Al Rajhi Bank: Banking and Financial Services Sector Report Q3 2017

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1. Al Rajhi Banking and Financial Services Sector RJHI AB - 1120 .SE October 23, 2017 Al Rajhi Bank Q3 2017 Recommendation Neutral Fair Value (SAR) 67.25 Price as of October 22, 2017 64.63 Expected Return %4.05 Tadawul Symbol 52 Week High (SAR) 1120.SE 71.70 YTD Change %2.99 Company Data 52 Week Low (SAR) From a profit perspective, net special commission income drove most of the operating income advance, aided by loan growth and a benign interest climate, alongside a growth of 2.2% in fees and commission income. The lower cost of deposits also had a positive impact on profitability margins. However, weakness was concentrated in other operating income, which experienced a decline of 47% YoY. All told, September-period results exceeded both our estimate and analysts’ consensus of SAR 2,219 million and SAR 2,204 million, respectively. 53.50 3-Month Average Volume (Thousand Shares) 3,865 Market Cap. (SAR Million) 105,024 Market Cap. (USD Million) 28,006 Outstanding Shares (Million Shares) 1,625 Major Shareholders ( > 5% ) General Organization for Social Insurance Meanwhile, total operating expenses slipped 8.4% over the same-quarter last year, which were held back by a decline of 24.3% in impairment charge for financing and 3.8% in salaries expenses. In contrast, expenses rose slightly 0.9% on a quarterly basis, due to a jump in rent, general, and salaries expenses. 10.19% 52-week Stock Price Movement Alrajhi Al Rajhi Bank registered better-than-expected results in Q3 2017. Net profit hit SAR 2,265 million, up 12.7% YoY and 3.8% QoQ. Accordingly, the nine-month bottom-line reached SAR 6,668 million, edging up 9.7% YoY. Additional details of the September-quarter included a 0.9% decrease in customer deposits. Demand deposits (without cost) represented 90% of total deposits. On the other hand, the bank expanded its loan portfolio by 3.2% YoY, as a result, the loans-to-deposits ratio increased from 82.8% to 86.3%. Tad awu l In dex 140 130 Looking ahead to the December quarter, we expect that Al Rajhi bank's positive performance will continue, driven by growth in retail banking sector. Moreover, we foresee that the recent concentration of the bank on real estate sector and the interest-rate hikes should help loan growth, as well as lift net interest income further to a new level. 120 110 100 90 Source: Tadawul Quarterly Operating Income (SAR mn) and Profit Margin Operati ng Income Profit Margin 400 0 60% 350 0 55% 300 0 50% 250 0 45% 200 0 40% 150 0 35% 100 0 30% Source: Company Filings, Albilad Capital Research Estimates For more information, please contact: Turki Fadaak Research & Advisory Manager tfadaak@albilad-capital.com Abdulrahman S. Aljarboua, MSF Financial Analyst aaljarboua@albilad-capital.com Therefore, we are leaving our valuation unchanged at SAR 67.25 per share with assigning a “Neutral” recommendation. FY - Ending December 2015A 2016A 2017E 2018F Net Interest Margin 3.98% 4.31% 4.37% 4.43% Return on Assets 2.29% 2.48% 2.62% 2.68% Return on Equity 16.11% 16.49% 16.24% 14.87% Net Special Commission Growth 1.44% 12.11% 6.69% 5.13% Expenses to Income 33.88% 32.38% 32.15% 32.15% Net Loans / Deposits 81.54% 82.54% 86.45% 88.08% NPL / Total Loans 1.51% 1.24% 0.69% 0.82% 176.72% 231.30% 311.75% 278.53% PE 14.73 12.92 11.71 11.10 P / BV 2.25 2.02 1.80 1.53 EPS (SAR) 4.39 5.00 5.52 5.82 Coverage Ratio Source: Company Filings, Albilad Capital Research Estimates 1
2. Al Rajhi Banking and Financial Services Sector October 23 , 2017 RJHI AB - 1120.SE Summary of Q, Results Income Statement (SAR mn) Q3 2016 Q3 2017 Change Q2 2017 Change Special Commission Income 3,075 3,178 %3.35 3,097 %2.62 Special Commission Expense 161 146 (%9.32) 143 %2.10 Net Special Commission Income 4,9,2 ,,0,4 %2.04 4,942 %4..2 Other Incomes 964 944 (%2.07) 923 %2.28 Total Operating Income ,,3,3 ,,9,. %4.4, ,,3,, %4.44 Total Operating Expenses 1,869 1,711 (%8.45) 1,695 %0.94 Net Income 4,009 4,4.4 %,4.,2 4,,34 %,.30 EPS (SAR) 1.24 1.39 Balance Sheet (SAR mn) Q3 2016 Q3 2017 Change Q2 2017 Change Investments 33,753 35,692 %5.74 31,578 %13.03 Loans and advances, net 225,863 233,181 %3.24 232,797 %0.16 Total Assets 330,516 338,030 %2.27 345,597 (%2.19) Customer Deposits 272,600 270,102 (%0.92) 285,390 (%5.36) Loans / Deposits %82.86 %86.33 1.34 %81.57 Summary of