AlJazira Cap says Saudi banks perform well despite COVID-19, gives Neutral rating to Al Rajhi, Alinma, AlBilad

The Saudi banking sector fared well despite the slowdown due to COVID-19 pandemic and the precautionary measures taken by the government, AlJazira Capital said in a recent report.

The sector continues to face headwinds from cheap oil as state revenue cut pushed the government into expenditure cut, the report said, indicating that government finances will improve in the future, supported by the recovery in oil prices.

Meanwhile, growth in loans remained impressive throughout the year with 15% year-on-year (YoY) in the first nine months of 2020, supported by triple digit growth witnessed in mortgage loans.

Meanwhile, other sectors showed slow growth, as manufacturing and processing showed a fall of 2.4% YoY, whereas building and construction remained flat.

The brokerage firm further noted that profits in 2020 continue to witness pressure due to net interest margins (NIMs) compression and higher provisions.

AlJazira Cap expects the low interest rate scenario to continue until 2021, given the Fed’s directives, will continue to put pressure on NIMs, indicating that the continued low interest rate will lead to loans re-pricing, exacerbating the impact.

Al Rajhi Bank with a strong retail share (77.3% of loans provided to retail sector by the end of 9M 2020) and 6% interest bearing loans, put the bank in a favorable position, while corporate loans may lead to an increase in non-performing loans (NPLs), resulting in higher provisions.

AlJazira Cap expects Al Rajhi Bank to realize a net profit of SAR 10 billion in 2020, down 1.5% YoY, and an increase of 0.6% in 2021 net profit, due to the increase in provisions.

Alinma Bank’s loan portfolio contains 77% of corporate loans, along with 42% of its deposits are are Murabaha deposits. Higher concentration of corporate loans leaves the bank susceptible to higher NPLs, in addition to higher corporate exposure also will result in loans re-pricing, consequently impacting NIMs.

Alinma Bank is estimated to record a net profit of SAR 2.1 billion in 2020, down 15.6% YoY.

Bank Albilad has a nearly 1:1 ratio of corporate to retail loans, whereas almost 59% of its deposits are non-interest bearing (NIB).

The brokerage firm expects higher provisioning from the bank once the loan deferral program by the government ends. It also estimates the bank to achieve a net profit of SAR 1.36 billion in 2020.

The following table shows Aljazira Capital's recommendations for the three banks and their target prices: