in 2010). A decline in NPFs by 31.1% is believed to be a result of the bank s active write off (2% of gross financing), as it continued with a prudent stance for cleansing its portfolio. The bank s cautious stance also led to a rise of 8.4% YoY in provisions expense in We do not expect the repetition of severe asset quality deterioration as witnessed by the sector in past few years. RJHI s provisions are expected to have touched the peak and could record CAGR ( ) of -25.3%. Although the drop in NPF ratio to 2.2% in 2010 could marginally rise in near term (as increase in financing may lead to rise in NPF), Global Research expects it to stabilize around 2.0% and NPF coverage to reach 155.9% by The bank also maintains very healthy capital adequacy ratio that reached 20.6% in Asset base continues on growth trajectory Despite the lackluster market conditions, the bank s assets base (dominated 45% by retail assets) recorded growth of 8.3%, while financing and deposits grew by 7.6% and 16.4%, respectively, in Focusing on its retail business strength, the bank followed

2 Global Research - Saudi Arabia very selective stance in extending corporate facilities (as corporate assets & financing both declined by around 6.5% each in 2010). Global Research expects RJHI to be able to capitalize well on various business opportunities (using the largest branch network), leading to assets, financing and deposits growth of 10.3%, 16.8% & 15.1%, respectively in Profitability Trend 30% 6.3% 25% 6.2% 6.2% 20% 6.1% 15% 6.0% 6.0% 5.9% 10% 5.8% 5.9% 5.8% 5% 5.7% 0% 5.6% -5% 5.5% e 2012e Net invst. & fin. income Net income Banking spread Source: Global Research & Company reports Impairments and NPF Coverage 50% 40% 30% 149.7% 151.3% 20% 135.8% 10% 0% -10% -20% 108.4% -30% -40% -50% e 2012e Impairment charges NPF coverage 160% 150% 140% 130% 120% 110% 100% 90% Revision in estimates A relatively better than expected result led us to revise our financial estimates, resulting in higher net income forecast for We expect the current year results to be driven by both the relatively lower impairment charges and improved results from operations. (SAR mn) Earlier estimates Revised estimates % change Gross financing 140, , % Deposits 164, , % Net financing income 10,482 9, % Operating profit 8,840 9, % Provisions (1,090) (1,355) 24.3% Net income 7,750 7, % Source: Global Research Valuation update We have incorporated 1% political risk to the existing risk premium due to political tension in the region, and also revised our forward estimates; however our fair value remains unaltered. Global Research has maintained its fair value at SAR78.9 per share, which offers upside of 2.0% over the current market price of SAR77.3 (as on 29 March, 2011). At current price levels, we reiterate our HOLD recommendation on the stock. March

