Result Update Saudi Arabia Tickers: BSFR AB (Bloomberg) 1050.SE (Reuters) Listing: Saudi Stock Exchange Performance sustenance demands more CMP: SR49.0 (as on March 18, 2009) March, 2009 Buy Key Data CMP#(SR) 49.0 EPS*(SR) 4.1 BVPS*(SR) 19.9 P/E* 11.8 P/BV* 2.5 12M Avg. vol. 149,769 52 week Lo / Hi (SR) 47.9 /49.0 Source: Global Research # As on Mar 18, 2009 *2009 Projected Highlights - s (BSF) results showed profitability increase of 3.5% (from SR2.7bn in 2007 to SR2.8bn in 2008) as compared to YoY decline of 9.8% in 2007. The FY08 profitability results were lower (5.5%) than our earlier forecasts, mainly because of registering of higher impairment charges in wake of global financial distress conditions. The bank s total assets posted an encouraging (YoY) growth of 26.1% (FY08: SR125.8bn). - Despite the softening of interest rates environment during 2008, the bank successfully recorded special commission income increase of 7.4% (from SR4.9bn in 2007 to SR5.2bn in 2008), while special commission expense declined by 6.3% (YoY). Overall, BSF showed an improved core banking performance (FY08) with net special income increase of 23.2%. Faisal Hasan, CFA Head of Research fhasan@global.com.kw Phone No:(965) 22951270 Mohammed Ali Shah Financial Analyst mashah@global.com.kw Phone No:(965) 22951283 Naveed Ahmed Financial Analyst nahmed@global.com.kw Phone No:(965) 22951280 - BSF s enhanced top-line performance was augmented by the non-interest income increase (YoY) of 11.8% in FY08. Although the bank (linked to the effects of global financial crisis) recorded an impairment charge on investments of SR410mn, BSF s income from operating activities showed (YoY) an increase of 3.2%. - The bank s total assets (YoY) recorded a 3-year CAGR (2005-08) of 23.1%, with an annual increase of 26.1% in 2008. Gross loan and advances posted a (YoY) growth of 34.7% (from SR60.6bn in 2007 to SR81.7bn in 2008), while the customer deposits (YoY) increased by 25.4% (from SR74.0bn in 2007 to SR92.7bn in 2008). - BSF remains an adequately capitalized bank with Tier-1 capital of SR13.5bn and the Tier- 1 ratio at 11.0% in 2008. Although the NPL coverage dropped from 189.6% in 2007 to 111.0% in 2008, it remained in the comfortable range. - Our fair value for BSF is estimated to be SR54.6 per share. According to our fair value the banking scrip is 11.3% higher than the current market price of SR49.0 (as on Mar 18, 2009). Therefore, we maintain our earlier recommendation of Buy on the stock with a medium term perspective. 1
Recent Developments - In Mar-09, it was announced that the Capital Market Authority has approved the bank s request to distribute 28.57% bonus shares for the year ended December 31, 2008. Awaiting the general assembly s approval, the bank s outstanding shares could then rise from 562.5mn to 723.2mn. - In Feb-09, the BOD proposed the distribution of cash dividend of SR1 per share, in addition to the 28.57% bonus shares. - In Feb-09, BSF signed a SR912.5mn long-term Shariah-compliant financing agreement with South Steel Company (Saudi Arabia) to finance the company s construction works at its plant in the Jizan Economic City. The plant is expected to start operations during the year 2011. Rating Update - In Dec-08, Fitch Ratings Agency announced the ratings for the bank. The bank was assigned stable outlook, with long-term issuer default rating (IDR) affirmed at A, the short-term issuer default rating (IDR) affirmed at F1, and the individual rating downgraded from to B/C from B. Analysis of Financial Performance -FY08 Income Statement - BSF s results showed profitability increase of 3.5% (from SR2.7bn in 2007 to SR2.8bn in 2008) as compared to YoY decline of 9.8% in 2007. The FY08 profitability results were lower (5.5%) than our early forecasts, mainly because of registering of higher impairment charges in wake of global financial distress conditions. The bank s annual performance was better than the listed Saudi banking sector that registered a marginal growth of 0.5% in FY08. The