December 11, 2014 Weaker Economic Outlook to Limit Growth Asim Bukhtiar, CFA asim.bukhtiar@riyadcapital.com +966-11-203-6816 Ibrahim Al-Harbi ibrahim.a.al-harbi@riyadcapital.com +966-11-203-6841
Executive Summary The precipitous decline in crude (Brent -38% YTD) over the last three months has fueled the sell-off in Saudi equities. Tadawul All Share Index (TASI) declined -25% from a peak of 11,149 to 8,411, leaving investors searching for signs of stabilization. We observe that the correlation between oil and TASI weakened during periods of higher crude prices and strengthened in a downtrend. The market is now virtually taking the lead from oil prices. While we refrain from projecting an average oil price for 2015, we do highlight some factors that will play a role in setting the direction for the commodity and the overall market. In this Update, we revise our outlook for Saudi banks and consequently target price forecasts. For the moment, all eyes are on the upcoming budget announcement expected towards the end of December. Will there be cuts or can built-up reserves fill revenue shortfall? We place less emphasis on reserves and more on the longer-term outlook for oil to set the tone for expenditure in the coming years. In our view, shale is just one factor creating headwinds, rising output from other producers, such as Libya and Iraq, will add to the supply glut. Further, strengthening USD is in an early stage and could pick-up momentum in 2015, exerting downward pressure on oil prices. OPEC stepped back from announcing production cut in its 30 mbpd quota at the last meeting in November. While a cut may have supported oil prices in the short-term, it may not have been enough to reverse the longer-term trend. The International Monetary Fund (IMF) projects Saudi real GDP growth at +4.5% for 2015 versus +4.0% in 2013 when Brent hovered around $110, while Bloomberg consensus estimate stands at +4.1%. We take a cautious view for next year and base our assumptions on a tighter economic environment. Further, we stress our models with rising non-performing loans, constant net interest margins and higher salary expense to derive our earnings forecasts. Consequently, median net income growth for the ten banks under our coverage will be a slim +1% Y/Y in 2015 versus an estimated +13% Y/Y in 2014. Median 2015E P/E multiple for the group has contracted from 12.8x to 11.7x in the past quarter and may remain under pressure until oil settles in a price range. Our revised target prices represent a median 2015E P/E of 13.0x, previously 15.4x. Surprise budget expansion and market opening to direct foreign investment pose catalysts for the overall index. While a correction in US markets will exacerbate valuation multiples compression. We recommend longer-term investors to weather the clouds ahead and await a brighter 2016. Ratings and Target Price Summary TASI Code Target Price BJAZ 1020 Sell 20.00 SAIB 1030 Buy 30.00 SHB 1040 Buy 51.00 BSF 1050 Buy 38.00 SABB 1060 Buy 55.00 ANB 1080 Buy 34.00 Samba 1090 Hold 47.00 Rajhi 1120 Hold 65.00 Bilad 1140 Sell 27.00 Alinma 1150 Sell 16.00 Source: Riyad Capital Recommendation December 11, 2014 2
