financials - Bank Audi

August 24, 2012
EQUITY RESEARCH
SAUDI BANKS
VALUATION METHODOLOGY
We value the Saudi banks using the sustainable ROE approach cross-checked with the dividend
discount model with the exception of Alinma Bank, where we rely solely on the sustainable ROE
model. Our estimates have a five year forecast period with a terminal value in the fifth year. We
derive the cost of equity by using the capital asset pricing model while taking into account the
political and socio-economic environment. Our discount rate of 12% takes into account the current
state of global markets, leading to a higher investor risk premium . We apply a perpetual growth rate
of 5% on the terminal value.
VALUATION KEY RISKS
Key risks to our fair value estimations for the covered banks are:
• Further deterioration in Europe’s debt crisis. The direct impact on the KSA banks is limited given
the modest exposure on the books, however the indirect repercussions will result in heavier
consequences.
• Slower than foreseen global growth from the rest of the world (mainly US and BRICS), hence
causing a slowdown in commodities demand (including oil).
• A blow up in any large single name exposure.
• A faster than expected mortgage penetration is an upside risk to our valuations.
HOW WE DIFFER FROM CONSENSUS
Our earnings estimates are relatively in line with consensus. In terms of loan growth we are less
bullish on growth emerging from the mortgage law. Our NIM estimates are slightly more bullish,
however our ROEs are at the low end of consensus as we assign higher capital ratios in general.
TOP PICKS: AL RAJHI, ANB AND SAMBA
Al Rajhi: superior profitability more than justifies premium valuation
Al Rajhi Bank is the most profitable bank within KSA with a 2012E ROE of 24.5%, well above the
average ROE of 15.6% for the rest of the Saudi peers. Al Rajhi enjoys a cheap funding base with short
term deposits constituting about 90% of its total deposit base. With 2 thirds of its total loans in retail,
Al Rajhi’s yield on assets is evidently higher than the rest of the Saudi banks, which carry a more
corporate skewed loan book. We expect the recent strength in retail lending to continue to support
Al Rajhi’s profitability. Over the last 2 years, Al Rajhi’s liquidity remained adequate with its current
loan to deposit ratio reaching 85%, providing itself with a strong platform for future growth. Al Rajhi
trades at a PB 2012E of 3.27x, a premium of 42% to the Saudi market weighted average PB 2012E of
2.25x. Al Rajhi’s premium valuation, in our opinion, is more than justified by its superior profitability
and strong growth outlook.
Arab National Bank: attractive valuation / growth profile
ANB is within top players in the retail Saudi market which has supported its NIM over the years. The
bank has largely addressed its previous asset quality concerns with its NPL now declining to 2.13%
on an NPL coverage of 159%. The bank is well established to grow in both the retail and corporate
space, now that asset quality concerns have been dealt with. Y-o-Y the corporate book has grown
by12% while the retail book has grown by 20%. We forecast earnings growth for ANB of 19% and
13% for 2012 and 2013 respectively. The bank trades at a PB2012E of 1.40x, 10% below its 2 year
average. On a PE basis, the bank is valued at 9.6x 2012E a 6% discount to peers. We raise ANB’s fair
value to SAR 36.4 given its improved fundamentals.
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