Buy 12-Month Target Price SAR 31.00 November 10, 2015 Expected Total Return Price as on Nov-09, 2015 SAR 22.17 Upside to Target Price 39.8% Expected Dividend Yield 5.4% Expected Total Return 45.2% Market Data 52 Week H/L SAR 20.90/31.00 Market Capitalization SAR 44,340 mln Shares Outstanding 2,000 mln Free Float 50.29% 12-Month ADTV (000 s) 100.165 TASI Weight 2.79% Reuters Code 1090.SE Bloomberg Symbol SAMBA AB 1-Year Price Performance 120 110 100 90 80 70 N D J F M A M J J A S O Samba TASI TBFSI Source: Bloomberg Samba TASI TBFSI Nov-09, 2015 22.17 7,015 15,649 Total Change 6-months (25.9%) (27.8%) (27.6%) 1-Year (22.4%) (28.4%) (27.2%) 2-Year (2.5%) (14.9%) (10.5%) F2015E SAR mln Special Comm. Income 5,108 Special Comm. Expense (454) Net Comm. Income 4,654 Total Operating Income 7,882 Total Operating Expense (2,566) Net Income 5,315 Bang for the Buck Operating with a network of 72 branches and an asset base of SAR 217 billion (as of 2014), (Samba) is the fourth largest bank in the country. Government institutions hold almost 50% stake providing an inherent sovereign backing. Although Citibank sold-off its last remaining shares in 2004, legacy brand equity continues to benefit Samba versus local peers. The bank trades at one of the most attractive relative valuations within the top five banking space in KSA. While some of this may be explained by sub-par performance on metrics such as LDR, we contend valuations need to correct upwards to reflect growth potential. Our justified P/B valuations place the stock firmly on our Buy list with a target price of SAR 31. Loan growth to lead LDR rise We believe loan growth will trough in 2015E and start on an expansionary mode going forward. A rising interest rate environment is unlikely to impede advances. Lower appetite at comparable large banks may actually aide in loan book expansion. We do not foresee a material NPL rise at Samba given the current loan portfolio and a constricted loan to deposit ratio (LDR) of 72% (2015E). Even assuming an increase in provisions for credit losses from SAR 141 million in 2014 to SAR 537 million by 2018 keeps the NPL coverage ratio in excess of 100%. Constrained deposit growth We expect restricted deposit growth at a CAGR of 2.8% between 2015-18 versus a CAGR of 6.1% during 2011-14 on the back of weaker economic growth for the next three years. 65% demand deposits are a blessing but fade in comparison to Rajhi s 89% and NCB s at 75%. We agree with management that these demand deposits are mostly inelastic. NIMs to rebound Falling average asset yields from 2.7% in 2011 to 2.3% in 2015 have outweighed declining cost of funds from 0.31% to 0.25% for the same period. Consequently, NIMs have shrunk by 300bps to 2.1% this year. We bet on a rebound to 2.3% by 2018 leading to a net income CAGR of 5.4% through 2018. Enticing valuations Using a 12.0% ROE, 10.4% cost of equity and 6.6% long term growth rate, we arrive at a justified P/B multiple of 1.4x. Applying it to 2016E book value of SAR 21.73/share, we arrive at our SAR 31 target price, +40% upside from current levels. Buy. Key Financials FY December 31 (SAR mln) 2014A 2015E 2016E 2017E Net Comm. Income 4,593 4,654 5,059 5,403 Provisions for credit losses 141 335 489 654 NIM 2.2% 2.1% 2.2% 2.3% Cost-to-income 30.2% 28.3% 27.7% 27.2% NPL coverage 160% 122% 112% 108% ROAA 2.4% 2.3% 2.3% 2.4% ROAE 13.6% 13.4% 13.4% 12.9% CAR 19.9% 18.4% 17.9% 18.1% EPS (SAR) 2.50 2.66 2.81 2.90 DPS (SAR) 1.12 1.20 1.30 1.30 BVPS 32.32 20.26 21.73 23.35 P/E 9.0x 8.5x 8.0x 7.8x P/B 0.7x 1.1x 1.0x 1.0x Muhammad Faisal Potrik muhammed.faisal@riyadcapital.com +966-11-203-6807 Sultan S. Al-Abdulkarim sultan.s.al-abdulkarim@riyadcapital.com +966-11-203-6812 Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
We reinstate coverage on (Samba) with a Buy rating and a SAR 31 target price. Sector well placed versus global peers We continue to believe that Saudi banks are at a strong footing in terms of capitalization levels, CARs and regulated by a very proactive central bank (SAMA). Any upcoming stress is likely to be addressed appropriately. On a sector level, a rise in interest rates (most probably in the next Fed meeting in December) can expand net interest margins. The SAR peg to the USD will ensure a pass-through of rates. Standard & Poor s (S&P) has taken a negative view on KSA and the local banking sector changing ratings. They downgraded 5 Saudi banks with a negative outlook citing increased economic risks and tougher operating conditions on November 5 th. S&P had cut Saudi Arabia s long-term foreign and local currency ratings A-plus/A-1 with a negative outlook on October 30 th. In early November, Fitch changed the outlook on SABB, ANB and Saudi Fransi to negative citing a deteriorating operating environment could be characterized by slowing loan growth, reduction in earning and profitability growth, a deterioration in asset quality metrics, and subsequent impact on capital, as well as tighter liquidity, and could result in a downgrade of the banks long-term IDRs. Moody s has been more measured in its approach weighing the strengths of the country (such as high foreign exchange reserves, low debt to GDP ratio) against the stress caused by subdued international crude prices and opting to maintain ratings and a stable outlook. It said Saudi Arabia's fiscal position is weakening but is still relatively strong. Comparative valuation of the 12 local banks in terms of relative multiples (P/B and P/E) and dividend yield reveals valuations have narrowed. Despite a dividend yield of 3.3% and 3.6% in 2013 and 2014 respectively, Samba trades at a 2015E P/B and P/E of just 1.1x and 8.9x respectively based on Bloomberg consensus data. Table 1: Local Banks Comparative Valuations Price P/E P/B Dividend Yield Company (SAR) 2013 2014 2015E 2013 2014 2015E 2013 2014 2015E RB 12.55 9.5x 8.7x 8.5x 1.1x 1.1x 1.0x 5.8% 5.8% 6.1% BJAZ 17.98 11.0x 12.6x 6.2x 1.3x 1.2x 0.9x - - - SAIB 18.05 9.1x 8.2x 9.1x 1.1x 1.0x 0.9x 3.8% 4.1% 4.3% SHB 29.60 11.3x 9.3x 8.6x 1.8x 1.6x 1.4x 2.8% 3.6% 3.2% BSF 28.03 14.0x 9.6x 8.8x 1.5x 1.3x 1.1x 1.2% 3.2% SABB 26.38 10.5x 9.3x 9.0x 1.7x 1.5x 1.4x 2.8% 2.7% 2.9% ANB 25.87 10.3x 9.0x 8.3x 1.4x 1.3x 1.2x 1.6% 3.9% 4.5% SAMBA 22.17 9.9x 8.9x 8.8x 1.3x 1.1x 1.1x 3.3% 3.7% 4.6% Rajhi 50.82 12.0x 12.1x 12.1x 2.1x 2.0x 1.9x 4.5% 3.4% 3.3% Bilad 24.01 16.4x 13.9x 13.9x 2.4x 2.0x 1.9x - - 1.7% Alinma 14.42 21.2x 17.0x 14.6x 1.3x 1.2x 1.2x - 3.5% 4.0% NCB 51.65 9.8x 11.9x 11.8x 1.9x 2.3x 2.0x 3.7% 2.8% 3.2% AVERAGE 12.1x 10.9x 10.0x 1.6x 1.5x 1.3x 3.3% 3.7% 3.7% Source: Bloomberg November 10, 2015 2