Oil Still Dominant Factor Before getting into our forecast revisions, some words on oil as an underlying factor merit attention. Oil comprises some 90% of total government revenues of SAR 1.1 trillion in 2013. As such the budget is set with a forecast average oil price for the year ahead. In the past five years, infrastructure spending has been a major benefactor of bank credit demand which has grown at double-digit rates since 2011, following -4% contraction in 2009. Aside from the banking sector, oil affects the overall stock market direction, particularly during periods of decline, as fiscal concerns surface. Oil and equities correlation Market correlation rises when oil declines In Exhibit 1, we plot Brent (blue line) versus TASI (green line) movement since 2008 and note that correlation rises in a declining oil scenario. For example in late-2008, Brent dropped to $40 due to the financial crisis and TASI slumped to near 4,500 level, despite the Saudi banking system being relatively unaffected by the collapsing banks in other regions. In early-2011, geopolitical tensions drove divergence in price movement as oil rallied but the stock market declined. Correlation weakened between mid-2012 and early-2014 as oil was flat but the TASI moved higher as banks and petrochemicals reported solid earnings growth. During this period, investors were comfortable with price stability near $110 Brent and focused on market fundamentals. More recently, the drop in oil has curbed investor appetite and pushed TASI lower on public sector spending concerns. Exhibit 1: Oil (Blue) and TASI (Green) Movement Improving earnings: Oil moves sidew ays but market rallies on earnings grow th Financial crisis: Market decline matches oil drop Arab Spring: Turmoil drives oil higher but pushes TASI low er 38% oil drop: Market follow s oil dow n Source: Bloomberg, Riyad Capital The question arises, can we predict market level based on oil price forecast? Does 5% drop in Brent correspond to 500 point decline for the TASI? In our view, the drop in TASI accelerates as Brent moves lower. For example, a 5% drop in oil below $60 will disproportionately magnify decline in equities versus an equivalent decline when oil is at $110. The simple reason is budget implications. Reserves will be preserved for a rainy day Recent history has shown that the Saudi budget is based on a conservative oil price assumption. In some instances, the budgeted price assumption turns out to be $15- $20 lower than the realized price which contributes to a significant surplus despite higher than projected spending. In fact since 2008, excess revenues have added some December 11, 2014 3
SAR 1.6 trillion to the total current reserves of SAR 2.8 trillion. Between 2008 and 2013, the government has spent on average SAR 125 billion above the planned expenditure. Table 1: Budget Headline Figures Surplus / Expenditure SAR bln Revenues Expenditure (Deficit) Growth (Y/Y) 2008 1,100 510 590 2009 505 550 (45) 7.8% 2010 735 627 108 14.0% 2011 1,110 804 306 28.2% 2012 1,239 853 386 6.1% 2013 1,131 925 206 8.4% 2014E 855 855 - (7.6%) Source: Ministry of Finance Government spending projected flat to slightly lower than 2014 With oil testing $65, the budget may well be based at this price or even lower, suggesting total revenues of around SAR 890 billion. In our view, expenditure will likely not exceed SAR 900 billion in 2015 on efforts to avoid running a deficit. Overall Y/Y spending will be flat to mildly negative. We believe an expansionary budget will be surprising as the government will not rush to start dipping into its savings. It has taken an abnormal