Saudi banks to post lower profit in 2013
Riyadh, March 25, 2013
The Saudi Arabian banks are likely to register a lower profit growth this year owing to increasing competition and reduced income from brokerage, according to a report.
The pressure on these banks' net interest margin (NIM) will be considerable due to the competition, said NCB Capital, a leading Saudi Arabian investment company in its latest report on Saudi banks.
NCB Capital has reduced its NIM estimate due to increasing competition as it expects a 9bps decline in margins from a previous estimate of flat NIMs.
“As a result, we expect Saudi Banks to have lower profit growth that is also due to reduced income from brokerage,” remarked Mahmood Akbar, the equity research analyst at NCB Capital.
“Nonetheless, we expect a bottoming out of margin contraction in 2013 and hence expect current valuations to improve. All our ratings are unchanged; we continue to prefer large-caps banks such as Al Rajhi, Samba and Riyad which trade at attractive levels and offer high dividend yield,” he noted.
In the report, NCB Capital revises its estimates for profits for 2013 for the ten banks under its coverage 2.5 per cent lower to SR29.4 billion due to a 16bps reduction in its estimate for NIMs.
"This leads to NCB Capital’s expectation of profit growth of 6.8 per cent YoY in 2013 compared to our earlier estimate of 9.5 per cent. The change in asset mix towards consumer financing will limit the NIMs’ decline to 9bps for 2013E compared to the 14bps decline in 2012," said Akbar.
“Our NIMs’ estimates are more conservative than management guidance,” remarked Akbar.
“We believe our estimate for margin contraction is on the higher end of the management guidance range of 5-10 bps. We are concerned about the similarities of strategies between banks, particularly the focus on lending to the consumer segment. We believe this supports our estimate for loans yield spread over Saibor, which we forecast to decline by 31bps in 2013," he observed.
“Despite the margin contraction, we continue to believe that valuations remain attractive with dividends limiting further downside risk on share prices. Indeed our forecasts do not incorporate the expected increase in global interest rates in 2016E. Hence, we only assume a marginal increase of 27bps in 2013-17," said the expert.
According to him, NCB Capital’s valuation call is based on P/B expansion. The sector is trading at a 2013E P/B of 1.5x compared to its historic five year average of 2.3x.
“We believe this discount is not justified as we expect a bottoming out of margins. Hence we expect valuation multiples to revert to its historic mean,” he added.
“We revise our estimates for net interest margins down for 2013E for banks under our coverage from 2.7 per cent in 2012 (hence flat YoY) to 2.61 per cent which represents a 9bps decline YoY,” said Akbar.
“We believe the combination of greater competition from banks for lending opportunities as well as abundant liquidity in the Saudi economy will put further pressure on NIMs in 2013E. However, the extent of the decline will be lower than in 2012 when margins contracted by 14bps," he added.
The decline in margins, said Akbar, was the main contributor to the 2.5 per cent downward revision in the NCB Capital estimates for 2013 profits to SR29.4 billion.
"Nonetheless, we still see good profit growth of 6.8 per cent in 2013 from 2012, although slightly lower than our previous growth estimate of 9.5 per cent. Given the lower expected margins for 2013, we expect the profit growth to be driven mostly due to a 12.5 per cent expansion in loan books," he added.
Akbar said the banks were likely to post a net profit CAGR of 11.1 per cent during 2012-16 which is slightly lower than the NCB Capital's previous estimate of 12.7 per cent.
"We expect this to be led by an 11.6 per cent lending CAGR. We continue to be conservative with our estimates for margin, expecting only a 10bps improvement during the stated period," he noted.
NCB Capital in its report said the significant growth in money supply reflected abundant liquidity.
"With oil prices continuing to trade at elevated levels, coupled with the significant increase in budgeted government expenditure, liquidity in the Kingdom continues to be high," the report stated.
"This supports the decline in yields while expanding the balance sheets of banks due to the increase in deposits, stated the NCB Capital report.
The customer deposits are likely to increase by 10.2 per cent year-on-year in 2013 for the Kingdom's banks, it added.-TradeArabia News Service