16-Jan-2017
Bank Aljazira - 4Q16: Improved non-II offset by higher provisions
Rating: Neutral
Target Price: SAR12.5
Closing Price: SAR13.3
Earnings decline on higher provisions; maintain Neutral on sub-par returns
Bank Aljazira reported 4Q16 earnings of SAR152mn, 5% lower Q-o-Q and 10% below our estimate. We forecast that the bank’s annualised credit costs rose to 38bps in 4Q16 compared to 27bps in the previous quarter. Aljazira had reported a slight deterioration in asset quality in 3Q16, which likely sustained in 4Q16, driving up credit costs. Aljazira’s NPL coverage at 151% in 3Q16 was one of the lowest amongst Saudi banks. We maintain our Neutral rating on Aljazira, even though the stock trades at an almost 34% discount to book value. Excluding the one-off gains from land sale, Aljazira’s profitability metrics - 2016a ROA of 1.0% and ROE of 8.5% - are sub-par and one of the lowest in the sector.
Non-II improves, but NIMs are stable
Revenue growth was sluggish at 2.5% Q-o-Q, and was below our forecast. Non-interest income improved, in line with our expectation, likely driven by better broking income. Trading volumes at Tadawul stock exchange rose 49% Q-o-Q in 4Q16, which should have driven strong growth in Aljazira’s broking income. However, we estimate that Aljazira’s net interest margins (NIMS) were broadly flat Q-o-Q. We were expecting a slight improvement in NIMs, driven by steady upward re-pricing of loans. However, strong deposit growth in 4Q16 is likely to have weighed on funding costs, and, in turn, on NIMs.
Loan book continues to contract; deposit growth recovers
After steady growth in the first two quarters of the year, Aljazira’s loan book contracted in the last two quarters of the year. Net loans declined 5% from 1H16 levels to end the year at 5% Y-o-Y. Contraction in the loan book for the second consecutive quarter suggests that credit appetite remains low, while payments of outstanding dues by the government are also likely to have led to repayments by corporates. On the other hand, deposit growth recovered after remaining broadly flat in the previous two quarters, suggesting improved market liquidity conditions.
Murad Ansari
Shabbir Malik
Target Price: SAR12.5
Closing Price: SAR13.3
Earnings decline on higher provisions; maintain Neutral on sub-par returns
Bank Aljazira reported 4Q16 earnings of SAR152mn, 5% lower Q-o-Q and 10% below our estimate. We forecast that the bank’s annualised credit costs rose to 38bps in 4Q16 compared to 27bps in the previous quarter. Aljazira had reported a slight deterioration in asset quality in 3Q16, which likely sustained in 4Q16, driving up credit costs. Aljazira’s NPL coverage at 151% in 3Q16 was one of the lowest amongst Saudi banks. We maintain our Neutral rating on Aljazira, even though the stock trades at an almost 34% discount to book value. Excluding the one-off gains from land sale, Aljazira’s profitability metrics - 2016a ROA of 1.0% and ROE of 8.5% - are sub-par and one of the lowest in the sector.
Non-II improves, but NIMs are stable
Revenue growth was sluggish at 2.5% Q-o-Q, and was below our forecast. Non-interest income improved, in line with our expectation, likely driven by better broking income. Trading volumes at Tadawul stock exchange rose 49% Q-o-Q in 4Q16, which should have driven strong growth in Aljazira’s broking income. However, we estimate that Aljazira’s net interest margins (NIMS) were broadly flat Q-o-Q. We were expecting a slight improvement in NIMs, driven by steady upward re-pricing of loans. However, strong deposit growth in 4Q16 is likely to have weighed on funding costs, and, in turn, on NIMs.
Loan book continues to contract; deposit growth recovers
After steady growth in the first two quarters of the year, Aljazira’s loan book contracted in the last two quarters of the year. Net loans declined 5% from 1H16 levels to end the year at 5% Y-o-Y. Contraction in the loan book for the second consecutive quarter suggests that credit appetite remains low, while payments of outstanding dues by the government are also likely to have led to repayments by corporates. On the other hand, deposit growth recovered after remaining broadly flat in the previous two quarters, suggesting improved market liquidity conditions.
Murad Ansari
Shabbir Malik