Bank Al Jazeera’s (BJAZ) shareholders approved the increase in the bank’s capital through a rights issue of SAR3.0bn (0.57 shares for every 1 share held). The rights will increase the bank’s paid-up capital to SAR8.2bn, an increase of 57.7%. The bank’s stock went ex-rights today. BJAZ said it will use the rights proceeds to fund growth plans focused primarily on: i) expansion into the retail space, with a target to increase the number of customers to 1mn in three years; ii) widen their corporate product offering to new sectors of healthcare, education, transportation and defence; and iii) focus on SME lending. The bank also aims to strengthen its capital adequacy levels. 
 
Our view: While the rights issue would increase the bank’s lending capacity, it would also weigh on its profitability in the ST, in our view. We estimate the bank’s Tier 1 ratio will increase to 22% from 16.5% post rights. BJAZ’s ROE in 2017 was 9.5%, which is already below our cost of equity of 10.5%, and we expect its ROE to dilute in 2018 (post rights, the bank’s total equity would increase by 34%) as the deployment of new capital would take time. Looking ahead, we believe BJAZ is well positioned for growth given the improved capitalisation. It is a retail-focused bank (45% of loans), which gives it exposure to the emerging growth themes in the retail segment (women drivers, mortgages). It is also well positioned to benefit from a pick-up in trading activity on Tadawul (brokerage income accounted for 20% of the bank’s non-interest income) as it is the second largest broker by market share in 2017 (market share 13%).

Shabbir Malik