Saudi banks 2008 performance was mainly dampened by 4Q08 results that witnessed pressure largely due to setting aside /realizing of higher financial allocations by the banks in consideration to the decline in their investment portfolios. Table 01: Income Statement Highlights (SR mn) 2005 2006 2007 2008 Growth (2007-08) Special commission income 3,011.6 4,257.1 4,934.1 5,298.3 7.4% Net special commission income 1,705.8 2,016.9 2,289.4 2,820.6 23.2% Total non-interest income 1,387.9 1,922.0 1,405.1 1,571.1 11.8% Total operating income 2,958.8 3,848.3 3,652.5 4,297.4 17.7% Net income 2,215.6 3,006.9 2,711.1 2,805.7 3.5% - The bank s special commission income showed an increase of 7.4% (from SR4.9bn in 2007 to SR5.2bn in 2008). This reflects the bank s increased efforts for higher revenue generation from its credit portfolio as the Kingdom experienced the softening of interest rates during 2008. The lowering of interest rates is believed to be the main reason for decline in special 2
commission expense by 6.3% (YoY). Overall, the bank showed an improved core banking performance recording net special income increase of 23.2% in FY08. - In the wake of widening global financial crisis, the Kingdom besides undertaking other proactive measures, reduced its official repurchase rate (through various rate cuts) from 5.5% in Dec-07 to 2.5% in Dec-08. Although BSF s commission earning rate of 6.4% in FY07 declined to 5.5% in FY08, the bank was able to maintain its spreads at 2.9% as the commission expense rates also dropped from 3.5% in FY07 to 2.6% in FY08. - We expect that going forward (esp. in 2009) as compared to 2008, it will be much more challenging to fight the contraction in the banking spreads across the industry. The year 2008 was different because interest rates mainly declined in 4Q08, thus providing a window for banks to have sustained higher banking spreads for the major part of the year before feeling the pinch in the last quarter. The year 2009 has started amidst low interest rate environment, which is not expected to change very soon due to continuing global recessionary trends. Chart 01: Banking Spreads 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2005 2006 2007 2008 Yield on avg. earning assets Spreads Cost on avg. commission bearing liabilities - BSF s enhanced core banking performance was augmented by the non-interest income increase (YoY) of 11.8% in FY08. Although the bank s net fees from banking services witnessed an annual decline of 7.0% (directly affected by TASI decline of 56.5% in 2008, at times of global economic recession also termed as Great Recession), dividend income dropped by 51.6% and net losses of SR55.6mn on non-trading investments were recorded, the pressure on the non-interest income was offset by an increase of 28.3% in exchange income and rise in net trading income (due to higher income from net derivatives) by 60.8%. Due to stressful global financial conditions, the bank after realizing net losses on non-trading investments (loss of SR171.6mn recorded for AFS portfolio) has already placed an impairment charge of SR35mn for AFS in 2008. 3
Chart 02: Operating Income Mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4% 5% 9% 5% 4% 5% 36% 40% 55% 51% 10% 5% 24% 19% 62% 64% 2005 2006 2007 2008 Net special commission income Fees from banking services Exchange income Trading & other investments income Other operating income - A continuing increase in the share of net special income (from 62% in 2007 to 64% in 2008) in total operating income signals the bank s focus on strengthening its core banking operations. The share of fees from banking services recorded a declining trend and is expected to revive as capital market activity picks up. - An increase of 17.7% in total operating income (from SR3.6bn in 2007 to SR4.2bn in 2008) was not largely subdued by the rise in total operating expenses. The total operating expenses recorded an increase of 58.8%, which if adjusted for impairment charge on investments of SR410mn results in YoY