Rating: Neutral
Target Price: SAR66.0
Closing Price: SAR63.9

Earnings down 2% Q-o-Q, ahead of EFG estimate
Al Rajhi Bank (Rajhi) reported 2Q17 net profit of SAR2.2bn, -2% Q-o-Q and +6% Y-o-Y, coming in 7% ahead of our estimate of SAR2.0bn, although in-line with consensus of SAR2.2bn. Better-than-expected provisioning and good cost discipline drove the earnings beat. Revenue was flat Q-o-Q as higher net interest income compensated for weak non-interest income. Spreads widened 6bps Q-o-Q to 3.57% in 2Q17, following a 7bps Q-o-Q contraction in 1Q17, owing to higher asset yields. Although higher rates should be beneficial for Rajhi, we believe re-pricing of its assets is likely to take longer than corporate-focused conventional banks. We see Rajhi as a defensive name in the sector as we believe the credit quality of its retail-oriented loan book should hold up better than the sector. We have a Neutral rating on Rajhi.
 
Above-sector-average loan growth; solid deposit growth
Loan growth continues to be decent, relative to the weak trend in the sector. The bank posted loan growth of 2% Q-o-Q and 4% Y-o-Y. We expect the bank to continue delivering above-sector-average loan growth in 2017. Rajhi has been eyeing the corporate segment, where it is under-penetrated, to drive its loan growth. In retail, we see an opportunity for the bank to grow in the mortgage segment, however affordability and weak economic conditions are key obstacles in the ST. Deposit growth was solid at 5% Q-o-Q (5% Y-o-Y), and this helped liquidity with LDR improving to 82% from 85% in 1Q17.
 
Provisioning surprised positively; retail oriented loan book mitigates credit risk
Provisioning surprised positively, with cost of risk at 68bps coming in well within our estimate of 97bps. Going into 2Q17 Rajhi’s credit quality metrics were in good shape – its NPL ratio improved 20bps Q-o-Q to 1.0%, while NPL coverage was robust at 256% as of 1Q17. Rajhi’s retail-oriented loan book (70% of loans), should shield it from elevated credit risks in the corporate segment. Also, within the retail segment Rajhi focuses on public sector employees, which should be less sensitive to macro weakness than employees in the private segment, in our view.

Murad Ansari

 
Shabbir Malik