and scarce bull run in oil prices to accumulate the much talked about reserves. Such golden days may not return in the near future. Therefore prudent spending of reserves will be exercised and focus will turn to trimming or deferring discretionary projects. This does not necessarily mean that mega projects will be cancelled, simply that the scope will be refined and delivery dates may extend to spread cash outlay over a longer time horizon. Ultimately, the decision to start spending reserves will hinge of future oil price expectations. If the recent drop is deemed temporary then using reserves to plug revenue gap is an easier decision. Conversely, if long-term trends are bearish for oil then undoubtedly reserves will be preserved. Hard to get positive reading on oil Oil price expected to be range bound We will not even attempt to guess an average oil price for 2015 but we will broach three determinant factors: supply-demand, production cuts and strengthening US dollar. Much has been written about the game-changing impact of shale which will only increase in a rising price environment to eventually lower prices back down to their equilibrium. In essence price will be range bound likely below $100 but above $60. Second, according to EIA Libyan current output is one-third of its effective production capacity of 1.6 million barrels, which could come back to the market by end-2015. Additionally, impact of Iraqi oil will be marginal in next year but could rise in the years beyond. Conversely, the demand side of the equation is murky considering weaker import data from China, deflationary concerns in Europe and ever increasing fuel efficiency of vehicles. Some argue that lower prices at the pump will translate into higher consumption which does not entirely mean higher fuel demand. News flow increasingly suggests that production cuts are no longer an effective means of supporting oil prices. Market forces are emerging as the desired price setting mechanism. A cut in output may temporarily boost price only to incentivize another producer to step-in and capitalize. Secondly, production cuts seem out of place when December 11, 2014 4
producers are discounting prices to Asian customers to stimulate demand and possibly market share. USD rally has room to run on interest rates and equities Further, strengthening US dollar means lower prices. We believe the dollar rally is in early stages and still has room to run in 2015 for two reasons: 1) even a modest uptick in interest rates will push the currency higher and 2) strong performance of US equities will attract investors away from other markets and raise dollar demand. Recap of 9M2014 Performance Over the trailing nine months, net commission income for the group was mildly below expectations at SAR 25.2 billion. BSF stands-out with an impressive +6.6% outperformance relative to our estimate, while both Rajhi and Bilad disappointed. Both are facing severe margin headwinds likely on intense competition driving asset yields lower. Only four banks (SHB, BSF, SABB and ANB) consistently beat our net commission income estimates in each of the three quarters. In terms of total revenues, the group comfortably exceeded our forecast by +2.9%, largely helped by the extraordinary gain on investment reclassification by SAIB in 1Q2014 and superior execution by BSF. Across the board non-lending revenues were strong on rising