Buy 12-Month Target Price SAR 38.00 November 26, 2015 Expected Total Return Price as on Nov-25, 2015 SAR 28.07 Upside to Target Price 35.3% Expected Dividend Yield 3.6% Expected Total Return 38.9% Market Data 52 Week H/L SAR 26.90/40.90 Market Capitalization SAR 33,834 mln Shares Outstanding 1,205 mln Free Float 45.77% 12-Month ADTV (000 s) 319.558 TASI Weight 2.03% Reuters Code 1050.SE Bloomberg Symbol BSFR AB 1-Year Price Performance 120 110 100 90 80 70 N D J F M A M J J A S O BSF TASI TBFSI Source: Bloomberg Fransi TASI TBFSI Nov-25, 2015 28.07 7,208 15,717 Total Change 6-months (9.82%) (9.82%) (9.89%) 1-Year (628.%) (908.%) (968.%) 2-Year 10.1% (13.6%) (10.9%) F2015E SAR mln Special Comm. Income 4,851 Special Comm. Expense (816) Net Comm. Income 4,035 Total Operating Income 6,072 Total Operating Expense (2,460) Net Income 3,650 Strategy Payback Time Banque Saudi Fransi (BSF) is one of the top six banks in the country, similar in size to SABB. It is one of the few banks with direct foreign ownership (31% owned by Credit Agricole) with an asset base of SAR 185 billion. Although its recent conservative approach has at times been criticized, particularly with regards to loan growth, BSF should benefit from this very strategy in the current environment of tightening liquidity and potential NPL stress. Our preferred P/B valuations point towards an attractive 35% upside to our SAR 38 target price. We recommend a Buy at current levels. Comfortable asset position Double-digit loan growth in 2011 and 2012 subsequently gave way to mid-single digit growth as a consequence of a restructuring effort that resulted in provisions of SAR 957 million in 2013. We have modeled average gross advances growth of 3.0% between 2016 and 2018. Following a selective loan onboarding strategy, even before oil prices started to slump, emphasis on larger corporates should be advantageous. With only 8% exposure to consumer loans, management has put renewed focus on retail, which can prove lucrative in a rising rate environment. Even after assuming a rise in NPLs to SAR 1.8 billion by 2018, NPL coverage would stand at a comfortable 199%. Increasing asset yields to boost NIMs Post a minor (-0.5%) deposit contraction likely in 2015, we expect a low single-digit growth through 2018 (average 2.8%). 78% of deposits in NIBs as of September coupled with falling cost of funds to 0.50% has resulted in NIMs edging up to 2.2% in 2014 from 2.1% in the preceding year. We expect further expansion to 2.4% in 2016 and beyond but this time due to a rise in average asset yields. Investments sustainable at current levels Investments have fallen from SAR 45.3 billion in 2014 to SAR 36.5 billion by September 2015. While this is a snapshot, management believes the current level is more representative. There has been some duration rise in sovereign exposure recently in view of capacity; any further buildup would depend on balance sheet optimization strategy. Target SAR 38 per share We project a 32.5% average payout through 2018 (guidance minimum 30%), implying a yield of 3.6%. Assuming a 11.2% ROE, 9.8% cost of equity and 6.9% long term growth rate, we arrive at our SAR 38 target price, +35% upside from current levels. Time to Buy. Key Financials FY December 31 (SAR mln) 2014A 2015E 2016E 2017E Net Comm. Income 3,817 4,035 4,435 4,581 Provisions for credit losses 321 449 659 652 NIM 2.2% 2.2% 2.4% 2.4% Cost-to-income 32.9% 33.1% 32.5% 33.2% NPL coverage 195% 211% 194% 194% ROAA 2.0% 1.9% 2.0% 1.9% ROAE 14.2% 13.3% 12.8% 12.0% CAR 17.3% 17.6% 17.1% 16.7% EPS (SAR) 2.92 3.00 3.11 3.19 DPS (SAR) 0.95 1.00 1.00 1.00 BVPS 21.96 23.26 25.38 27.56 P/E 9.6x 9.3x 9.0x 8.8x P/B 1.3x 1.2x 1.1x 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 Market Authority (No. 07070-37)