increase of 16.2%. A significant impairment charge was basically allocated for losses in investments portfolio linked to the effects of global financial crisis. Even after absorbing these high impairments, BSF s income from operating activities showed (YoY) an increase of 3.2%. Overall, the bank s net income recorded (YoY) an increase of 3.5% (from SR2.7bn in 2007 to SR2.8bn in 2008). Chart 03: ROAA & ROAE Trend 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 2005 2006 2007 2008 ROAA (lhs) ROAE (rhs) 38% 36% 34% 32% 30% 28% 26% 24% 22% 20% - BSF s improved performance did not fully translate into the bank s return ratios. The increased profitability while higher growth in asset and equity base led to ROAA decline from 3.0% in 2007 to 2.5% in 2008, and ROAE drop from 26.2% in 2007 to 22.2% in 2008. 4
Balance sheet - BSF with an asset base (FY08) of SR125.8bn was able to capture 11.9% market share of the total assets (SR1.0tr) of the listed Saudi banks. The bank s balance sheet footing strengthened over the years, posting a 3-year CAGR (2005-08) of 23.1%. Table 02: Balance Sheet Highlights (SR mn) 2005 2006 2007 2008 Cash & balances with SAMA 2,317.3 3,398.8 10,152.2 5,772.9 % total 3.4% 4.3% 10.2% 4.6% Investments, net 18,127.8 16,013.0 22,376.1 27,710.0 % total 26.9% 20.1% 22.4% 22.0% Loans and advances, net 42,978.7 51,130.2 59,850.0 80,866.5 % total 63.7% 64.2% 60.0% 64.2% Total assets 67,501.4 79,581.0 99,808.1 125,864.8 Customers deposits 51,093.4 61,998.1 74,007.3 92,791.3 % total 75.7% 77.9% 74.1% 73.7% Total equity 6,929.3 9,404.8 11,240.6 14,069.1 % total 10.3% 11.8% 11.3% 11.2% Total liabilities & equity 67,501.4 79,581.0 99,808.1 125,864.8 - The bank s total assets posted an increase (YoY) of 26.1% (from SR99.8bn in 2007 to SR125.8bn in 2008), slightly higher than the growth recorded in 2007. Gross loan and advances that continued to dominate (64%) the bank s assets, posted a (YoY) growth of 34.7% (from SR60.6bn in 2007 to SR81.7bn in 2008). The customer deposits (FY08) constituting 74% of BSF s funding sources, recorded (YoY) growth of 25.4% (from SR74.0bn in 2007 to SR92.7bn in 2008). Chart 04: Balance Sheet Growth (SR bn) 140 120 100 80 60 40 20 0 2005 2006 2007 2008 Loan Deposit Total Assets Loan growth Deposit growth Assets growth 36% 32% 28% 24% 20% 16% 12% 8% 4% 0% - The analysis of loans portfolio shows that BSF has 78.1% of its lending in commercial loans, followed by overdraft and consumer loans having a share of 7.7% and 5.6%, respectively. A significant increase in non-performing loans (NPLs) by 75.4% (from SR435.5mn in 2007 to SR763.8mn in 2008) was mainly generated from a significant rise in NPLs from commercial loans, which implies the need for closer attention to this category. 5
- In contrast to higher rise in NPLs, the increase of only 2.7% in provisioning (from SR825.5mn in 2007 to SR847.7mn in 2008) led to significant decline in NPL coverage from 189.6% in 2007 to 111.0% in 2008. Although the NPL coverage remains in comfortable range, the decrease in ratio (over prior year) suggests that the bank now has relatively lower provisioning cushion against its loan portfolio. Chart 05: Credit Quality (SR mn) 1,000 900 800 700 600 500 400 300 200 2005 2006 2007 2008 NPLs Provisions for loan losses NPL coverage 200% 180% 160% 140% 120% 100% 80% - Although the Saudi banks maintained an overall good asset quality in consideration to global financial crisis of 2008, the Saudi banks (in 4Q08) either actually realizing losses or being prudent increased provisions /financial allocations for recording any future decline in asset values. BSF recorded (in FY08) an impairment charge on investments of SR410mn. - The customer deposits posted a 3-year CAGR (2005-08) of 22.0%. The deposit base remained dominated by Time deposits with a share of 65.3% of the total, while demand deposits which provide a low cost funding pool had a share of 30.9% in total deposits. Table 03: Customers deposits 2005 2006 2007 2008 Demand 36.1% 30.3% 30.4% 30.9% Saving 0.6% 0.5% 0.4% 0.4% Time 59.9% 66.6% 64.6% 65.3% Other 3.4% 2.6% 4.6% 3.4% Total customers deposits 100.0% 100.0% 100.0% 100.0% - The total equity of the bank continued to strengthen over the years posting a 3-year CAGR (2005-08) of 26.6% (from SR6.9bn in 2005 to SR14.0bn in 2008), and an annual (FY08) increase of 25.2%. Although Equity to Gross loans ratio witnessed a decline from 18.5% in 2007 to 17.2% in 2008, the ratio implies the bank s adequate position to cover any unexpected future losses. 6
