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August 24, 2012 FINANCIALS EQUITY RESEARCH AL RAJHI BANK Balance Sheet Mix 2010 2011 2012E 2013E 2014E 2015E 2016E Loans to Deposits 84% 81% 86% 88% 89% 90% 90% Loans/ Assets 65% 64% 68% 70% 71% 72% 72% Assets/Equity 6.8 7.6 7.8 7.9 8.0 8.0 8.2 (Cash + Net Interbank) /Assets 14% 13% 10% 9% 9% 9% 9% Deposits/ Total Funding 77% 79% 79% 80% 80% 80% 81% Asset Quality 2010 2011 2012E 2013E 2014E 2015E 2016E NPL Ratio 2.2% 1.7% 1.8% 1.8% 1.8% 1.7% 1.7% NPL Coverage Ratio 135.8% 148.0% 155.0% 158.0% 160.0% 163.0% 166.0% Cost of Risk (% of Gross Loans) 1.59% 1.10% 1.05% 1.00% 0.90% 0.91% 0.90% Capital Adequacy 2010 2011 2012E 2013E 2014E 2015E 2016E Tier 1 15.2% 16.3% 15.3% 15.2% 15.2% 15.2% 15.2% CAR 20.5% 20.5% 19.5% 19.0% 19.1% 19.4% 19.5% Profitability 2010 2011 2012E 2013E 2014E 2015E 2016E ROAE 22.5% 23.2% 24.5% 25.6% 26.7% 27.4% 31.9% ROAA 3.3% 3.2% 3.2% 3.3% 3.4% 3.4% 3.9% NIM 4.76% 4.63% 4.49% 4.45% 4.43% 4.44% 4.89% Cost to Income 25.6% 27.8% 27.1% 25.8% 24.5% 23.3% 20.7% Operating Income Attribution 2010 2011 2012E 2013E 2014E 2015E 2016E Net Interest Income 76% 73% 69% 70% 70% 70% 71% Fee Income 14% 18% 22% 22% 22% 22% 21% Other Income 10% 9% 9% 9% 9% 8% 8% 24
CURRENT PRICE SAR 32.9 FAIR VALUE SAR 38.7 RATING ACCUMULATE Stock Data Ticker SABB AB Price 32.9 Consensus Median Target Price (SAR) 38.7 Fair Value 38.7 Upside Potential 18% Market Cap (SAR m) 32,899 August 24, 2012 HIGHLIGHTS Market Cap (USD m) 8,773 Number of Shares (m) 1,000 Free Float 45% Av Monthly Liquidity (SAR) 113 52 week High (SAR) 37.2 Major Shareholders Name Holding HSBC Holdings 40.0% Olayan Saudi Investment 16.9% Company GOSI 9.5% Muhaidib and Sons 4.5% Public Source: Zawya 29.1% Relative Share Price Performance SABB: RAISING FAIR VALUE ON HIGHER PROFITABILITY EQUITY RESEARCH After experiencing a sharp deterioration in asset quality in 2009, SABB’s ROE has bounced back on lower provisioning as well as stronger lending momentum. Moreover, we are witnessing signs of stabilizaton in the bank’s NIM. Based on the latter, we raise our fair value on SABB from SAR 36.8 to SAR 38.7 and keep an accumulate rating. ROE TURNS UPWARDS ON BETTER ASSET QUALITY Pressure on asset quality has eased with the NPL ratio now declining to 1.78% after it reached 4.5% in 2009. The bank has managed to build solid NPL coverage, rising from 100% in 2009 to 126% currently. We forecast an NPL ratio of 1.75% for 2013 with an 32 bps cost of risk. GROWTH ADDS SUPPORT TO THE TOP LINE SABB is amongst the best positioned to grow in KSA with its strong corporate franchise and solid mortgage book. Loan growth ended at 11.7% for the first 6 months of 2012 and 18.6%. Y-o-Y, corporate loans account for 82% of the total loans. Growth in the corporate book has exceeded the sector average recording 16% over the last 12 months to June 2012. The bank’s solid corporate franchise enables it to be a key player in the project finance area, where direct government financing is slowing while global banks are reducing their presence in the local market. SABB was involved in many major syndications recently (eg Maaden, Tasnee). We forecast a loan growth of 17.4% and 14.2% for 2012 and 2013 respectively. NIM HAS BOTTOMED Net interest margin for SABB is starting to improve (5bps Q-o-Q in Q2-12). Y-o-Y Net interest income has risen by 6.5%. The bank has targeted to contain its cost of funds by increasing its proportion of demand deposits from 42% as at the end of 2009 to 50% as of June 2012. Re-pricing of the long term corporate book is mostly done, while retail momentum will help improve asset yields. STRENGTH IN NON-INTEREST INCOME MAINTAINED Non-interest income rose by 28% over the past 12 months. SABB is benefiting from a rise in borrowing appetite and a strong corporate lending foothold. SABB also delivered strong brokerage income, benefiting from HSBC strong brand name and its track record to in the brokerage business. We note that previously HSBC plc merged its brokerage business HSBC Saudi Arabia with SABB’s brokerage arm. COMFORTABLE LIQUIDITY With a loan to deposit ratio of almost 80%, relatively in line with sector average, SABB’s balance sheet remains comfortable. The bank’s liquidity is sufficient to allow the bank to sustain loan growth momentum, on the corporate as well as on the retail side. VALUATION PARTIALLY REFLECTS IMPROVED FUNDAMENTALS, MAINTAIN ACCUMULATE Currently SABB trades at a PE 2013E of 8.6x and PB 2012E of 1.63x. SABB’s valuation is at a premium of 12% to the sector reflecting its improved fundamentals (SABB’s ROE is at 17.1% against 15.6% for its peers). We keep our Accumulate rating on SABB and revise our fair value upward from SAR 36.8 to SAR 38.7. FINANCIAL DATA SAUDI BRITISH BANK 2011 2012e 2013e 2014e Net Income 2,888 3,361 3,833 4,454 EPS 2.42 3.36 3.83 4.45 P/B (x) 1.91 1.63 1.45 1.30 P/E (x) 13.6 9.8 8.6 7.4 Dividend Yield 2.1% 3.0% 3.6% 4.6% ROAE 16.8% 17.1% 17.4% 18.3% NPL Ratio 1.9% 1.7% 1.7% 1.6% NPL Coverage 123% 131% 138% 149% 25
Page 1 and 2: COVERED BANKS Samba Financial Group
Page 3 and 4: August 24, 2012 INVESTMENT CASE IMP
Page 5 and 6: August 24, 2012 EQUITY RESEARCH SAU
Page 13 and 14: August 24, 2012 RETAIL LENDING STIL
Page 17 and 18: August 24, 2012 NET INTEREST MARGIN
Page 19 and 20: CURRENT PRICE SAR 47.6 FAIR VALUE S
Page 21 and 22: August 24, 2012 FINANCIALS EQUITY R
Page 23: August 24, 2012 FINANCIALS EQUITY R
Page 49 and 50: FAIR VALUE DEFINITION August 24, 20

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