JEDDAH – The six Saudi banks – namely Al Rajhi Bank, Riyad Bank, Samba, Banque Saudi Fransi, SABB and Arab National Bank – will have an average net income growth of 17 percent in 2013-15, Credit Suisse said in its latest “Saudi Arabia Banks” equity research issued Tuesday. Moreover, based on liquidity, funding profile, capitalization, asset quality, book formation, (earnings momentum, dividend growth potential and profitability, the Saudi banks rank high on every one of these aspects versus other banks in the MENA region, the report said. Saudi banks are among the most liquid banks in EEMEA. They also exhibit strong capitalization and the highest asset quality within the region. “Given SAMA's strict guidelines, we are not surprised to find that Saudi banks are some of the most liquid banks within EEMEA. Not only are they required to deploy substantial funding into liquid assets, but their dependence on wholesale funds is by far the lowest across the region.” Saudi banks exhibit some of the strongest fundamentals in EEMEA region, the report said, based on liquidity, funding structure, capitalization, asset quality, capital formation, earnings growth and profitability. Overall, Saudi banks exhibit some of the strongest fundamentals across the region, delivering the highest profitability despite complying with one of the most stringent regulatory frameworks in the world, Credit Suisse said. “In particular, they exhibit robust liquidity, a solid funding structure/asset quality and strong profitability. In our view, fundamentals alone would justify a valuation premium in the context of the MENA region.” The report further said the earnings forecasts incorporate overall loan volume growth remaining above 10 percent for the next three years. At the same time, it expects modest cost of risk leverage to come through. These two factors are the main source of earnings stabilization in the forecast. The study expects net interest margins to stabilize after a protracted period of pressure owing to falling interest rates. On the one hand, banks generate substantial liquidity through demand deposits, which now account for more than 50 percent of the total; and a strong focus on the retail segment has improved the overall asset mix providing some relief. On the other hand, the landscape remains competitive, with large banks having high market shares. Up until recently, this had not contributed to margin pressure due to lackluster loan growth. However, new entrants, strong economic growth, and a flatter interest rate outlook have resulted in accelerating credit supply, which in turn has started to dent yields in certain segments. Moreover, the study forecasts that fee income should largely normalize in 2012. Saudi banks' fee income growth came under substantial pressure following Tadawul's correction in 2007 due to large brokerage fees on the back of retail trading volume. Fee income has benefited from growing trading volumes in 2011 and 2012, it added. It expects Al Rajhi Bank to benefit the most from this trend given its commanding market share of 17 percent. The main reason behind fee income generation normalizing in 2013 is Credit Suisse assumption that Tadawul volume growth will stabilize at its long-term annual rate of 13 percent. “Hence, we see upside risk to our estimates should velocity and/or average volumes increase substantially if, for instance, authorities allow direct foreign ownership of shares trading on the local exchange.” Saudi banks exhibit robust liquidity and solid funding profiles within MENA. Although Saudi banks' cash and equivalents levels (including central bank reserves) seem to be relative low in the context of the MENA region), the report said by adding liquid assets (i.e., interbank loans + securities), their profiles appear more in line with the peer group average. However, observing liability, the study noted that Saudi banks seem to exhibit one of the strongest liquidity buffers. Their exposure to wholesale funds is among the lowest, and a relatively high part of their deposits are retail/demand in nature (i.e., more stable). Saudi banks also enjoy a high and solid equity base, which is second in relative size only to that of Qatari banks (relative to assets), but of the strongest quality (i.e., mostly core capital). Saudi banks will also deliver the most meaningful recovery in earnings growth across the EEMEA region in the next three years, matching MENA banks' net “We estimate Saudi banks should deliver double-digit earnings growth for the next three years, owing to higher credit volumes and cost of risk leverage, which could accelerate further should monetary policy tighten.” However, Credit Suisse noted main risks to its forecasts, such as the sustained oil price weakness, corporate loan concentration, and regulatory pressure. It said a high dependence on oil revenues may result in sluggish economic growth and thus could put pressure on credit growth should oil prices fall substantially from current levels. It added that outside state enterprises, corporate credit exposures could be significant and correlated since large conglomerates control significant parts of the economy. In the past, this has resulted in substantial credit losses, it noted. It noted, too, that since “Saudi banks operate in one of the strictest regulatory frameworks in the world, new regulation could result in lower returns than we forecast.” – SG/QJM