Chart 06: Capital Adequacy 15.0% 14.0% Tier-1 Ratio 13.0% 12.0% 11.0% 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% Equity /Total Assets 10.0% 2005 2006 2007 2008 Equity/ Total Assets (Equity capital ratio) Tier-1 capital ratio 9.0% - BSF remains an adequately capitalized bank with Tier-1 capital (FY08) of SR13.5bn. Although the Tier-1 capital showed an increase over the last year, a higher increase in riskweighted assets led to decline in Tier-1 ratio (from 12.2% in 2007 to 11.0% in 2008). The bank continues to maintain the minimum level of the regulatory capital and the ratio of total regulatory capital to the risk-weighted asset at or above the agreed minimum of 8%. 7
Analysis of Financial Performance -4Q08 - BSF (YoY) net income increase of 3.5% largely driven by the improved core banking performance helped the bank overcome the dampened 4Q08 results that recorded a decline of 21.6% (QoQ) and 11.3% (YoY). - The increase in special commission income by 17.8% (from SR1.3bn in 4Q07 to SR1.5bn in 4Q08) while special commission expense rise of 3.0%, led to an encouraging increase in the net special commission income by 35.3% (from SR602mn in 4Q07 to SR815mn in 4Q08). - The effects of declining stock markets were evident as the fees from banking services posted a decline of 5.7% (from SR192.3mn in 4Q07 to SR181.4mn in 4Q08), net exchange income decreased (YoY) by 0.4% and net trading income (YoY) dropped by 41.2%. The pressure on non-interest income was exacerbated by recording of higher impairment charges for credit losses (SR78.8mn) and investments (SR208.6mn). This provisioning by the bank was carried out in the light of international economic slump. Table 04: Key Income Statement Data (SR mn) 4Q07 4Q08 YoY growth Special commission income 1,318.2 1,552.4 17.8% Special commission expense 715.8 737.6 3.0% Fees from banking services, net 192.3 181.4-5.7% Exchange income, net 67.0 66.7-0.4% Trading income, net 57.2 33.6-41.2% Impairment charge for credit losses, net 19.2 78.8 311.4% Impairment charge on investments - 208.6 - Net income 640.5 568.1-11.3% - BSF s total assets growth (9M08) of 21.2%, on full year basis posted an encouraging (YoY) growth of 26.1% (from SR99.8bn in FY07 to SR125.8bn in FY08) as compared to an annual growth of 25.4% in FY07. The growth was led by net loan & advances portfolio recording (YTD) rise of 32.2% and (YoY) increase of 35.1% (from SR59.8bn in FY07 to SR80.8bn in FY08). - The customer deposits constituting 73.7% of BSF s balance sheet footing, recorded (YTD) rise of 13.4% and (YoY) increase of 25.4% (from SR74.0bn in FY07 to SR92.7bn in FY08) as compared to annual growth of 19.4% in FY07. The equity base of the bank also showed consistent increase during 2008, recording (YTD) growth of 15.7% followed by annual growth of 25.2% (from SR11.2bn in FY07 to SR14.0bn in FY08). Table 05: Key Balance Sheet Data (SR mn) FY07 9M08 FY08 YTD growth YoY growth Investments, net 22,376.1 27,988.9 27,710.0 25.1% 23.8% Loans & advances, net 59,850.0 79,118.8 80,866.4 32.2% 35.1% Total assets 99,808.1 121,011.2 125,864.7 21.2% 26.1% Customers deposits 74,007.2 83,960.6 92,791.2 13.4% 25.4% Total equity 11,240.6 13,007.4 14,069.1 15.7% 25.2% Total liabilities & equity 99,808.1 121,011.2 125,864.7 21.2% 26.1% 8
