RIYADH – Saudi banks' net interest margin (NIM) estimates were lowered due to increasing competition, NCB Capital said in a new study Tuesday. It expects a 9bps decline in margins from a previous estimate of flat NIMs, it added. “As a result, we expect Saudi banks to have lower profit growth that is also due to reduced income from brokerage,” said Mahmood Akbar, 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.” In the report, NCB Capital revised its estimates for profits for 2013E for the ten banks under its coverage 2.5 percent lower to SR29.4 bilion due to a 16bps reduction in its estimate for NIMs. This leads to NCB Capital's expectation of profit growth of 6.8 percent YoY in 2013 compared to our earlier estimate of 9.5 percent. The change in asset mix towards consumer financing will limit the NIMs' decline to 9bps for 2013E compared to the 14bps decline in 2012. “Our NIMs' estimates are more conservative than management guidance,” noted Mahmood 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. “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 2016. Hence, we only assume a marginal increase of 27bps in 2013-17.” 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,” stated Mahmood Akbar. “We revise our estimates for net interest margins down for 2013 for banks under our coverage from 2.70 percent in 2012 (hence flat YoY) to 2.61 percent which represents a 9bps decline YoY,” commented 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 2013. However, the extent of the decline will be lower than in 2012 when margins contracted by 14bps.” “The decline in margins is the main contributor to the 2.5 percent downward revision in our estimates for 2013 profits to SR29.4 billion. Nonetheless, we still see good profit growth of 6.8 percent in 2013 from 2012, although slightly lower than our previous growth estimate of 9.5 percent. Given the lower expected margins for 2013, we expect the profit growth to be driven mostly due to a 12.5 percent expansion in loan books.” “Overall we expect net profit CAGR of 11.1 percent during 2012-16 which is slightly lower than our previous estimate of 12.7 percent. We expect this to be led by an 11.6 percent lending CAGR. We continue to be conservative with our estimates for margin, expecting only a 10bps improvement during the stated period.” NCB Capital noted that significant growth in money supply reflects 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. This supports the decline in yields while expanding the balance sheets of banks due to the increase in deposits. Overall, NCB Capital expects customer deposits to increase by 10.2 percent YoY in 2013 for banks under the report's coverage led by the aforementioned factors “We remain Overweight on Al Rajhi, with a revised PT of SR88.4,” stated Akbar. “We believe in Al Rajhi's strong fundamentals, ability to grow top-line and post good profits despite the higher cost of risk. Expectations of further selling by some of the inheritors has put downside pressure on the stock; however we believe this offers long-term investors a compelling opportunity to enter the stock.” NCB Capital remains Overweight on SAMBA with a revised PT of SR57.7 and is positive on the bank's strategy to grow lending and increase its loan-to-customer deposit ratio. NCB Capital maintains its Overweight rating on SABB with revised PT at SR41.0. SABB's strategy to grow loan volumes will enable the bank to increase its NSCI faster. – SG
