Drops in Saibor and oil prices could squeeze Saudi bank profits further

Banking stocks have declined 35% since January

  
Saudi men inspect a screen showing stock prices at ANB Bank in Riyadh, Saudi Arabia September 16, 2019.

Saudi men inspect a screen showing stock prices at ANB Bank in Riyadh, Saudi Arabia September 16, 2019.

REUTERS/Ahmed Yosri

The Saudi interbank offer rates (Saibor), already squeezed by US Federal Reserve’s rate cuts this month, could decline further from March onwards, leading to compression in net interest income (NIM) and lower net profits for Saudi banks, according to Al Rajhi Capital.

Now with the coronavirus outbreak hitting oil prices, leading to higher than expected deficits, overall economic growth is likely to be affected, more so because banks were relying on a revival in corporate and large project business, the investment bank added in a new report.

“Factoring no loan growth (ex. mortgage) and 10 percent mortgage growth; we believe profits could decline by c28 percent by 2022 as compared to our previous estimates (of 14 percent).

“Though measures to the tune of 120 billion riyals have been announced to mitigate payments/dues/liquidity, the cost of risk (CoR) could eventually spike,” the note added. “Based on a 2x increase in CoR, the (negative) impact on profit would be around 38 percent by 2022.” The investment bank presented three scenarios involving changes in Saibor and other factors.

Scenario 1:

  • Saibor drops to 84bps from March 2020
  • Mortgage growth of 38 percent in 2020 and 32 percent in 2021
  • CoR of 70bps in 2020 and 66bps in 2021
  • Lending growth (ex. mortgage) is 6 percent in 2020 and 5 percent in 2021

This would result in an approximately 14 percent decline in profits by 2022.

Scenario 2:

  • Saibor drops to 84bps from March 2020
  • Mortgage growth of 10 percent in 2020 and 2021
  • CoR of 70bps in 2020 and 66bps in 2021
  • Lending growth is zero

This would result in an approximately 28 percent decline in profits by 2022.

Scenario 3: All assumptions in Scenario 2 hold true, but CoR doubles. This would imply approximately 38 percent decline in profits by 2022.

SAMA initiatives

In order to mitigate the impact from coronavirus, the Saudi central bank SAMA has undertaken some measures that include a deferred payment program, funding for the lending program, loan guarantee program, and exemptions and postponement of some government dues.

“On the positive side, in 2020 banks’ profit could improve if they sell government bonds /fixed rate investments, and thus may not cut dividends materially,” Al Rajhi said.

Saudi banking stocks have declined on an average by 35 percent since January 2020, implying that the worst has been factored in already.

If the current situation normalizes quickly, then those stocks that took the most beating in share performance – like Saudi British Bank (down 43 percent till March 25), Samba and Banque Saudi Fransi (both down 37 percent) – are good picks, the report added.

As are those trading at deep discounts to historical price-to-book ratio, like Saudi British Bank and Saudi Investment Bank.

(Reporting by Brinda Darasha, editing by Seban Scaria)

( seban.scaria@refinitiv.com )

#SAIBOR #SAUDI #OIL #ECONOMY #EQUITIES #BANKING

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© ZAWYA 2020

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