fee income. Table 2: 9M2014 Earnings Performance 9M2014 Net Comm Income Operating Income Net Income SAR mln Forecast Actual Variance Forecast Actual Variance Forecast Actual Variance BJAZ 1,027 1,056 2.8% 1,556 1,669 7.3% 554 373 (32.7%) SAIB 1,132 1,115 (1.5%) 1,599 1,884 17.8% 991 1,062 7.2% SHB 1,397 1,437 2.9% 2,240 2,377 6.1% 1,394 1,359 (2.5%) BSF 2,670 2,847 6.6% 4,005 4,366 9.0% 2,463 2,666 8.2% SABB 2,961 2,999 1.3% 4,664 4,940 5.9% 3,186 3,297 3.5% ANB 2,596 2,680 3.2% 3,929 4,060 3.3% 2,207 2,246 1.8% Samba 3,452 3,420 (0.9%) 5,385 5,567 3.4% 3,585 3,779 5.4% Rajhi 7,651 7,348 (4.0%) 10,988 10,631 (3.2%) 6,299 5,317 (15.6%) Bilad 801 750 (6.4%) 1,574 1,563 (0.7%) 607 615 1.3% Alinma 1,552 1,544 (0.5%) 1,917 1,898 (1.0%) 969 932 (3.8%) Total 25,239 25,196 (0.2%) 37,857 38,955 2.9% 22,255 21,646 (2.7%) Despite attractive revenue gains, the group earnings were -2.7% lower than expected at SAR 21.6 billion. Rajhi and BJAZ led the group lower on higher impairment charges. Interestingly both banks consistently missed expectations in the past three quarters while SAIB, BSF and Samba consistently topped estimates. Forecast Revisions NPLs projected to rise along with impairment charges In our view, economic slowdown in KSA triggered by lower oil prices will affect credit demand. Second, although banks started building-up coverage levels in 2014 comfortably above 150%, increase in non-performing loans and debt write-offs will raise the need to book higher impairment charges. And third, margin relief appears remote even with a modest increase in US interest rates. Liquidity should continue to flow with some moderation. With this backdrop we outline our expectations for the year ahead. Further declines in oil prices will drag the overall stock market lower and banks will not be immune. Even with TASI at 12.9x forward P/E versus 15.4x for DJIA and 23.3x for Nasdaq, investors remain skeptical on value case anticipating further December 11, 2014 5
downside and the chance to pick-up stocks cheaper. Sentiment is overshadowing fundamentals, meaning if confidence improves, banks stand to rally. Loan growth cut in half Limited big-ticket financing transactions on the horizon For next year, we expect loan growth to significantly slowdown to +5.8% Y/Y from an estimated +12.6% Y/Y in 2014. The banking system has witnessed a tremendous run in credit growth since 2010 and next year is shaping to be less exciting. Some twothirds of total lending is comprised of corporate borrowers who may scale back capital spending plans. Financing for mega projects (current phase) is mostly in place and limited big-ticket transactions appear on the horizon. On consumer credit side, demand will remain robust however the built-up anticipation of mortgage financing has so far failed to impress. Media reports suggest that buyers are deferring purchase decisions on expectations of a real estate correction. We project mid-single digit loan growth for the larger banks and group leading increase by Bilad (+9.5% Y/Y) and BJAZ (+8.7% Y/Y), as both are coming off a low base. Plain loan-to-deposit ratio will edge up to 83% from 82%. Table 3: 9M2014 Earnings Performance Net Loans Loan Growth (Y/Y) 2014 Quarterly Loan Growth (Y/Y) LDR SAR mln 2013 2014E 2015E 2013 2014E 2015E 1Q 2Q 3Q 4QE 2013 2014E 2015E BJAZ 34,995 41,672 45,308 17.1% 19.1% 8.7% 13.2% 17.0% 12.4% 19.1% 73% 75% 75% SAIB 47,567 