JEDDAH — Saudi banks are on track to deliver double-digit earnings per share (EPS) growth, offering attractive value within EEMEA, Credit Suisse said in its Equity Research on Saudi banks for the month of November. Credit Suisse research analyst William Mejia said the adjusted forecast for Saudi banks incorporates recently disclosed detailed third-quarter financials, resulting in minor changes to our earnings estimates and target prices. “We believe incremental provisioning to be non-recurrent,” he said. Saudi banks' shares came recently under pressure as market participants incorporated relatively weak bottom-line dynamics in 3Q12, the study said. Indeed, Saudi banks' shares in Credit Suisse coverage declined 3 percent in the last two months having underperformed EEMEA banks by around 5 percent during the same period. However, most of the negative surprise was related to incremental general provisions, which “we believe to be a non-recurrent trend as banks conservatively covered corporate exposures as a result of isolated credit events in the construction sector.” Nonetheless, asset quality remains robust, with NPL ratios declining sequentially for most banks and NPL coverage only declining in the case of Al Rajhi Bank. Earnings continue to be well supported by top line growth. On the bright side, net interest margins exhibited further signs of stabilization with NIMs seemingly bottoming out for most banks in 2Q12. Hence, Credit Suisse's investment call remains intact as “we anticipate stable loan growth and margins to result in attractive earnings growth from 2013 onwards. Hence, we see attractive value in Saudi banks' shares, which excluding Al Rajhi Bank now trade at around 20 percent discount to the EEMEA peer group based on 2013E P/B. Credit Suisse favors Riyad Bank and Banque Saudi Fransi in particular, which based on its study, target prices are offering around 30 percent potential upside. The study's adjustment on its estimates incorporates recently disclosed financials results. For Arab National Bank, it projects 2012-15 earnings estimates increase of 4 percent on average as reflected margin improvement on the back of better asset mix (i.e., the bank shifted liquidity into higher interest-earning assets ahead of our expectations). In addition, cost or risk projections were also adjusted to reflect slightly lower provisioning rates going forward as it seems the bank took measures during the third quarter to strengthen its credit exposure, resulting in the NPL coverage ratio increasing to 191 percent. For SABB, Credit Suisse sees 2012-15 earnings to increase 3 percent on average, mainly to incorporate stronger than expected credit volume growth and loan mix improvement. The 2012 earnings forecast also account for better-thanexpected investment income during the third quarter. For Banque Saudi Fransi, Credit Suisse expects 2012-15 earnings to decline 3 percent on average, mainly to incorporate lower fee income generation and to accommodate higher levels of NPL coverage going forward. For Samba, Credit Suisse estimates 2012-15 earnings to drop 2 percent on average, to reflect slightly lower investment income and modest changes to the expected provisioning rate for loan losses. Although Credit Suisse's 2012-15 earnings forecast for Riyad Bank and Al Rajhi Bank changed by less than 1 percent on average, the study target prices for both banks are around 3.5 percent lower as “we introduced minor adjustments to the applicable Ke in our valuation methodology in order to incorporate in the calculation a more comprehensive historical pricing database, which resulted in small changes in implied volatility and hence equity risk premium estimates,” Mejia said in the study. — SG
