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Riyadh-based investment bank Al Rajhi Capital believes that Saudi Arabia's banking sector offers strong buying opportunities amid the current sell-off in Tadawul where the bank index is down 10% since the end of September 2022.
Following the government budget statement, which has strong GDP forecasts for the medium term, the brokerage in a new report raised loan growth estimates, driven by corporate loans.
It raised total loan growth estimates for 2022 and 2023 to 14% and 12%, respectively, from 13% and 11% earlier. It also revised the loan growth estimates for 2024e and 2025e to over 11% in 2024e and almost 11% in 2025e (from 9% and 7%, respectively).
Al Rajhi raised corporate loan growth estimate to 13% each in 2022e and 2023e from 10% before, while raising the estimate for 2024-2026e to 14%/14%/10% from average 7.0% growth in each year before.
According to the report, the SME segment has been the key driver for corporate loan segment in the recent years supported by various governmental measures.
"Going forward, we believe the mid and large corporate loan category to see higher uptick from 2023 onwards, particularly from H2 2023, supported by implementation of Giga projects and many other initiatives under vision 20230 such as NIS (national investment strategy that focuses on private sector investments, includes Shareek program), National Strategy for Industry and Agriculture (focuses on industrial development and agriculture), etc."
The brokerage's estimates for mortgages are unchanged at 23%/13%/10% in 2022/ 2023/2024 and average 8.6% in 2025 and 2026. They continue to be a key driver, albeit with the growth rate moderating from 33% y-o-y in Q1 2022 to 28% y-o-y growth in Q3 2022.
The brokerage cut personal finance loan growth numbers, as they have been trending downward from almost 15% y-o-y in Q1 2022 to 9% y-o-y in Q3 2022.
The brokerage trimmed its net interest margin (NIM) expansion estimates for 2023 and "will follow a wait and watch approach when it comes to revising our NIM estimates," the report said.
For the ten banks that Al Rajhi Capital covers, NIM estimates for 2023e are significantly trimmed to just +12 basis points (bp) expansion y-o-y from +64 bp before.
However, despite the sharp cut in NIMs for 2023e and modest expansion thereafter, the brokerage expects the banks to post healthy net income growth.
"Based on the strong loan growth but flattish to modest NIM improvement over the medium term, our estimate for net income growth is mid to high teens over the next two years," it concluded.
(Writing by Brinda Darasha; editing by Seban Scaria)