59,572 64,269 39.7% 25.2% 7.9% 41.2% 35.5% 34.7% 25.2% 83% 84% 84% SHB 53,652 65,051 69,684 18.5% 21.2% 7.1% 17.1% 16.2% 15.4% 21.2% 87% 88% 88% BSF 111,307 121,539 125,200 8.3% 9.2% 3.0% 8.5% 6.5% 6.3% 9.2% 85% 91% 90% SABB 106,115 118,868 126,871 10.4% 12.0% 6.7% 8.6% 6.3% 6.3% 12.0% 76% 81% 82% ANB 88,456 97,321 101,880 2.5% 10.0% 4.7% 1.7% 7.2% 8.2% 10.0% 83% 83% 83% Samba 113,455 122,224 129,466 8.3% 7.7% 5.9% 8.5% 9.7% 9.9% 7.7% 72% 74% 76% Rajhi 186,813 206,429 216,451 8.6% 10.5% 4.9% 7.0% 8.7% 9.7% 10.5% 81% 82% 82% Bilad 23,415 28,804 31,537 28.3% 23.0% 9.5% 29.9% 31.7% 28.5% 23.0% 80% 76% 76% Alinma 44,924 51,620 55,600 20.8% 14.9% 7.7% 16.2% 17.9% 19.6% 14.9% 105% 95% 95% Total 810,700 913,099 966,265 11.6% 12.6% 5.8% 10.9% 12.9% 11.1% 13.5% 81% 82% 83% We stressed our loan quality assumptions, most notably for BJAZ with non-performing loans rising to 1.6% from an estimated 1.0% at end-2014. Overall for the group, we project NPLs will rise nearly 40 bps to 1.6%. Similarly loan loss buffers will be utilized to write-off bad debts, trimming coverage levels to 149% from an expected 166% at end-2014. Table 4: Loan Quality NPLs Coverage 2013 2014E 2015E 2013 2014E 2015E BJAZ 1.2% 1.0% 1.6% 154% 179% 131% SAIB 0.8% 0.8% 0.9% 178% 159% 150% SHB 1.3% 1.3% 1.7% 161% 158% 141% BSF 1.3% 1.2% 1.3% 146% 148% 147% SABB 1.4% 1.3% 1.6% 148% 159% 149% ANB 1.1% 1.2% 1.3% 205% 196% 204% Samba 1.7% 1.6% 1.7% 145% 154% 148% Rajhi 1.6% 1.5% 1.7% 144% 178% 172% Bilad 1.9% 1.6% 1.7% 194% 181% 170% Alinma 0.7% 0.7% 0.9% 170% 173% 174% Median 1.3% 1.2% 1.6% 158% 166% 149% December 11, 2014 6
Selectivity on deposits As non-interest bearing deposits start to ebb, we believe banks will become more selective in deposit intake to manage funding costs. Deposit growth showed signs of a slowdown in 2014 and will accelerate in 2015. For the group, we project +5.3% Y/Y increase in deposits. Table 5: Deposit Growth Deposits Deposit Growth (Y/Y) 2014 Quarterly Deposit Growth (Y/Y) 2013 2014E 2015E 2013 2014E 2015E 1Q 2Q 3Q 4QE BJAZ 48,083 55,295 60,548 18.2% 15.0% 9.5% 17.0% 14.7% 17.0% 15.0% SAIB 57,044 71,305 76,653 41.2% 25.0% 7.5% 41.1% 39.5% 34.4% 25.0% SHB 61,875 73,941 79,487 14.8% 19.5% 7.5% 16.2% 16.2% 17.1% 19.5% BSF 131,601 134,233 139,603 13.9% 2.0% 4.0% 15.6% 7.9% 9.2% 2.0% SABB 138,961 146,882 154,226 15.4% 5.7% 5.0% 12.2% 9.9% 8.6% 5.7% ANB 106,373 117,010 122,861 (1.1%) 10.0% 5.0% 7.7% 6.0% 5.0% 10.0% Samba 158,337 164,670 170,928 6.5% 4.0% 3.8% 4.7% 4.9% 6.9% 4.0% Rajhi 231,589 252,432 262,529 4.6% 9.0% 4.0% 2.9% 9.7% 10.2% 9.0% Bilad 29,108 37,840 41,548 22.6% 30.0% 9.8% 24.2% 24.3% 30.9% 30.0% Alinma 42,763 54,309 58,653 32.7% 27.0% 8.0% 31.4% 34.3% 34.1% 27.0% Total 1,005,733 1,107,917 1,167,035 11.2% 10.2% 5.3% 15.9% 12.3% 13.6% 12.5% NIBs increased to 58% through 9M2014 from 54% Group median NIBs continued to rise through 2014 to reach 58% by the third quarter up from 54% at the start of the year. SAIB made some progress but not to the extent of its larger peers. Meanwhile the trend reversed for Bilad as time and savings accounts increased to pressure margins. A dramatic shift in deposit composition is unlikely during the year but a slight downtrend in NIBs is expected. Rollover of savings accounts at modestly higher rates threatens funding cost. Table 6: Deposit Composition Demand Time & Savings Other 2013 3Q2014 2013 3Q2014 2013 3Q2014 BJAZ 40% 45% 57% 53% 3% 2% SAIB 23% 25% 75% 74% 2% 1% SHB 40% 39% 58% 59% 1% 2% BSF 63% 64% 35% 33% 2% 3% SABB 54% 58% 44% 40% 2% 2% ANB 54% 57% 40% 40% 6% 3% Samba 64% 66% 31% 30% 4% 5% Rajhi 89% 90% 9% 9% 2% 2% Bilad 78% 72% 20% 26% 2% 2% Alinma 51% 51% 48% 47% 1% 1% Median 54% 58% 42% 40% 2% 2% December 11, 2014 7