Outlook - Saudi banking sector strengths accompained by cautiously optimistic macro-economic outlook, favourable demographics, ability to support infrastructure investments through sovereign muscle, sectoral reforms, and trends in global financial markets in 2009, holds significant potential to allure investments. Having said that, containing the interest margins, managing credit and market investments risks remain a few of the challenging areas for the Kingdom s banks. - BSF already operating in the Kingdom for over 30years has a well established brand name with strong corporate banking relationships. The inclination towards corporate rather than retail segment may result in slower volumetric loan growth in 2009, but will simultaneously be advantageous in containing deterioration of credit quality. We believe that in near term (esp. 2009) the bank s focus will be skewed towards sustaining interest spreads rather than balance sheet growth. - Although BSF with pre-dominantly time deposits (affected by softening interest rate scenario) and corporate assets (re-pricing with higher risk premium charge) on the book is expected to better manage its interest spreads in 2009, the drop in interest spreads seem inevitable. On the investments front, we believe that the majority of impairment on investments is already accounted for, and with 77% of investment portfolio (FY08) in domestic government bonds counterparty risk is largely reduced. - We expect BSF s total assets to grow at a 4-year CAGR (2008-12) of 8.0%, posting an annual growth (FY09) of 7.0%. The net loans and advances are expected to record a 4-year CAGR (2008-12) of 9.0%, and the customer deposit base showing a 4-year CAGR (2008-12) of 10.0%. The bank s net income is estimated to record (FY09) increase of 6.9%. Valuation - Our fair value for BSF is estimated to be SR54.6 per share, based on Dividend Discounting Model (80%) and adaptation of the Gordon Growth Model (20%). Table 06: Sensitivity -DDM Cost of Equity Source: Global Research Terminal growth 2.0% 2.5% 3.0% 3.5% 4.0% 10.0% 56.6 59.7 63.3 67.4 72.2 10.5% 53.3 56.0 59.1 62.6 66.7 11.0% 50.4 52.7 55.4 58.5 61.9 11.5% 47.7 49.8 52.2 54.8 57.9 12.0% 45.4 47.2 49.3 51.7 54.3 - Our sensitivity analysis shows variation in estimated fair price based on various rates. Table 07: Sensitivity -GGM Return on Equity Source: Global Research Cost of Equity 10.0% 10.5% 11.0% 11.5% 12.0% 22.5% 55.8 52.0 48.7 45.9 43.3 23.0% 57.2 53.3 50.0 47.0 44.4 23.5% 58.6 54.7 51.2 48.2 45.5 24.0% 60.0 56.0 52.5 49.4 46.6 24.5% 61.5 57.3 53.7 50.6 47.7 9
- Based on the current market price of SR49.0 (as on Mar 18, 2009), BSF is trading at (2009E) P/E and P/BV multiples of 11.8x and 2.5x, respectively. Table 08: Valuation Summary Valuation Methods Price (SR) Weight Weighted Value (SR) DDM 55.4 80% 44.3 GGM 51.2 20% 10.3 Estimated Fair Price BSF per share 54.6 Source: Global Research - According to our fair value (SR 54.6) the banking scrip is 11.3% higher than the current market price of SR49.0 (as on Mar 18, 2009). Therefore, we maintain our earlier recommendation of Buy on the stock with a medium term perspective. 10
Balance Sheet Statement SR 000 2006 2007 2008 2009F 2010F 2011F 2012F Cash & balances with SAMA 3,398,836 10,152,190 5,772,857 4,970,648 4,456,120 6,104,847 7,580,412 Due from banks and other FI s 6,223,277 3,224,062 4,246,065 4,033,762 4,114,437 4,196,726 4,280,660 Trading investments 996,204 2,205,517 1,771,052 1,806,473 1,824,610 1,861,103 1,898,325 Non-trading investments 15,016,750 20,170,632 25,938,971 27,797,406 29,280,529 31,522,259 33,832,543 Net Loans and advances 51,130,195 59,849,952 80,866,475 89,808,248 100,527,561 108,476,034 114,871,717 Net fixed assets 552,382 577,318 590,645 604,590 643,143 730,933 833,730 Investment in associates 124,595 176,859 203,388 233,896 257,286 283,014 Other assets 2,263,366 3,503,844 6,501,837 5,851,653 6,319,786 6,635,775 6,768,490 Total assets 79,581,010 99,808,110 125,864,761 135,076,168 147,400,081 159,784,962 170,348,891 Due to banks and other financial institutions 3,456,313 8,122,713 8,402,002 7,981,902 8,620,454 9,913,522 11,400,551 Customers deposits 61,998,107 74,007,251 92,791,281 104,390,191 116,917,014 126,270,375 133,846,598 Term loan 2,437,500 2,437,500 