The outlook for the Saudi banking sector remains strong, NCBC Research said, noting that it continues to prefer the larger banks which are better able to tap the retail lending opportunity and trade at attractive valuations. Although net interest margins (NIMs) will continue to contract, NCBC expects the bottom line to be driven by loan volumes and higher YoY activity in the Tadawul. NCBC's analysts have upgraded ANB to 'Overweight' and downgraded AlBilad to 'Underweight'. All other ratings remain unchanged. However, net profits estimates were cut 2.8 percent for 2012 due to higher provisions. "We reduce our net income forecast for banks under coverage by 2.8 percent to SR27.97 billion in 2012E (+10.9 percent YoY) as 1Q12 net profits came 6.7 percent below our forecasts. This is mainly due to provisions which came in higher than expected, particularly from Al Rajhi. We, therefore, revise our forecast for provisioning in 2012 9.0 percent higher to SR4.55 billion. Pre-provision profits are revised downwards by only 1.2 percent from our earlier estimate," said the research note. The margin contraction reflects abundant liquidity and high competition, the study noted. "Based on our revised forecasts for banks under our coverage, we expect margin contraction of 5 bps higher than our previous estimate to 2.71 per cent for 2012E. NIM's declined 15bps YoY in 1Q12 owing to abundant liquidity in the Saudi economy and aggressive lending practices from smaller banks." However, estimates for net income growth in 2012 will grow 10.9 percent YoY driven primarily by high TASI volumes activity and strong growth in loan volumes, particularly in the retail segment, it said. "Therefore, we estimate an 11.8 percent YoY growth in non-interest income and NSCI growth of 6.8 per cent led by a loan growth of 12.4 percent YoY in 2012E."