Table 7: Profitability Metrics NIMs Funding Cost Asset Yield ROAE ROAA 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E BJAZ 2.28% 2.34% 2.29% 0.86% 0.60% 0.64% 3.07% 2.90% 2.88% 11.9% 9.6% 8.7% 1.2% 0.9% 0.8% SAIB 2.05% 1.83% 1.92% 0.88% 0.86% 0.85% 2.83% 2.58% 2.65% 13.1% 13.1% 10.1% 1.8% 1.7% 1.3% SHB 2.22% 2.31% 2.35% 0.74% 0.69% 0.70% 2.87% 2.91% 2.96% 17.0% 18.2% 16.8% 2.0% 2.1% 2.0% BSF 2.13% 2.22% 2.25% 0.66% 0.51% 0.51% 2.69% 2.65% 2.68% 10.5% 14.4% 13.3% 1.5% 2.0% 2.0% SABB 2.29% 2.27% 2.32% 0.48% 0.37% 0.38% 2.70% 2.58% 2.64% 17.6% 17.8% 15.8% 2.3% 2.4% 2.3% ANB 2.52% 2.56% 2.51% 0.49% 0.37% 0.37% 2.95% 2.88% 2.82% 13.6% 15.1% 14.2% 1.8% 2.1% 2.0% Samba 2.32% 2.25% 2.20% 0.29% 0.27% 0.27% 2.56% 2.47% 2.42% 13.6% 13.8% 11.6% 2.2% 2.4% 2.0% Rajhi 4.27% 4.03% 3.83% 0.20% 0.14% 0.14% 4.47% 4.17% 3.98% 19.9% 17.7% 17.6% 2.7% 2.5% 2.5% Bilad 3.29% 2.88% 2.79% 0.10% 0.16% 0.12% 3.38% 3.03% 2.91% 15.4% 15.2% 11.8% 2.2% 2.0% 1.5% Alinma 3.30% 3.14% 3.00% 0.48% 0.41% 0.42% 3.63% 3.44% 3.31% 6.0% 7.4% 7.5% 1.7% 1.8% 1.7% Median 2.30% 2.33% 2.34% 0.49% 0.39% 0.40% 2.91% 2.89% 2.85% 13.6% 14.8% 12.6% 1.9% 2.1% 2.0% Source: Riyad Capital Higher provisioning will limit earnings Net commission income is projected to remain healthy into 2015 rising +5.7% Y/Y for the group on rising loan volumes. In addition, the full impact of interest calculation changes will be realized in 2015. On the other hand, non-lending revenues will weaken on lighter fee income. Table 8: Earnings Projections 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E BJAZ 1,223 1,445 1,549 28.6% 18.2% 7.2% 1,839 2,253 2,359 14.9% 22.5% 4.7% 651 586 592 30.0% (9.9%) 1.0% SAIB 1,365 1,520 1,763 9.9% 11.4% 15.9% 2,017 2,471 2,407 17.1% 22.5% (2.6%) 1,287 1,449 1,213 41.1% 12.6% (16.3%) SHB 1,624 1,974 2,243 18.3% 21.5% 13.6% 2,616 3,211 3,527 17.9% 22.7% 9.9% 1,502 1,834 1,939 19.8% 22.1% 5.7% BSF 3,363 3,835 4,135 1.7% 14.0% 7.8% 5,053 5,858 6,229 0.9% 15.9% 6.3% 2,406 3,565 3,717 (20.2%) 48.2% 4.2% SABB 3,719 4,035 4,358 13.9% 8.5% 8.0% 5,815 6,577 6,968 12.6% 13.1% 5.9% 3,774 4,360 4,407 16.5% 15.5% 1.1% ANB 3,375 3,602 3,791 3.5% 6.7% 5.2% 5,110 5,445 5,789 7.4% 6.6% 6.3% 2,525 3,024 3,149 6.5% 19.8% 4.1% Samba 4,528 4,600 4,681 6.0% 1.6% 1.8% 7,001 7,437 7,387 4.6% 6.2% (0.7%) 4,510 4,995 4,500 4.2% 10.8% (9.9%) Rajhi 9,649 9,756 9,892 1.6% 1.1% 1.4% 14,115 14,161 14,427 0.9% 0.3% 1.9% 7,438 7,186 7,822 (5.7%) (3.4%) 8.8% Bilad 947 1,018 1,150 12.8% 7.6% 12.9% 1,917 2,120 2,259 10.4% 10.6% 6.5% 729 836 740 (22.6%) 14.7% (11.5%) Alinma 1,835 2,090 2,262 20.9% 13.9% 8.2% 2,279 2,558 2,754 24.8% 12.2% 7.7% 1,005 1,258 1,302 37.0% 25.2% 3.5% Total / Median 31,628 33,876 35,823 7.1% 7.1% 5.7% 47,761 52,092 54,106 6.8% 9.1% 3.9% 25,826 29,094 29,379 2.6% 12.7% 1.0% Net Comm Income Net Comm Income Growth (Y/Y) Operating Income Operating Income Growth (Y/Y) Net Income Net Income Growth (Y/Y) Samba, BJAZ and Bilad most exposed to rising impairment charges We project impairment charges to rise on deteriorating asset quality. Most exposed, in our view, will be Samba, BJAZ and Bilad. Although Rajhi provisioned heavily in 2014, it is prone to rapid impairment and write-offs which can once again pressure earnings. ANB has near 200% coverage level however the bank has historically been overly cautious. 2015 will test SHB s mid-market strategy as this segment is the first to feel the jolt in an economic slowdown. SAIB s Y/Y drop in earnings is due to the extraordinary gain in 1Q2014. Under a stressed scenario we still expect the banks to squeeze +1% Y/Y earnings growth. December 11, 2014 8
