|19 May, 2019

Improving net interest margins, key positives for Saudi banks in first quarter

Eight of the biggest Saudi banks reported an average 10 basis points q-o-q NIM expansion in Q1 2019, note shows

Men arrive at the NCB Capital office in Riyadh, Saudi Arabia, November 8, 2017. Image for illustrative purposes.

Men arrive at the NCB Capital office in Riyadh, Saudi Arabia, November 8, 2017. Image for illustrative purposes.

REUTERS/Faisal Al Nasser

Saudi Banks’ first quarter (Q1) earnings were supported by improving net interest margins (NIMs), but banks’ balance sheet growth remains tepid, an analyst told Zawya.

Eight of the biggest Saudi banks reported a year-on-year (y-o-y) NIM expansion in Q1 2019, while six of the eight also reported margins widening on a quarterly basis, an analysis of Q1 results by SICO Bank showed on Thursday.

“Improving NIM was the key positive for KSA banks, however we expect it to stabilise in subsequent quarters as (the) Fed (United States Federal Reserve) looks to freeze rate hikes,” Chiro Ghosh, research manager at investment bank SICO, said in the note.

The eight banks covered in the SICO note are Al Rajhi Banking and Investment Corporation, Alinma Bank, Arab National Bank (ANB), Banque Saudi Fransi, National Commercial Bank (National Commercial Bank2), Riyad Bank, Samba Financial Group and Saudi British Bank (SABB).

SICO’s data shows that the banks reported an average 10 basis points quarter-on-quarter (q-o-q) NIM expansion in Q1 2019. Riyad Bank and NCB were the only two banks to report a drop in quarterly interest margins.

“NCB’s NIM was impacted by Turkish operations and higher funding cost, while Riyad Bank likely paid higher funding cost to gather deposits,” Chiro Ghosh, research manager at investment bank SICO, said in the note.

NCB posted a 5.69 percent increase in Q1 net profit, a 14.89 percent increase in revenue and a 0.7 percent rise in total operating expenses. (Read more here).

Riyad Bank’s Q1 total operating expenses were higher by 4.7 percent, with the bank posting a 44.74 percent increase in Q1 net profit and a 29.95 percent increase in revenue.

NCB and Riyad bank announced late in December last year that they began preliminary discussions about a potential merger. The two banks will have a combined market share of 30 percent if the merger happens, according to analysts. (Read more here).

A $5 billion merger by Saudi British Bank and Alawwal bank announced last year was also approved by shareholders from both organisations at meetings last week, the respective lenders announced on Thursday.

Alvarez and Marsal said in March this year that it expects UAE banks NIMs to continue seeing pressure going forward. The professional services firm’s UAE Banking Pulse report, which covers ten banks, showed that Q4 2018 NIMs for the biggest banks in the country dropped by six basis points q-o-q. (Read more here).

Negatives

Saudi Banks reported deposit outflows and tepid lending book growth for Q1 2019.

The SICO note shows that only two out of the eight banks covered accumulated deposits during the quarter, with Alinma Bank witnessing a 2.4 percent growth in deposits and Riyad Bank adding 2.2 percent. The other six banks reported deposit declines, dragging average deposits lower by 2 percent q-o-q.

“In our opinion, Alinma and Riyad Bank reported the strongest performance in 1Q19,” SICO’s Ghosh said.

The eight Saudi banks reported an average 1.2 percent q-o-q growth in their lending books, broadly in line with SICO’s full-year target of 5 percent growth for 2019.

“The mid-cap banks’ lending (was) relatively weaker, while Samba reported 1.2 percent QoQ lending growth after nearly four years of contraction,” Ghosh said.

ANB is the only bank out of the eight covered to report a contraction in its lending book of 0.7 percent q-o-q, following a 7 percent accumulated growth in the previous three quarters.

Valuation

The MSCI Saudi Arabia Banks index shows that the sector has gained 18.99 percent so far since the start of the year .

“We do not see much value in KSA banks at current levels,” Ghosh said, noting, however, that he expects Riyad Bank (target price of 27 riyals per share) to outperform its peers and Al Rajhi (target price of 69 riyals per share) to “remain the prime beneficiary of MSCI-related flows.”

MSCI, the world’s largest index provider, announced last week that 30 Saudi Arabian securities will be added by May 28 this month to its MSCI emerging markets index, representing a 1.42 percent weight in the index.

Riyad Bank’s shares were trading at the 25.75 riyals level and Al Rajhi’s shares were at 70.4 riyals by 13:07 GST on Sunday.

(Reporting by Gerard Aoun; Editing by Michael Fahy)

(gerard.aoun@refinitiv.com)

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© ZAWYA 2019

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