We reinstate coverage on Banque Saudi Fransi (BSF) with a Buy rating and a SAR 38 target price. Tight liquidity situation as year-end nears Following our last note on SAMBA, money market liquidity has tightened (SIBOR up 12 basis points in the last three months) and the forward USD/SAR rate has risen to multi-year highs. While liquidity is indeed expected to be tight until the remainder of the year, pressure on the forward exchange rate may ease. We now believe there is high probability that the US Fed will raise the Fed Funds rate. Consequently, SAMA would also have to raise the local interest rates which may ease some pressure on the forward exchange rates. The overall banking sector is comfortably placed for the current year. Senior management at leading local banks does not anticipate any undue provisioning requirements or a spike in NPLs during the final quarter of the year. However, there is some uncertainty going into 2016 in terms of liquidity and the resultant impact on bank s balance sheets. We expect the bigger banks to be more comfortably placed, particularly ones with stringent risk management guidelines versus the smaller ones. Both loan and deposit growth is forecasted to slow as compared to the last three years but do not expect significant earnings decline given an environment of rising interest rates. Moody s has maintained its stable outlook on the banking system. In a recent assessment it stated Countercyclical government spending will continue to support the non-oil sectors to which most bank lending is directed. They added that asset quality may weaken but will remain strong overall with NPLs to gross loans expected below 2.5% for 2016. Comparative valuation of the 12 local banks in terms of relative multiples (P/B and P/E) and dividend yield reveals that overall banks trade at an average of 1.3x 2015E P/B while BSF trades at a 2015E P/B and P/E of 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 12.54 9.5x 8.6x 8.5x 1.1x 1.1x 1.0x 5.8% 5.8% 6.1% BJAZ 17.40 10.7x 12.2x 6.0x 1.2x 1.1x 0.9x - - - SAIB 17.95 9.1x 8.1x 9.1x 1.1x 1.0x 0.9x 3.8% 4.1% 4.4% SHB 28.10 10.7x 8.8x 8.1x 1.7x 1.5x 1.3x 2.9% 3.8% 3.3% BSF 28.07 14.0x 9.6x 8.9x 1.5x 1.3x 1.1x 1.2% 3.5% 3.6% SABB 27.90 11.1x 9.8x 9.6x 1.8x 1.6x 1.5x 2.6% 2.5% 2.7% ANB 24.95 9.9x 8.7x 8.0x 1.3x 1.2x 1.1x 1.7% 4.0% 4.6% SAMBA 22.23 9.9x 8.9x 8.8x 1.3x 1.1x 1.1x 3.3% 3.6% 4.5% Rajhi 50.63 12.0x 12.0x 12.1x 2.1x 2.0x 1.9x 4.6% 3.5% 3.3% Bilad 24.81 17.0x 14.3x 14.4x 2.4x 2.1x 1.9x - - 1.6% Alinma 14.42 21.2x 17.0x 14.6x 1.3x 1.2x 1.2x - 3.5% 4.0% NCB 53.63 10.2x 12.4x 12.3x 2.0x 2.4x 2.1x 3.5% 2.7% 3.1% AVERAGE 12.1x 10.9x 10.0x 1.6x 1.5x 1.3x 3.3% 3.7% 3.7% Source: Bloomberg November 26, 2015 2
Advances growth to plateau After experiencing double-digit gross loan growth in 2011 and 2012 (average 13.9%), growth slowed down in the subsequent two years to an average of 6.6%. As a matter of fact, BSF had to book exceptional provisions in 2013 as a result of aggressive advances onboarding earlier. We expect improved advance growth in 2015 at 6.5% but a slowdown in 2016 followed by a resumption of higher growth. BSF has been following a conservative approach post-2013 restructuring efforts even before the recent slump in oil prices resulting in very selective money lending following strict Credit Agricole guidelines. LDR dropped in 2014 to 75.5% from 80.2% the year earlier but is expected to grow to 82.0% this year. However, going forward we are modeling a more stable LDR at 82.3% through 2018. We believe BSF will continue to be selective in loan onboarding but is in a sweet spot as it has the capacity with bigger corporates as its core clients. We continue to expect lower crude price forecast to impact GDP growth and resultantly keep overall banking sector deposit and advance growth in check. There is an emerging trend where key petrochemical and oil industry players are now calling a bottom on oil implying that the worst is behind us. However, this remains to be tested. While