Saudi banks have maintained relatively high profitability for 2012 in spite of high provisioning, said NCB Capital, a leading wealth manager and the kingdom’s largest asset manager, in its latest report on the Saudi banking sector.

“We revise our profit CAGR for 2011-16 down from 14.5 per cent to 12.1 per cent due to our expectations of tighter margins, lower fee income and increased provisions,” said Mahmood Akbar, 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.”

“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 per cent with SABB and BSF seeing the biggest declines at 7.5 per cent and 4.5 per cent respectively,” he added.

“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 goes on to state that asset quality remains intact despite increased provisions, noting that, despite the Al Mojil Group (MMG) exposure, which was less than 0.15 per cent 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, according to the report.

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 2013 to remain at 2.77 per cent, in line with the 2012 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 earnings in the fourth qaurter of 2012 will be a catalyst for upside returns,” he added.

Overall, for the ten banks under the report’s coverage, NCB Capital expects net income to grow 12.9 per cent year-on-year (YoY) and 1.5 per cent quarter-on-quarter (QoQ) in the fourth quarter of 2012.

Adjusting for the spike in provisioning during the third quarter of 2012, the report expects pre-provision profits for the fourth quarter to decline 4.2 per cent QoQ due to a 2.1 per cent 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, the report said.

“Our estimates remain conservative compared to other analysts,” said Akbar.

“While our estimate for 2012E net profit is 0.8 per cent higher than consensus, our 2013E and 2014E forecasts are 5.3 per cent and 6.1 per cent lower than consensus respectively for the ten banks under our coverage. We believe this reflects our conservative assumptions for margins and loan growth.”

“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,” he concluded. – TradeArabia News Service