Valuation and Recommendation Median target 2015E P/E drops to 13.0x from 15.4x Our target prices have been revised lower across the board with the exception of ANB. The median target 2015E P/E for the group has dropped drastically from 15.4x to 13.0x. This compares to 12.9x forward P/E for the TASI. We made two ratings changes including an upgrade for ANB from Hold to Buy and downgrade for Samba from Buy to Hold. We maintain SABB on our Buy list despite relatively lower potential upside from current level, to reflect the stock s resilience in a market sell-off and scope for positive earnings surprise. Conversely, in a market upturn Samba lags peers in narrowing valuation gap. We are cautiously maintaining our Hold recommendation on Rajhi given the string of recent disappointments. Table 9: Target Price Revisions TASI Close Recommendation Target Price Target P / E Code Price Old New Old New Upside 2013 2014E 2015E BJAZ 1020 28.36 Sell Sell 31.50 20.00 (29.5%) 12.3x 13.6x 13.5x SAIB 1030 26.47 Buy Buy 34.00 30.00 13.3% 14.0x 12.4x 14.8x SHB 1040 42.40 Buy Buy 58.00 51.00 20.3% 16.2x 13.2x 12.5x BSF 1050 31.32 Buy Buy 43.00 38.00 21.3% 19.0x 12.8x 12.3x SABB 1060 52.80 Buy Buy 68.00 55.00 4.2% 14.6x 12.6x 12.5x ANB 1080 29.51 Hold Buy 34.00 34.00 15.2% 13.5x 11.2x 10.8x Samba 1090 39.11 Buy Hold 56.00 47.00 20.2% 12.5x 11.3x 12.5x Rajhi 1120 55.44 Hold Hold 74.00 65.00 17.2% 14.2x 14.7x 13.5x Bilad 1140 41.67 Sell Sell 30.50 27.00 (35.2%) 14.8x 12.9x 14.6x Alinma 1150 20.67 Sell Sell 18.00 16.00 (22.6%) 23.9x 19.1x 18.4x Median 14.4x 12.9x 13.0x Source: Riyad Capital We point out that the group median 2015E P/B has dropped below 2.0x to 1.6x, possibly as a reflection of lower expected ROAE of 12.6% versus 14.8% expected in 2014. We are neutral on our dividend outlook and expect the payout policy to continue into 2015. December 11, 2014 9
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 Head Office Riyad Capital P.O. Box 21116 Riyadh 11475 Saudi Arabia Phone 800 124 0010 Website www.riyadcapital.com Email research@riyadcapital.com Disclaimer This research document is prepared for the use of clients of Riyad Capital and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Riyad Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Riyad Capital. The information herein was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Riyad Capital make no representations or warranties whatsoever as to the data and information provided and Riyad Capital do not represent that the information content of this document is complete or free from any error. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Riyad Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments. Riyad Capital shall not be liable for any loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document is subject to change without prior notice. Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)