Itqan Cap maintains “Neutral” on Al Rajhi Bank, expects dividend distribution for 2020

Al Rajhi Bank branch

Itqan Capital maintained its “Neutral” recommendation for Al Rajhi Bank with a share target price (TP) of SAR 83.5.

The brokerage firm said in a report that the bank recorded a strong recovery during the fourth quarter of 2020, indicating that the strong continued growth in financing, along with higher income from other operations, offset the impact of the lower net interest margin (NIM) and supported Al Rajhi’s net profit in the fiscal year 2020.

Itqan Capital projects lower NIM as the key downside risk for Al Rajhi in FY2021 due to lower expected average SAIBOR during the year, higher competition amid increased credit demand, and ample liquidity in the banking sector due to Saudi Central Bank’s (SAMA) liquidity injection through deposits with a maturity of up to three years, which will pressure lending rates.

Mortgages will continue to drive financing growth for the banking sector, in general, and Al Rajhi in particular, but at more normalized growth rates than FY2020.

Given the absence of SAMA’s restriction on dividends distributions and Al Rajhi’s strong financial position and profitability during 2020, Itqan Capital believes the bank is likely to distribute dividends for FY2020.

The bank is expected to reach a decision by the end of this month, the brokerage firm added.

The bank is expected to achieve a net income of SAR 10.4 billion for FY2021, and SAR 12.1 billion for FY2022.

Al Rajhi Bank stock is currently trading at 3.6x its book value vs 1.4x in the banking sector. While it may be justified that Al Rajhi would be trading at a premium to its peers given its high earnings quality and strong financial position, Itqan Capital believes it is unattractive at current market price.