3 Ratio Analysis Balance Sheet Income Statement Global Research - Saudi Arabia Financial Statements (SAR mn) e 2012e 2013e 2014e Financing Income 9,423 8,960 9,091 10,169 12,119 15,040 18,318 Payment to Depositors (927) (570) (230) (398) (661) (1,249) (1,999) Net Financing Income 8,497 8,390 8,861 9,771 11,458 13,791 16,319 Fee & Commission Income 1,241 1,427 1,634 1,781 1,977 2,353 2,612 Investment Income 483 1, ,033 1,166 1,280 Other Income Total Non-Financing Income 2,079 3,116 2,800 2,857 3,151 3,695 4,085 Total Operating Income 10,575 11,505 11,661 12,628 14,609 17,486 20,404 Provisions expense (1,227) (1,761) (1,909) (1,355) (801) (686) (596) Operating Expenses (2,823) (2,977) (2,981) (3,393) (3,881) (4,176) (4,812) Profit Before Taxation 6,525 6,767 6,771 7,879 9,927 12,624 14,996 Taxation & Minority Interest Net Profit Attributable to Parent 6,525 6,767 6,771 7,879 9,927 12,624 14,996 Cash Balances 11,302 11,413 19,475 18,030 16,164 14,319 13,509 Deposits with Banks & FIs 2,892 14,335 11,118 11,340 11,907 10,716 10,931 Investment Securities 1,610 27,139 28,887 32,312 36,166 41,837 46,439 Gross Financings 144, , , , , , ,992 Financing Loss Reserve (3,950) (4,192) (3,616) (4,971) (5,772) (6,458) (7,054) Net Financings 140, , , , , , ,938 Investment in Associates Investment Properties Net Fixed Assets 2,868 3,182 3,395 3,624 4,153 4,712 5,279 Other Assets 4,024 2,513 1,901 2,262 2,624 2,939 3,204 Total Assets 163, , , , , , ,299 Deposits from Banks & FIs 7,902 6,102 5,414 5,587 5,777 6,101 6,449 Deposits from Customers 118, , , , , , ,166 Other Borrowings 1, Other Liabilities 7,824 13,025 6,045 4,534 4,760 4,903 5,001 Paid-up Capital 15,000 15,000 15,000 15,000 15,000 15,000 15,000 Retained Earnings ,184 3,683 Other Reserves 11,911 12,997 15,112 14,082 15,000 15,000 15,000 Shareholders' Equity 27,032 28,741 30,318 29,130 30,669 32,184 33,683 Minority Interest Total Equity & Liability 163, , , , , , ,299 Return on Average Assets 4.5% 4.1% 3.8% 4.1% 4.5% 5.0% 5.3% Return on Average Equity 28.2% 27.1% 25.3% 27.9% 33.2% 40.2% 45.5% Net Financing Income/Operating Income 80.3% 72.9% 76.0% 77.4% 78.4% 78.9% 80.0% Recurring Income/Operating Income 92.1% 85.3% 90.0% 91.5% 92.0% 92.3% 92.8% Financing Assets Return 7.5% 6.6% 6.0% 6.1% 6.4% 6.7% 7.2% Cost of Funds 0.8% 0.4% 0.2% 0.3% 0.4% 0.6% 0.8% Net Spread 6.7% 6.2% 5.8% 5.9% 6.0% 6.2% 6.4% Cost to Income Ratio 26.7% 25.9% 25.6% 26.9% 26.6% 23.9% 23.6% OPEX/Average Assets 2.0% 1.8% 1.7% 1.7% 1.8% 1.7% 1.7% Net Financing to Customer Deposits 118.5% 91.3% 83.9% 82.8% 84.4% 86.1% 86.4% Non Performing Financing 2,766 3,866 2,662 3,322 3,816 4,200 4,525 Financing Loss Reserve 3,950 4,192 3,616 4,971 5,772 6,458 7,054 NPFs to Gross Financing 1.9% 3.3% 2.2% 2.3% 2.3% 2.1% 2.0% NPF Coverage 142.8% 108.4% 135.8% 149.7% 151.3% 153.8% 155.9% Cost of Risk (bps) Equity to Gross Financing 18.7% 24.7% 24.5% 20.6% 18.3% 16.1% 15.0% Equity to Total Assets 16.5% 16.8% 16.4% 14.3% 13.2% 12.0% 11.4% Dividend Payout Ratio 73.1% 65.8% 77.5% 77.0% 84.5% 88.0% 90.0% Adjusted EPS (SAR) Adjusted BVPS (SAR) Market Price (SAR) * Dividend Yield 5.7% 4.2% 4.2% 5.2% 7.2% 9.6% 11.6% P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research * Market price for 2011 and subsequent years as per closing prices on Mar 29, 2011 March

4 Global Research - Saudi Arabia Disclosure The following is a list of disclosure. Disclosure Checklist Company Recommendation Bloomberg Ticker Reuters Ticker Al Rajhi Banking & Investment Corp. HOLD RJHI AB 1120.SE SAR77.3 Price Global Research: Equity Ratings Definitions Global Rating Definition STRONG BUY BUY HOLD SELL Fair value of the stock is >20% from the current market price Fair value of the stock is between +10% and +20% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is < -10% from the current market price Disclaimer This material was produced by Global Investment House - Saudia, a firm regulated by the Capital Market Authority of KSA. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities Information and opinions contained herein have been compiled or arrived by Global Saudia from sources believed to be reliable, but Global- Saudia has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global - Saudia accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global- Saudia for, or sent by Global- Saudia to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Global investment house- Saudia is authorized and regulated by the Capital Market Authority (CMA) in the Kingdom of Saudi Arabia. License Number March

5 Global Investment House-Saudia Website: CEO Fahad Al-Hamidi (966) falhamidi@globalinv.com.sa Research-Saudia Syed Taimure Akhtar (966) sakhtar@globalinv.com.sa Research-Kuwait Faisal Hasan, CFA (965) fhasan@global.com.kw Mohammad Ali Shah (966) mashah@globalinv.com.sa Wealth Management-MENA & Far East Fahad Al-Ibrahim (965) fahad@global.com.kw Wealth Management - Kuwait Rasha Al-Qenaei (965) alqenaei@global.com.kw Global Kuwait Tel: (965) Fax: (965) P.O.Box Safat, Kuwait Global Abu Dhabi Tel: (971) Fax: (971) /4 P.O.Box Abu Dhabi, UAE Global Egypt Tel: (202) /06 Fax: (202) Cleopatra St., Heliopolis, Cairo Global Bahrain Tel: (973) Fax: (973) P.O.Box 855 Manama, Bahrain Global Saudi Arabia Tel: (966) Fax: (966) P.O. Box Riyadh 11586, Kingdom of Saudi Arabia Global Jordan Tel: (962) Fax: (962) P.O.Box 3268 Amman 11180, Jordan Global Dubai Tel: (971) Fax: (971) P.O.Box Dubai, UAE Global Qatar Tel: (974) Fax: (974) P.O.Box Doha, Qatar Global Saudia Wealth Manager ksa-wealthmgmt@globalinv.com.sa Tel: (966)