Al Jazira Cap maintains “Neutral” recommendation on Al Rajhi Bank, AlBilad; reiterates “Overweight” for Alinma Bank

Al Jazira Capital maintained its “Neutral” recommendation for Al Rajhi Bank and Bank AlBilad and reiterated its “Overweight” recommendation for Alinma Bank while reducing its target price.

The brokerage firm said in a recent note that the banking sector’s strong performance continued in Q4 2019 as deposit and loan growth remained steady, but higher provision for impairment negatively impacted the profitability of most banks.

The firm further pointed out that the impact of interest rate reduction by the Saudi Arabian Monetary Authority (SAMA) would be felt after some time by retail banks, as significant growth in mortgage loans attracts attention.

Al Jazira believes the changes in the mortgage law places Al Rajhi Bank in a favorable position, given its retail-heavy portfolio.

“However, SAMA’s discount rate cut would hit the bank’s top line and bottom line,” the firm said, also adding an estimated earnings per share (EPS) of SAR 3.88.

The brokerage expects deposit growth rate to increase at a slightly lower rate in FY2020 due to changing business conditions for Alinma Bank.

“Net income in FY2019 declined 11.3% mainly due to provision reversal of SAR 556 million in 2018 and increase in impairment charge of financing assets, which we expect to moderate going forward,” Al Jazira said.

Funding cost for AlBilad would continue rising as the bank tries to attract higher Murabaha deposits, according to Al Jazira.

The firm mentioned that net income in FY2019 more than doubled to SAR 1.24 billion due to Zakat settlement during Q4 2018 and a 25.5% YoY increase in net income from investing and financing assets, as return on equity (ROE) rose to 13.2%.