Advances growth to slow We believe loan growth will trough in 2015 and commence an expansionary mode going forward. LDR is expected to gradually rise from 72% in 2015 to 74% through 2018. Were it not for a forecasted relatively difficult external operating environment, we would have expected an even greater rise given a meek last couple of years as LDR has not done justice to the banks size and status. Gross advances growth has waned over the last 3 years, dropping from 16.6% in 2012 to an estimated 3.0% this year. However, we expect the trend to reverse from next year with loan growth rising to 4.0% by 2018. Lower crude price expectations going forward leading to weaker GDP growth would keep the upside potential in check, in our view. IMF has recently revised upwards its 2015E GDP growth rate estimates from 2.8% to 3.4% versus 3.5% in 2014 with a slower growth forecast of 2.2% in 2016. Loan growth has been fueled by government spending which is likely to slow down going forward. Exhibit 1: Net Advances (SAR bln) and Growth (%) Exhibit 2: Loan to Deposit Ratio (%) 160 140 120 100 80 60 40 20 7.9% 8.9% 3.0% 3.5% 3.5% 4.0% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 77% 76% 75% 74% 73% 72% 71% 70% 75.8% 71.7% 72.3% 73.1% 73.4% 74.2% - 0% 69% Net Advances Advances Growth LDR In absolute terms, we forecast gross advances to rise from SAR 127 billion in 2014 to SAR 145 billion by 2018. At the same time, we expect provisioning to be strengthened with provisions for credit losses charge (net of recoveries) rising from SAR 141 million last year to SAR 537 million by 2018. We believe it is wise to expect a rise in non-performing loans (NPLs) for the next few years as lower economic growth and more careful government spending may put pressure on corporates, particularly smaller ones. Exhibit 3 below illustrates our expectations of an increase in NPLs from SAR 1.66 billion to SAR 2.71 billion through 2018. While NPL coverage may also decline from a high of 145% in 2014, it is likely to remain above 100% through 2018. November 10, 2015 3
Exhibit 3: NPLs and NPL coverage 3.00 2.50 2.00 1.50 2.01 1.66 2.12 2.32 2.54 2.71 180% 160% 140% 120% 100% 80% 1.00 60% 0.50 40% 20% 0.00 0% NPLs (SAR bln) NPL Coverage (5) Deposit growth to slowdown For the past two years (2013-14), demand deposits have constituted an average 65% of total customer deposits. These non-interest bearing (NIB) deposits are one of the lifelines for most banks in the country. For some of its larger peers, the proportion is even higher such as Al Rajhi at 89% and NCB at 75% although they have different dynamics. These deposits feed into better margins for the banks. Exhibit 4: Deposits (SAR bln) and Growth (%) 250 200 150 100 50-8.0% 6.5% 3.4% 2.5% 3.0% 3.0% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Total Deposits Deposits Growth Deposits growth Y/Y has been volatile ranging between 2.8% to 8.4% over the last four years. Despite lower oil prices, we expect deposits to reach SAR 177 billion by December-end 2015 (SAR 175 billion at September-end) corresponding to a Y/Y growth of 8.0%, one of the highest in recent years. We expect the growth to ease going forward to 3.0% by 2018. Tight liquidity with corporates and retail clients would be one of the contributing factors in our view. We may also witness a trend within the banking sector where interest bearing deposits start to replace non-interest bearing deposits if rates rise significantly. However, this remains to be tested. November 10, 2015 4