government spending may slow, we do not anticipate key infrastructure projects to be affected. Exhibit 1: Net Advances (SAR bln) and Growth (%) Exhibit 2: Loan to Deposit Ratio (%) 160 140 120 100 8.8% 6.5% 10% 9% 8% 7% 6% 84% 82% 80% 80.2% 82.0% 82.3% 82.3% 82.3% 80 4.7% 5% 78% 60 40 20 2.5% 3.1% 3.5% 4% 3% 2% 1% 76% 74% 75.5% - 0% 72% Net Advances Advances Growth LDR We estimate gross advances to rise from SAR 119 billion in 2014 to SAR 138 billion by 2018. Net provisioning charge is forecasted to rise from a low of SAR 321 million last year to SAR 449 million this year and prudently going up to SAR 651 million through 2018. This still compares favorably to SAR 455 million booked in 2012 and an extraordinary SAR 957 million in 2013. Despite a relatively stronger loan portfolio, we have modeled higher non-performing loans (NPLs) in the medium term. NPLs dropped from SAR 1.5 billion in 2013 to SAR 1.2 billion in 2014. We estimate SAR 1.5 billion in 2016 rising to SAR 1.8 billion by 2018 as lower economic growth may put pressure on corporates, even larger ones. Exhibit 3 below illustrates this. It is pertinent to note that NPL coverage has already reached beyond 200% (forecasted at 211% for 2015) and even higher NPL assumptions bring coverage to 199% through 2018, a very comfortable situation. November 26, 2015 3
Exhibit 3: NPLs and NPL coverage 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1.80 1.67 1.52 1.49 1.18 1.20 250% 200% 150% 100% 50% 0% NPLs (SAR bln) NPL Coverage (5) Slower deposit growth Non-interest bearing (NIB) deposits continue to be the lifeline for most banks in KSA as they prop up margins for the sector. BSF is in a favorable situation as its NIB deposits have been growing, rising from 56% in 2012 to 73% in 2014 with a further increase to 78% by September 2015. This is inspite of a decline in total deposits from SAR 145.3 billion by 2014-end to SAR 143.9 billion as of 3Q2015. Exhibit 4: Deposits (SAR bln) and Growth (%) 160 155 150 145 140 135 130 125 120 115 13.9% 10.4% 3.0% 3.5% 2.0% (0.5)% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Total Deposits Deposits Growth 2013 and 2014 witnessed strong deposits growth at an average of 12.2% but we expect a minor deposit contraction this year (0.5%) largely due to the tight liquidity situation in the country and attributed to bigger clients in our view. Although we do expect oil prices to be subdued, they are expected to witness some Y/Y growth over the next three years. We have modeled a total deposit growth of 2.0% for 2016 going up to 3.5% by 2018. In nominal terms, we expect deposits to grow from an expected level of SAR 144.6 billion by December-end 2015 (SAR 143.9 billion at September-end) to SAR 157.2 billion through 2018. Larger corporates (one of the bank s core clients) and even smaller November 26, 2015 4
businesses are likely to be frugal in giving incremental deposits to the banks given internal liquidity requirements. Rising interest rates are unlikely to aide in deposit growth given 78% NIB deposits and that most customers are unlikely to be ratesensitive. 90% of income comes from loans Even after taking into account a clean-up in 2013 (largely in terms of extraordinary provisioning) total special commission income has grown at an average of 6.5% over the last three years. We expect 6.3% growth in the current year peaking to 8.3% next year (2016) as rising interest rates take effect. Income from advances has historically constituted the largest share of total income (90% average between 2012 and 2014) and we expect this to continue going forward with a contribution of 89% this year and next year. Total special commission expenses shrunk by -16.3% in 2014 due to (1) NIBs rising from 65% in 2013 to 73% in 2014 and (2) decline in deposit rates with cost of funds coming down from 0.66% in 2013 to 0.50% in 2014. We anticipate a +9.1% rise in