4,927,200 4,927,200 2,489,700 2,489,700 2,489,700 Other liabilities 2,284,309 4,000,011 5,675,142 3,405,085 3,745,594 4,307,433 4,953,548 Total liabilities 70,176,229 88,567,475 111,795,625 120,704,378 131,772,762 142,981,030 152,690,396 Share capital 3,375,000 5,625,000 5,625,000 7,232,143 7,232,143 7,232,143 7,232,143 Statutory reserve 3,375,000 4,052,780 4,754,195 5,504,169 6,400,210 7,232,143 7,232,143 General & other reserves 2,414,841 1,180,381 2,885,441 1,578,288 1,918,783 2,232,235 3,064,191 Retained earnings 37,997 68,339 5,872 35,871 53,792 83,850 105,182 Proposed dividend 201,943 314,135 776,711 - - - - Total equity attributable to the equityholders of the bank 9,404,781 11,240,635 14,047,219 14,350,470 15,604,928 16,780,371 17,633,659 Minority Interest - - 21,917 21,320 22,391 23,561 24,835 Total equity 9,404,781 11,240,635 14,069,136 14,371,790 15,627,319 16,803,932 17,658,495 Total liabilities and equity 79,581,010 99,808,110 125,864,761 135,076,168 147,400,081 159,784,962 170,348,891 11
Income Statement SR 000 2006 2007 2008 2009F 2010F 2011F 2012F Special commission income 4,257,134.0 4,934,104.0 5,298,313.0 5,569,362.8 6,439,485.9 7,219,512.6 8,143,861.1 Special commission expense (2,240,267.0) (2,644,706.0) (2,477,723.0) (2,422,672.8) (2,833,373.8) (3,284,878.2) (3,786,895.4) Net special commission income 2,016,867.0 2,289,398.0 2,820,590.0 3,146,690.0 3,606,112.1 3,934,634.3 4,356,965.7 Provision for credit losses, net (90,484.0) (42,011.0) (94,265.0) (163,475.0) (179,023.3) (188,951.0) (195,630.2) Net special commission income after PLLs 1,926,383.0 2,247,387.0 2,726,325.0 2,983,214.9 3,427,088.8 3,745,683.4 4,161,335.5 Fees from banking services 1,571,961.0 897,234.0 834,480.0 792,756.0 816,538.7 914,523.3 987,685.2 Exchange income 144,345.0 187,968.0 241,105.0 229,049.8 235,921.2 264,231.8 277,443.4 Net trading income, net 189,332.0 310,627.0 499,640.0 349,748.0 437,185.0 480,903.5 504,948.7 Dividend income 1,641.0 3,699.0 1,791.0 1,432.8 2,005.9 2,607.7 3,390.0 (Losses) /gains on non-trading investments, net 9,375.0 - (55,687.0) (38,980.9) 3,898.1 4,677.7 5,379.4 Other operating income 5,311.0 5,539.0 49,722.0 4,972.2 5,220.8 5,481.9 5,755.9 Total non-interest income 1,921,965.0 1,405,067.0 1,571,051.0 1,338,977.9 1,500,769.7 1,672,425.9 1,784,602.6 Total operating income 3,848,348.0 3,652,454.0 4,297,376.0 4,322,192.8 4,927,858.5 5,418,109.2 5,945,938.1 Salaries & employee related expenses (462,923.0) (543,322.0) (624,223.0) (692,887.5) (776,034.0) (869,158.1) (973,457.1) Rent & premises related expenses (68,980.0) (76,858.0) (90,944.0) (104,585.6) (117,135.9) (128,849.5) (141,734.4) Depreciation and amortization (68,138.0) (77,965.0) (86,940.0) (99,259.6) (110,337.0) (120,655.0) (136,915.5) Other G & A expenses (236,388.0) (244,876.0) (287,711.0) (310,727.9) (348,015.2) (389,777.1) (436,550.3) Other operating expenses (4,971.0) (5,014.0) (6,065.0) (6,671.5) (7,472.1) (8,368.7) (9,373.0) Impairment charge on investments - - (410,000.0) (123,000.0) - - - Total operating expenses (841,400.0) (948,035.0) (1,505,883.0) (1,337,132.1) (1,358,994.2) (1,516,808.4) (1,698,030.2) Income from operating activities 3,006,948 2,704,419 2,791,493 2,985,061 3,568,864 3,901,301 4,247,908 Share in earnings of associates, net - 6,691 12,443 14,237 16,373 18,010 19,811 Net Income 3,006,948 2,711,110 2,803,936 2,999,298 3,585,237 3,919,311 4,267,719 Gain /(loss) attributable to minority interest - - (1,723) (597) 1,071 1,170 1,274 Net Income attributable to the equity holders 3,006,948 2,711,110 2,805,659 2,999,895 3,584,166 3,918,141 4,266,444 P&L appropriation account 2006 2007 2008 2009F 2010F 2011F 2012F Opening balance of retained earnings 31,725.0 37,997.0 68,339.0 5,872.0 35,870.9 53,791.8 83,850.2 Net income 3,006,948.0 2,711,110.0 2,805,659.0 2,999,894.8 3,584,166.4 3,918,140.5 4,266,444.4 Transfer to statutory reserve - (677,780.0) (701,415.0) (749,973.7) (896,041.6) (831,932.5) - Transfer to general reserves (2,250,000.0) (950,000.0) (1,390,000.0) (299,989.5) (340,495.8) (313,451.2) (831,956.7) Gross dividends (750,676.0) (1,052,988.0) (776,711.0) (1,919,932.7) (2,329,708.2) (2,742,698.3) (3,413,155.6) Closing balance of retained earnings 37,997.0 68,339.0 5,872.0 35,870.9 53,791.8 83,850.2 105,182.4 12
