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Slowly improving visibility on potential
Saad and Algosaibi debt restructuring
should help Saudi banks’ valuations to
re-rate from their all-time lows
􀀗 Strong deposit accumulation in H1 2009
leaves Saudi banks well placed to meet
potentially rising demand for funding in
2010
􀀗 Riyad Bank and Samba our top picks,
both OW(V). Increase target prices for
Samba, ANB and Al Rajhi. Potential US
interest rate increase, not discounted in
our earnings, remains the key catalyst
for Saudi banks. We prefer to have this
as a free optionality
Loan loss provisioning charges on Saad and Algosaibi
group debt gradually unwinding in Q3 2009 to unlock
value. We expect Q3 2009 to be a disappointing quarter with
earnings declining c16% y-o-y for the banks under our
coverage. Excluding Al Rajhi Bank, we expect Q3 2009 loan
loss provision expenses to approach near peak levels,
increasing by 3.5 times q-o-q. Increased state funding of
domestic projects suggests the Saudi banks’ new loans are
likely to be dominated by government-backed projects,
implying a lower cost of risk for this new business.
We envisage improving outlook for 2010. Our research
shows that corporate loan growth tends to lag certain
industrial indicators by two to three quarters, such as
domestic steel output, which is up 37% q-o-q in Q2 2009
(flat y-o-y). A sequential increase in capex in the domestic
petrochemical industry, up 32% q-o-q in Q2 2009, implies
potentially rising demand for working capital financing. We
increase our net income estimates for the Saudi banks we
cover by 11% in 2009 and 18% in 2010 on average.
Our top picks: Riyad Bank and Samba, both OW(V). Saudi
banks (excluding Al Rajhi) now trade at a 10% discount to
CEEMEA bank peers vs a 22% premium in 2008. We see the
best value in Riyad Bank and Samba, with total potential
returns of 62% and 47% to our target prices, respectively.
Riyad Bank trades at 1.3x book value in 2010e with an
expected ROE of 11%. Samba currently trades at 1.8x book
value in 2010e, which discounts a higher expected 2010 ROE
of 20%. Potential interest rates increase is the key catalyst.
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