total special commission expenses this year slowing down to an average of 2.7% over the next three years. We forecast a slowdown in other income in 2015 as compared to the rapid growth in 2014. Fee-income inclined at an impressive 12.4% in 2014 but may moderate to 2.6% this year with growth around the 2.0% to 3.0% range through 2018. Trading gains would depend on market performance, which has been weak in 2015 but may improve in the next 2-3 years. Exhibit 5: Total Sp. Income Growth to Peak in 2016E 6,000 5,000 4,000 3,000 2,000 1,000 0 Total Sp Comm Income Income from loans Total Sp. Income Growth 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Current investments level sustainable Investments peaked at year-end 2014 to SAR 45.3 billion but have subsequently come down to SAR 36.5 billion by September-end 2015. As per management, the 2014 level was an extraordinary one and they estimate the current figure to be more sustainable. Overall, investments are largely a liquidity optimization tool. We believe the bank shall just go for duration change on its sovereign exposure for now moving from T-bills to longer tenor bonds as there is some duration capacity available. Any further rise in duration exposure would depend on the Asset-Liabilities situation. November 26, 2015 5
NIMs likely to expand albeit marginally Banque Saudi Fransi After rising to 0.66% in 2013 from 0.62% in 2012, cost of deposits have fallen to 0.50% last year. We forecast them to remain close to the 0.50% mark through 2018 despite a forecasted rise in interest rates as the majority of deposits are non-interest based. Consequently, an expected increase in average asset yields from 2.67% in 2015 to 2.86% in 2016 and remaining stable around this mark going forward is likely to push Net Interest Margins (NIMs) from 2.19% in 2014 to 2.41% in 2016. This is illustrated in exhibit 6 below. Indications from the US Fed point towards a 0.25% hike in rates in their meeting next month, which is likely to prompt SAMA to go for a similar hike in the Kingdom. Exhibit 6: Net Interest Margins & Avg Asset Yield (%) 2.7% 2.6% 2.7% 2.1% 2.2% 2.2% 2.9% 2.8% 2.9% 2.4% 2.4% 2.4% NIMs Avg Asset Yield Expect 30%+ dividend payouts BSF avoided a bonus issue last year although many of its peers raised paid up capital. There does not appear to be a bonus share announcement on the horizon at the end of the current year either. Exhibit 7: Stable Dividend Payouts 1.2 35% 1.0 0.8 0.95 1.00 1.00 1.00 1.10 30% 25% 0.6 20% 15% 0.4 0.2 0.30 10% 5% 0.0 DPS Dividend Payout Dividend Yield 0% November 26, 2015 6
Management guideline is for a minimum 30% dividend payout for the foreseeable future. BSF has had a volatile payout history fluctuating between 15.0% to 32.6% for the past five years. However, in light of our discussions with management, we are projecting an average payout of 32.5% through 2018. This implies a dividend yield of 3.6% for this year and the following two years. While the yield is lower than some of its peers, we believe this is a good bargain for a relatively conservative bank. The bank has already announced a SAR 0.50 DPS for 1H2015 and we forecast a matching dividend for the second half taking the full year payout to SAR 1.00. We expect the bank to continue to pay dividends every six months rather than annually. November 26, 2015 7