Special commission income to grow at 7.1% CAGR Despite sluggish loan growth, rising interest rates and expanding margins is expected to result in a 7.1% CAGR growth in total special commission income between 2015 and 2018 versus a CAGR of 1.3% between 2011 and 2014. Income from loans will likely remain the largest contributor, 77% in 2018 as compared to 79% in 2014. At the same, we anticipate a 6.1% CAGR rise in total special commission expenses. Exhibit 5: Total Income Growth to Wind- down 7,000 8.0% 6,000 5,000 4,000 3,000 2,000 1,000 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0 Total Sp Comm Income Income from loans Total Income Growth 0.0% Fee-income has risen at an impressive CAGR of 8.3% between 2011 and 2014 but may moderate to 4.5% through 2018. As the bank raises its investment book mainly on the back of increase in government bonds, we forecast investment income to grow at a CAGR of 6.0% until 2018. Although returns on sovereign bonds are typically lower, the zero risk weighting make them an attractive proposition. NIMs likely to expand albeit marginally Cost of deposit for Samba stood at just 0.24% in 2014, which we expect to marginally decline to 0.23% this year. Despite higher interest rates, increase in cost of deposits is likely to be marginal with our expectations at 0.25% by 2018. Net Interest Margins (NIMs) have generally been falling over the last few years. From 2.9% in 2009, they have come down to 2.2% in 2014 and likely to make a low of 2.1% in 2015. However, we expect a change in course from 2016 with a rise to 2.2% and then to 2.3% in 2018 as higher interest rates benefit. Average asset yield is also forecasted to grow from 2.3% in 2015 to 2.5% in 2018 as higher rates are passed on to consumers. November 10, 2015 5
Exhibit 6: Net Interest Margins & Avg Asset Yield (%) 2.6% 2.3% 2.5% 2.2% 2.3% 2.4% 2.1% 2.1% 2.4% 2.5% 2.2% 2.3% NIMs Avg Asset Yield 67% bonus in 2014 Amid a flurry of bonus issues within the banking sector, Samba did not fall behind and issued its own 67% bonus for the year 2014 taking paid up capital to SAR 20 billion. The previous bonus was announced for the year 2013 when paid up capital was raised from SAR 9 billion to SAR 12 billion. Exhibit 7: Stable Dividend Payouts 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1.30 1.30 1.40 1.20 1.12 0.98 DPS Dividend Payout Dividend Yield 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% With an average payout of 44% for the last three years, Samba has been paying out stable dividends. Our model assumes an average payout of 45% going forward. The bank has already announced a SAR 0.60 DPS for 1H2015 and a similar dividend can be expected for the second half taking the full year payout to SAR 1.20. November 10, 2015 6
Valuation and Recommendation We prefer the P/B valuation method for Samba. We find this a suitable valuation tool for financial firms given a stable book value that effectively captures returns. As illustrated in the table below, we have calculated a justified P/B multiple using a 12.0% ROE, 10.4% cost of equity and 6.6% growth rate. The growth rate stems from a long term ROE of 12.0% and a long term retention rate of 55%. Table 2: P/B Valuation Assumptions 2015E 2016E 2017E 2018E Risk-free rate 3.70% Book Value per share (SAR) 20.26 21.73 23.35 25.07 Equity risk premium 6.75% Beta 0.99 LT ROE 12.0% CoE 10.4% LT growth rate 6.6% LT retention rate 55.0% Cost of Equity 10.4% Justified P/B 1.4x Source: Riyad Capital Per Share Fair Value 31.03 Our justified P/B multiple for Samba comes out to 1.4x which we apply to our 2016E book value per share forecast of SAR 21.73 to arrive at a SAR 31.03 fair value. As a cross check we carried out a P/E valuation assuming a target P/E multiple of 10.0x, the average 2015E P/E for all banks based on Bloomberg consensus estimates. We applied this multiple to our average EPS forecast between 2016 and 2018 of SAR 2.94 leading to a fair value of SAR 29.42. Table 3: P/E Valuation 2015E 2016E 2017E 2018E EPS 2.66 2.81 2.90 3.12 Target P/E multiple 10.0x Avg EPS (2016E-2018E) 2.94 Fair value per share 29.42 Source: Riyad Capital We reinstate coverage on (Samba) with a 12-month target price of SAR 31.00 representing 1.5x P/B and 11.7x P/E. With an upside of 40% to our target price, we recommend a Buy. November 10, 2015 7
