RIYADH – The Saudi Arabian banks are likely to register a lower profit growth this year owing to increasing competition and reduced income from brokerage, NCB Capital said in its latest report on Saudi banks. The pressure on these banks' net interest margin (NIM) will be considerable due to the competition, it said. NCB Capital has reduced its NIM estimate due to increasing competition as it expects a 9bps decline in margins from a previous estimate of flat NIMs. “As a result, we expect Saudi Banks to have lower profit growth that is also due to reduced income from brokerage,” said Mahmood Akbar, the 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,” he noted. In the report, NCB Capital revises its estimates for profits for 2013 for the ten banks under its coverage 2.5 percent lower to SR29.4 billion 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 2013 compared to the 14bps decline in 2012,” said Akbar. “Our NIMs' estimates are more conservative than management guidance,” remarked Akbar. 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,” he added. Akbar said the banks were likely to post a net profit CAGR of 11.1 percent during 2012-16 which is slightly lower than the NCB Capital's 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,” he noted. NCB Capital in its report said the significant growth in money supply reflected 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,” the report stated. “This supports the decline in yields while expanding the balance sheets of banks due to the increase in deposits, the report said. The customer deposits are likely to increase by 10.2 percent year-on-year in 2013 for the Kingdom's banks, it added. “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,” he noted. — SG