Valuation and Recommendation We have used the justified P/B method as our preferred valuation metric for BSF. Given a stable book value that effectively captures returns; we believe this is an appropriate valuation metric for financial firms. As illustrated in the table below, we have calculated a justified P/B multiple for BSF using a 11.2% ROE, 9.8% cost of equity and 6.9% growth rate. The growth rate stems from a long term ROE of 11.2% and a long term retention rate of 62.0%. Table 2: P/B Valuation Assumptions 2015E 2016E 2017E 2018E Risk-free rate 3.70% Book Value per share (SAR) 23.26 25.38 27.56 29.78 Equity risk premium 6.75% Beta 0.90 LT ROE 11.2% CoE 9.8% LT growth rate 6.9% LT retention rate 62.0% Cost of Equity 9.8% Justified P/B 1.5x Source: Riyad Capital Per Share Fair Value 38.16 We arrive at a justified P/B multiple for BSF at 1.5x. We apply this to our 2016E book value per share forecast of SAR 25.38 to arrive at a fair value of SAR 38.16 per share. As a cross check we have also carried out a P/E valuation assuming a target P/E multiple of 10.9x, the average 2014 P/E for all banks based on Bloomberg consensus estimates. Applying this multiple to our average EPS forecast between 2016 and 2018 of SAR 3.21 leads to a fair value of SAR 34.97 close to the P/B estimated fair price. Table 3: P/E Valuation 2015E 2016E 2017E 2018E EPS 3.00 3.11 3.19 3.33 Target P/E multiple 10.9x Avg EPS (2016E-2018E) 3.21 Fair value per share 34.97 Source: Riyad Capital We reinstate coverage on Banque Saudi Fransi (BSF) with a 12-month target price of SAR 38.00 representing 1.2x P/B and 9.3x P/E. With an upside of 35% to our target price and a healthy 3.6% dividend yield for the next three years, we recommend a Buy at current levels. November 26, 2015 8
Summary Financials Table 4: BSF Summary Financials Income Statement (SAR mln) 2014 2015E 2016E 2017E Cash Flows (SAR mln) 2014 2015E 2016E 2017E Special Comm Income 4,565 4,851 5,255 5,425 Cash at Beg. of Year 18,140 20,014 11,358 18,114 Special Comm Income 748 816 820 844 Net Income 3,516 3,620 3,750 3,842 Net Special Comm Income 3,817 4,035 4,435 4,581 Dividends Paid (586) (1,876) (1,205) (1,205) Other Income 1,969 2,038 2,090 2,137 Depreciation & Amortization 125 127 129 130 Operating Income 5,786 6,072 6,525 6,719 Due from Banks (464) (6,026) 3,214 (241) Operating Expense 2,271 2,460 2,782 2,884 Operating Cash Flow 12,464 (17,415) 9,406 3,427 Share of associate income 1 7 7 7 Change in Investments (10,803) 9,069 (2,539) (1,941) Net Income 3,516 3,620 3,750 3,842 Loans and Advances (5,234) (7,492) (2,804) (3,671) Shares Outstanding (mln) 1,205 1,205 1,205 1,205 Debts Inc./Dec. 2,001 (2,418) (35) (40) EPS 2.92 3.00 3.11 3.19 Capital Expenditure (111) (128) (131) (128) DPS 0.95 1.00 1.00 1.00 Cash at year end 20,014 11,358 18,114 19,457 Balance Sheet (SAR mln) 2014 2015E 2016E 2017E Ratios 2014 2015E 2016E 2017E Assets Growth (YoY) Cash & Bank Bal. with SAMA 20,014 11,358 18,114 19,457 Net Special Comm. Income 13.5% 5.7% 9.9% 3.3% Due from Banks 2,009 8,035 4,821 5,062 Total Income 14.5% 4.9% 7.5% 3.0% Total Investments 45,102 36,033 38,573 40,513 Net Income 46.2% 2.9% 3.6% 2.4% Net Loans and Advances 116,541 124,033 126,836 130,507 Gross Loans 4.7% 6.5% 2.5% 3.1% Other Assets 4,407 5,730 5,787 5,845 Total Investments 31.2% -20.0% 7.0% 5.0% Net Fixed Assets 605 605 606 603 Customer Deposits 10.4% -0.5% 2.0% 3.0% Total Assets 188,777 185,901 194,846 202,099 Earning Assets 11.1% -2.3% 5.0% 3.8% Total Assets 11.0% -1.5% 4.8% 3.7% Liabilities & Equity Total Equity 14.0% 5.9% 9.1% 8.6% Customer Deposits 145,275 144,549 147,440 151,863 Profitability Due to Banks 3,864 1,159 4,575 4,712 RoAA 2.0% 1.9% 2.0% 1.9% Debt Sec. in Issue 9,131 6,713 6,678 6,638 RoAE 14.2% 13.3% 12.8% 12.0% Other Liabilities 4,036 5,448 5,557 5,668 NIMs 2.2% 2.2% 2.4% 2.4% Total Liabilities 162,306 157,869 164,250 168,882 Others CAR 17.3% 17.6% 17.1% 16.7% Capital 12,054 12,054 12,054 12,054 NPL Coverage 194.8% 210.9% 194.2% 194.3% Statutory Reserves 9,919 10,824 11,762 12,109 P/E 9.6x 9.3x 9.0x 8.8x Retained Earnings 2,252 3,761 5,368 7,658 P/B 1.3x 1.2x 1.1x 1.0x Total Shareholders Equity 26,471 28,032 30,596 33,218 Dividend Yield 3.4% 3.6% 3.6% 3.6% Total Liab & Equity 188,777 185,901 194,846 202,099 Dividend Payout 32.6% 33.3% 32.1% 31.4% November 26, 2015 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 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