Summary Financials Table 4: Samba Summary Financials Income Statement (SAR mln) 2014 2015E 2016E 2017E Cash Flows (SAR mln) 2014 2015E 2016E 2017E Special Comm Income 5,041 5,108 5,545 5,913 Cash at Beg. of Year 20,383 14,679 21,351 14,445 Special Comm Income 448 454 485 510 Net Income 5,005 5,316 5,620 5,799 Net Special Comm Income 4,593 4,654 5,060 5,403 Dividends Paid (2,061) (2,400) (2,600) (2,600) Other Income 2,792 3,228 3,386 3,462 Depreciation & Impairment 134 146 187 224 Operating Income 7,385 7,882 8,446 8,865 Due from Banks (2,548) (3,851) (1,126) (1,238) Operating Expense 2,374 2,566 2,826 3,066 Operating Cash Flow (2,175) 13,556 (51) 2,046 Profit/Loss minority shareholde (5) Change in Investments (4,648) (6,884) (6,854) (5,027) Net Income 5,005 5,316 5,620 5,799 Loans and Advances (10,624) (3,892) (4,545) (4,584) Shares Outstanding (mln) 1,200 2,000 2,000 2,000 Debts Inc./Dec. - - - - EPS (on current shares) 2.50 2.66 2.81 2.90 Capital Expenditure (1,494) (1,182) (1,267) (1,330) DPS 1.12 1.20 1.30 1.30 Cash at year end 14,679 21,351 14,445 11,463 Balance Sheet (SAR mln) 2014 2015E 2016E 2017E Ratios 2014 2015E 2016E 2017E Assets Growth (YoY) Cash & Bank Bal. with SAMA 14,679 21,351 14,445 11,463 Net Special Comm. Income 1.4% 1.3% 8.7% 6.8% Due from Banks 7,406 11,257 12,382 13,620 Total Income 5.5% 6.7% 7.2% 5.0% Total Investments 64,516 69,032 74,554 78,282 Net Income 11.0% 6.2% 5.7% 3.2% Net Loans and Advances 124,079 127,971 132,516 137,101 Gross Loans 8.9% 3.0% 3.5% 3.5% Other Assets 4,652 4,419 4,508 4,598 Total Investments 6.9% 7.0% 8.0% 5.0% Net Fixed Assets 2,067 3,100 4,171 5,262 Customer Deposits 3.4% 8.0% 2.5% 3.0% Total Assets 217,399 237,129 242,577 250,326 Earning Assets 5.8% 9.0% 1.9% 2.8% Total Assets 6.0% 9.1% 2.3% 3.2% Liabilities & Equity Total Equity 11.4% 4.5% 7.3% 7.4% Customer Deposits 163,795 176,898 181,321 186,761 Profitability Due to Banks 9,385 14,547 12,365 11,128 RoAA 2.4% 2.3% 2.3% 2.4% Debt Sec. in Issue 5,307 5,042 5,294 5,611 RoAE 13.6% 13.4% 13.4% 12.9% Borrowings - - - - NIMs 2.2% 2.1% 2.2% 2.3% Total Liabilities 178,487 196,487 198,979 203,500 Others CAR 19.9% 18.4% 17.9% 18.1% Capital 12,000 20,000 20,000 20,000 NPL Coverage 160.7% 121.5% 112.0% 108.0% Statutory Reserves 12,000 12,000 12,000 12,000 P/E 9.0x 8.5x 8.0x 7.8x Retained Earnings 12,926 7,842 10,862 14,061 P/B 1.2x 1.1x 1.0x 1.0x Total Shareholders Equity 38,784 40,514 43,469 46,698 Dividend Yield 5.0% 5.3% 5.8% 5.8% Total Liab & Equity 217,399 237,129 242,577 250,326 Dividend Payout 44.8% 45.0% 45.0% 45.0% November 10, 2015 8
Stock Rating Strong Buy Buy Hold Sell Not Rated Expected Total Return 25% Expected Total Return 15% Expected Total Return < 15% Overvalued Under Review/ Restricted For any feedback on our reports, please contact research@riyadcapital.com Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations. Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia ( KSA ). Website: www.riyadcapital.com