RIYADH – The Saudi banks were estimated to maintain relatively high profitability for 2012 despite high provisioning, NCB Capital, the GCC's leading wealth manager and the Kingdom's largest asset manager, said Saturday. “We revise our profit CAGR for 2011-16 down from 14.5 percent to 12.1 percent due to our expectations of tighter margins, lower fee income and increased provisions,” said, Mahmood Akbar, NCB Capital equity research analyst at NCB Capital. “This has reduced our PT's slightly. We continue to be positive on the sector which is trading at compelling valuations; our preference continues to be the large-cap banks such as AlRajhi, Riyad and Samba.” Akbar further said: “Given our downward revision in fee income and margins, coupled with higher-than-expected provisioning in 3Q12, we revise our PT's down by an average of 1.8 percent with SABB and BSF seeing the biggest declines at 7.5 percent and 4.5 percent respectively. Nonetheless, we continue to believe that banks are trading at compelling valuations. Our ratings for all banks remain the same with Al Rajhi, Riyad and Samba our top picks due to their attractive valuations, good growth potential and ability to absorb potential credit losses.” The report noted that asset quality remains intact despite increased provisions, adding that, despite the Al Mojil Group (MMG) exposure, which was less than 0.15 percent of the total loan book of the exposed banks, Saudi banks post relatively low NPL ratios. Management feedback indicates that concerns over cash flow problems were limited to a small number of contracting companies with this easing recently. Therefore, the provisioning charges reflect conservative banking regulations rather than expectations of deterioration in asset quality. Commenting on medium and long-term lending to partially offset margin contraction, Akbar said: “Saudi banks have increased their time deposit base and LT debt issues in 2012 and we believe that this is to support the ‘chase' for higher yielding medium and long term loans. We expect NIMs in 2013E to remain at 2.77 percent, in line with the 2012E level.” “There continues to be counter-consensus with preference for large-caps. Despite the recent declines in banking sector stocks, we believe the market is underestimating the growth potential and overestimating the impact of provisioning. We believe 4Q12E earnings will be a catalyst for upside returns,” he said. Overall, for the 10 banks under the report's coverage, NCB Capital expects net income to grow 12.9 percent YoY and 1.5 percent QoQ in 4Q12. And 1.5 percent QoQ growth in 4Q12 net income is expected to be mostly driven by lower provisioning. Adjusting for the spike in 3Q12 provisioning, the report expects pre-provision profits for 4Q12 to decline 4.2 percent QoQ due to a 2.1 percent QoQ decline in total operating income. Lower fee income is expected from reduced loan volumes growth and capital market activities to affect non-interest income, while a 4bps QoQ contracting in NIM's will keep NSCI flat on QoQ. “Our estimates remain conservative compared to other analysts,” said Akbar. “While our estimate for 2012 net profit is 0.8 percent higher than consensus, our 2013 and 2014 forecasts are 5.3 percent and 6.1 percent lower than consensus respectively for the 10 banks under our coverage. We believe this reflects our conservative assumptions for margins and loan growth.” Moreover, Akbar said: “In this update, we remain Overweight on seven of the banks under coverage; Al Rajhi Bank, Samba Financial Group, Riyad Bank, Saudi Hollandi Bank, Banque Saudi Fransi, SABB and Arab National Bank. We retain our Neutral rating for Bank Al Jazira and Saudi Investment Bank, and maintain our Underweight rating for Bank AlBilad.” – SG