Financial Statements & Forecasts Income Statement (SAR mn) 2014A 2015A 2016A Special Commission Income 10,213 10,258 11,751 12,490 13,149 Special Commission Expense 395 299 586 578 626 Net Special Commission Income 9,3,, 9,949 ,,,,.4 ,,,9,4 ,4,44, Fees & Commission Income, net 2,738 2,704 2,950 2,748 3,287 Foreign Exchange Income, net 952 980 925 937 986 Other Income 159 103 243 258 272 Total Operating Income ,,,.., ,,,,2. ,4,432 ,4,344 ,,,0.3 Salaries & Employee-related Expense 2,514 2,661 2,950 2,917 3,141 Rent & Premises-related Expense 1,335 1,379 1,307 1,427 1,536 Other expenses 670 618 693 753 811 Total Operating Expenses 2,4,9 2,.43 2,929 4,09, 4,233 Impairment Charge for Credit Losses, net 2,312 1,958 2,208 1,792 2,122 Net Income .,3,. ,,,,0 3,,4. 3,9.. 9,243 Balance Sheet (SAR mn) 2014A 2015A 2016A Cash & Balances with SAMA & Other Fin. Institutions 50,102 53,965 68,728 59,445 63,387 Investments, net 42,550 39,877 34,033 38,883 41,993 Loans & Advances, net 205,940 210,218 224,994 233,995 241,020 Property & Equipment, net 4,814 5,579 6,485 7,539 8,763 Other Assets 4,306 5,981 5,471 5,012 4,603 Total Assets ,0,,,,4 ,,4,.40 ,,9,,,4 ,22,3,2 ,49,,.. Due to Banks & Other Financial Institutions 2,135 4,558 8,917 9,809 11,770 Customer Deposits 256,077 257,822 272,593 270,662 273,632 Other Liabilities 7,603 6,601 6,255 5,927 5,617 Total Liabilities 4.4,3,4 4.3,93, 43,,,.4 43.,,93 49,,0,9 Total Equity 41,896 46,639 51,947 58,476 68,747 Total Liabilities & Shareholders' Equity ,0,,,,4 ,,4,.40 ,,9,,,4 ,22,3,2 ,49,,.. 2017E 2017E 2018F 2018F Source: Company Filings, Albilad Capital Research Estimates A: Actual. E: Albilad Capital Research Estimates. F: Albilad Capital Research Forecasts. 2
3. Al Rajhi Banking and Financial Services Sector October 23 , 2017 RJHI AB - 1120.SE Albilad Capital Rating Methodology Al-Bilad Capital uses its own evaluation structure, and its recommendations are based on quantitative and qualitative data collected by the analysts. Moreover, the evaluation system places covered shares under one of the next recommendation areas based on the closing price of the market, the fair value that we set and the possibility of ascent/descent. Overweight: The Target share price exceeds the current share price by ≥ 10%. Neutral: The Target share price is either more or less than the current share price by < 10%. Underweight: The Target share price is less than the current share price by ≥ 10%. To be Revised: No target price had been set for one or more of the following reasons: waiting for more analysis, waiting for detailed financials , waiting for more data to be updated, major change in company`s performance, change in market conditions or any other reason from Albilad Capital Research. Albilad Capital Client Services E-mail: Tel: clientservices@albilad-capital.com +966-11-203-9888 Toll-free: 800-116-0001 Research & Advisory E-mail: research@albilad-capital.com Tel: +966-11-290-6250 Website: www.albilad-capital.com Asset Management Brokerage Custody Investment Banking E-mail: Tel: E-mail: Tel: abicasset@albilad-capital.com +966-11-290-6280 custody@albilad-capital.com +966-11-290-6259 E-mail: Tel: E-mail: Tel: abicctu@albilad-capital.com +966-11-290-6230 investmentbanking@albilad-capital.com +966-11-290-6256 Disclaimer AlBilad Capital exerted utmost efforts to ensure that the information included in this report is accurate and correct. However, AlBilad Capital, its managers, and staff bear no liability whether explicitly or implicitly for the content of the report and no legal responsibility, whether directly or indirectly, for any results based on it. This report should not be reproduced, redistributed, or sent directly or indirectly to any other party or published in full or in part for any purpose whatsoever without a prior written permission from AlBilad Capital. We would also like to note that this information in no way constitutes a recommendation to buy or sell banknotes or make any investment decisions. Any investment act taken by an investor based fully or partially on this report is the complete responsibility of the investor. This report is not meant to be used or seen as advice or an option or any other measure to be taken in the future. We recommend consulting a qualified investment advisor before investing in these investment tools. AlBilad Capital preserves all rights associated with this report. CMA Authorization Number 08100-37 3