Cash flow Statement SR 000 2006 2007 2008 2009F 2010F 2011F 2012F Net income 3,006,948 2,711,110 2,805,659 2,999,895 3,584,166 3,918,141 4,266,444 Accretion of discounts 20,055 (9,089) (199,468) - - - - Gains on investments (9,375) - 55,687 38,981 (3,898) (4,678) (5,379) Depreciation and amortization 68,138 77,965 86,940 99,260 110,337 120,655 136,916 Loss/gain on disposal of fixed assets (1) (71) (446) - - - - Provision for investments & credit losses, net 90,484 42,011 504,265 286,475 179,023 188,951 195,630 Impairment of other financial assets 16,103 7,728 - - - - - Due from banks and other FI s (3,946,146) 2,999,215 (1,022,003) 212,303 (80,675) (82,289) (83,935) Investment held as FVIS 94,437 (1,209,313) 434,465 (35,421) (18,137) (36,492) (37,222) Loans and advances (8,241,977) (8,761,768) (21,110,788) (9,105,248) (10,898,336) (8,137,424) (6,591,314) Other assets (644,518) (1,115,883) (2,945,729) 650,184 (468,132) (315,989) (132,716) Due to banks and FI s (1,490,090) 4,666,400 279,289 (420,100) 638,552 1,293,068 1,487,028 Customers deposits 10,904,722 12,009,144 18,784,030 11,598,910 12,526,823 9,353,361 7,576,223 Other liabilities 418,427 1,603,510 2,137,707 (3,046,768) 340,509 561,839 646,115 CF from operations 287,207 13,020,959 (190,392) 3,278,470 5,910,232 6,859,143 7,457,791 Net sale /purchase of investments 1,945,257 (5,029,287) (5,771,762) (2,020,416) (1,479,225) (2,237,052) (2,304,905) Investment in associates (82,500) (52,264) (26,529) (30,508) (23,390) (25,729) Capex (144,642) (102,830) (99,821) (113,205) (148,889) (208,445) (239,712) CF from investing 1,800,615 (5,214,617) (5,923,847) (2,160,150) (1,658,622) (2,468,887) (2,570,345) Minority Interest - - 21,917 (597) 1,071 1,170 1,274 Term loan - - 2,489,700 - (2,437,500) - - Dividend and zakat paid (1,006,279) (1,052,988) (776,711) (1,919,933) (2,329,708) (2,742,698) (3,413,156) CF from financing (1,006,279) (1,052,988) 1,734,906 (1,920,530) (4,766,138) (2,741,528) (3,411,881) Change in cash 1,081,543 6,753,354 (4,379,333) (802,209) (514,528) 1,648,728 1,475,564 Beginning cash 2,317,293 3,398,836 10,152,190 5,772,857 4,970,648 4,456,120 6,104,847 Ending cash 3,398,836 10,152,190 5,772,857 4,970,648 4,456,120 6,104,847 7,580,412 13
Fact Sheet 2006 2007 2008 2009F 2010F 2011F 2012F Profitability - Return on average assets 4.1% 3.0% 2.5% 2.3% 2.5% 2.6% 2.6% - Return on average equity 36.8% 26.2% 22.2% 21.1% 23.9% 24.2% 24.8% - Net special commission income after PLL s/ Total op. income 50.1% 61.5% 63.4% 69.0% 69.5% 69.1% 70.0% - Non-interest/ Total op. income 49.9% 38.5% 36.6% 31.0% 30.5% 30.9% 30.0% - Fees from banking services/ Total op. income 40.8% 24.6% 19.4% 18.3% 16.6% 16.9% 16.6% - Assets utilization 4.8% 3.7% 3.4% 3.2% 3.3% 3.4% 3.5% - Dividend payout ratio 25.0% 38.9% 27.7% 64.0% 65.0% 70.0% 80.0% Margins - Net (or profit) margin 78.1% 74.0% 65.3% 69.4% 72.7% 72.3% 71.8% - Special commission expense/ Special commission income 52.6% 53.6% 46.8% 43.5% 44.0% 45.5% 46.5% - Yield on average earning assets 6.4% 6.4% 5.5% 4.8% 5.1% 5.2% 5.5% - Cost rate on average commission bearing liabilities 3.5% 3.5% 2.6% 2.2% 2.3% 2.5% 2.6% - Spread 2.8% 2.9% 2.9% 2.6% 2.7% 2.7% 2.8% - Commission margin (earning assets) 2.9% 2.9% 2.8% 2.6% 2.7% 2.7% 2.8% Efficiency - Total op. expenses /Total op. income 21.9% 26.0% 35.0% 30.9% 27.6% 28.0% 28.6% - Staff expenses/ Total op. income 12.0% 14.9% 14.5% 16.0% 15.7% 16.0% 16.4% - Rent, G&A expenses/ Total op. income 7.9% 8.8% 8.8% 9.6% 9.4% 9.6% 9.7% - Non-commission expense/ Average total assets 1.1% 1.1% 1.3% 1.0% 1.0% 1.0% 1.0% Liquidity - Gross loans / Commission earning assets 72.3% 73.2% 73.9% 74.8% 76.2% 76.3% 76.2% - Gross loans/ Customer Deposits 83.9% 82.0% 88.1% 87.0% 87.0% 87.0% 87.0% - Customer Deposits/ Equity 659.2% 658.4% 659.5% 726.4% 748.2% 751.4% 758.0% - Customer Deposits/ Total assets 77.9% 74.1% 73.7% 77.3% 79.3% 79.0% 78.6% - Due from Banks/ Due to Banks 180.1% 39.7% 50.5% 50.5% 47.7% 42.3% 37.5% Credit Quality - Provisions /Total op. income 2.4% 1.2% 2.2% 3.8% 3.6% 3.5% 3.3% - Provisions /Average loans 0.2% 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% - Non Performing Loans (SR mn) 602.6 435.5 763.8 953.6 762.9 769.0 815.1 - Provision for loan losses (SR mn) 893.4 825.5 847.7 1,011.2 1,190.2 1,379.2 1,574.8 - NPL s /Gross Loans 1.2% 0.7% 0.9% 1.1% 0.8% 0.7% 0.7% - NPL s /(Equity+provision for loan losses) 5.9% 3.6% 5.1% 6.2% 4.5% 4.2% 4.2% - PLL s / Gross Loans 1.7% 1.4% 1.0% 1.1% 1.2% 1.3% 1.4% - NPL Coverage 148.3% 189.6% 111.0% 106.0% 156.0% 179.4% 193.2% Capital Adequacy - Equity/ Total Assets (Equity capital ratio) 11.8% 11.3% 11.2% 10.6% 10.6% 10.5% 10.4% - Equity/ Gross Loans 18.1% 18.5% 17.2% 15.8% 15.4% 15.3% 15.2% Constitution of Total Operating Income - Net special commission income after PLL s/ Total op. income 50.1% 61.5% 63.4% 69.0% 69.5% 69.1% 70.0% - Fees from banking services/ Total op. income 40.8% 24.6% 19.4% 18.3% 16.6% 16.9% 16.6% - Investment Income/ Total op. income 5.2% 8.6% 10.4% 7.2% 9.0% 9.0% 8.6% - Exchange Income/ Total op. income 3.8% 5.1% 5.6% 5.3% 4.8% 4.9% 4.7% - Other Income/ Total op. income 0.1% 0.2% 1.2% 0.1% 0.1% 0.1% 0.1% - PLL s/ Total op. income 2.4% 1.2% 2.2% 3.8% 3.6% 3.5% 3.3% Operating Performance - Change in special commission income 41.4% 15.9% 7.4% 5.1% 15.6% 12.1% 12.8% - Change in Fees from banking services 41.6% -42.9% -7.0% -5.0% 3.0% 12.0% 8.0% - Change in Investment Income 61.2% 56.9% 41.8% -30.0% 41.9% 10.2% 5.2% - Change in Exchange Income 0.7% 30.2% 28.3% -5.0% 3.0% 12.0% 5.0% - Change in Other Income -45.9% 4.3% 797.7% -90.0% 5.0% 5.0% 5.0% RATIOS USED FOR VALUATION - Par value per share (SR) 10 10 10 10 10 10 10 - Shares in issue (mn) 337.5 562.5 562.5 723.2 723.2 723.2 723.2 - EPS (SR) 8.9 4.8 5.0 4.1 5.0 5.4 5.9 - DPS (SR) 2.1 1.8 1.3 2.5 3.1 3.6 4.5 - Book value per share (SR) 27.9 20.0 25.0 19.9 21.6 23.2 24.4 - Market price year end (SR) 82.6 115.8 45.1 49.0 49.0 49.0 49.0 - Market Cap. (SR bn) 27.9 65.1 25.4 35.4 35.4 35.4 35.4 - P/E 9.3 24.0 9.0 11.8 9.9 9.0 8.3 - P/BV 3.0 5.8 1.8 2.5 2.3 2.1 2.0 - Dividends yield 2.5% 1.5% 2.9% 5.2% 6.3% 7.4% 9.2% *Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price in the Saudi Stock Exchange as on Mar 18, 2009. 14
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The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Recommendation Ticker Price Disclosure Buy BSFR AB (Bloomberg) 1050.SE (Reuters) SR49.0 1, 10 1. did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in. 3. makes a market in securities issued by this company. 4. acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of serves on the board of directors of this company. 7. Within the past year, has managed or co-managed a public offering for this company, for which it received fees. 8. has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition Buy Hold Reduce Sell Fair value of the stock is >10% 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 between -10% and -20% from the current market price Fair value of the stock is < -20% from the current market price This material was produced by KSCC ( Global ),a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time,to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities ( securities ), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global 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 accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgement. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or ommission from this or any other document prepared by Global for, or sent by Global 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. Opinions and estimates constitute our judgment and are subject to change without prior notice.past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations. 16