Al Rajhi Bank Al Rajhi

Al Rajhi Bank – Al Rajhi
25 September 2013
Recommendation
Fair Value (SR)
Neutral
86.12
th
Price as of 19 of September 2013 (SR)
Expected return
78.75
9.36%
Company data
Tadawul symbol
52- week high (SR)
52-week low(SR)
YTD change
Average trading volume (thousand shares)
Market Cap (million SR)
Market Cap (million USD)
Number of shares issued (million)
Free float
Financial
indicators
Revenues
Net Income
EPS
PE ratio
P/BV
Dividend yield
Net Income
growth
*Ending Q2 2013
1120.SE
81.3
61.0
5.0%
1,872
103,125
27,500
1,500
68.3%
2010
11,661
6,771
4.51
15.23
3.40
0.0%
2011
12,502
7,378
4.92
13.98
3.08
0.0%
2012
13,983
7,885
5.26
13.08
2.83
0.0%
Last 12
months*
14,169
7,955
5.30
14.99
3.19
4.1%
%2.0
%6.2
%9.6
%2.0
Initiation of Coverage
Al Rajhi bank was established in 1987 as one of the leading banks in
Saudi Arabia with a branch network of 488 branches within the
Kingdom and 28 globally. The bank plans to extend the branch network
to 549 by the end of 2014. Al Rajhi is the third largest listed company in
Tadawul by market capitalization and the fourth largest by net income
as of 2012 year end. The bank is among the top five banks in KSA with
market share of 20.8% from the sector`s net income and 17% from the
aggregate deposits and loans. Moreover, Al Rajhi is the largest retail
bank in KSA and the largest Islamic Bank in the world. The bank`s retail
profit constitutes 46% of the aggregate retail banking profits, in which
we see more room for growth.
Revenue Breakdown H1 2013
1%
4%
17%
Brokerage
Treasury
Corporate
Retail
Al Rajhi
Banking Index
TASI
78%
120
115
110
105
100
95
90
85
80
Company
Al Rajhi Development Limited
Al Rajhi Limited
Al Rajhi Capital
Al Rajhi Bank
Al Rajhi Bank
Al Rajhi Takaful
Country
Saudi Arabia
Malaysia
Saudi Arabia
Kuwait
Jordan
Saudi Arabia
Ownership
100%
100%
100%
100%
100%
99%
For more information you may contact:
Turki Fadaak
Research & Advisory Manager
[email protected]
Or Albilad Capital Head Office:
Tel :
+966 11 203 9892
Fax :
+966 1479 8453
P.O. Box 041
Riyadh 00400
1
Al Rajhi Bank – Al Rajhi
25 September 2013
Sector Overview
The banking sector`s aggregate revenue and net income grew by 6% during the first half of 2013 to SAR 35.17 billion and SAR 20.07 billion,
respectively. The growth is attributed to the double digit growth of National Commercial Bank (NCB) earnings' by 20%.
Special commission income grew by 8%, compared to the same period of last year elevating its contribution of total revenue to 65%. The
sector`s spread dwindled by 26 basis points in the last twelve months to 2.27%.
The sector`s total assets grew 12% by the end of the first half, compared to end of June 2012, amounting to SAR 1,787 million. Loans leaped
by 16% during the first half, surpassing deposits growth of 14% and bringing aggregate loans and deposits to SAR 1,090 million and SAR
1,387 million, respectively. Corporate loans represented 69% of total loans, while demand deposit`s contribution reached its peak of 64%
compared to 40% in 2008 from the sector`s aggregate deposits. We think demand deposit`s fast growth is due to low level of interest rates
for an extended period time.
Saudi banks booked SAR 2,988 million of loan loss provisions, which is 12.5% lower than the corresponding period of last year. Corporate
and personal loans contributed to booked provisions by 53% and 44%, respectively. However, the coverage ratio advanced to 157% from
138%, a year earlier.
Deposits
300,000
Loans
NPL Coverage
Loans to Deposits
250%
250,000
200%
200,000
150%
150,000
100%
100,000
50%
50,000
0%
-
H1 2013
H1 2013
2
Al Rajhi Bank – Al Rajhi
25 September 2013
Sector Overview
The sector`s corporate banking net income increased by 27%, while retail and treasury segment grew by 2% and 7%, respectively. Despite
the growth in core banking division the brokerage fees declined by 33%. NCB showed robust net income growth from the corporate banking
services of 374%, while Saudi Hollandi Bank (SHB) grew the most in retail banking`s net income by 35%. Saudi Investment Bank showed 77%
and 110% increase in earnings from treasury and brokerage fees, respectively.
The sector sluggish top line and bottom line growth is due to lower banking spreads on the back of prevailing lower interest rate
environment. All the Saudi banks showed lower spread except NCB, which depicted marginal increase. Al Rajhi Bank and Bank Saudi Fransi
(BSF) showed the sharpest decline in spreads of 81 and 67 basis points, respectively. Moreover, brokerage fees declined by 33% compared
to the first half of 2012 amounting to SAR 998 million.
However, we expect interest rates to rise by the end of 2014 as the U.S. Federal Reserve Chairman indicated that the committee may start
reversing gradually the quantitative easing program by the end of 2013. We think the Fed will start raising rates afterwards due to the
recent improvement in the labor market. For instance, the US economy added on a monthly basis more than 160 thousand jobs on average
for the last six months and the unemployment rate declined to 7.3 percent, which is the lowest rate in five years. We believe that the
expected rate hikes will widen the banking sector`s spread and boost the sector profitability.
3.80%
3.30%
2.80%
2.30%
1.80%
1.30%
Spread YoY Change H1 2013
Spread H1 2013
0.20%
0.00%
-0.20%
-0.40%
-0.60%
-0.80%
-1.00%
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Al Rajhi Bank – Al Rajhi
25 September 2013
Sector Overview
Loans
Al Rajhi Bank and NCB maintained the leading positions in net loans with SAR 184 billion and SAR 178 billion, respectively. However, Al Inma
Bank and Saudi Investment Bank showed the highest growth of 38% and 36%, respectively. None of the Saudi bank`s witnessed decline in
net loans, but Arab National Bank showed the weakest growth of 6%.
Net Loans Growth H1 2013
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Net Loans (billion SR) H1 2013
10% 12%
10%
150
25%
24%
22%
200
38%
36%
19%
16% 17%
6%
100
50
00
Deposits
On the liabilities side, National Commercial Bank`s balance sheet showed the highest market share of deposits with SAR 288 billion followed
by Al Rajhi Bank with total deposits of SAR 223 billion. In addition, Al Inma Bank and Saudi Investment Bank recorded strong deposits growth
of 40% and 28%, respectively.
Customer Deposits Growth H1 2013
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Customer Deposits (billion SR) H1 2013
40%
350
300
28%
21%
250
23%
17%
14%
8%
7%
9%
10%
200
14%
15%
150
100
50
00
4
Al Rajhi Bank – Al Rajhi
25 September 2013
Latest Developments
Since its establishments, Al Rajhi continuously enhances and maintains the core banking infrastructure. In March, the bank awarded Drake
and Scull SAR 287 million contract to establish the bank’s cash, operations and data center in Riyadh. The new facility will be completed early
2015.
The bank also launched the "Lock Box” service with Azizia Panda hypermarkets, which allows corporate accounts as Azizia Panda to deposit
cash around the clock for the first time in Saudi Arabia. Moreover, the bank introduced the authorization code feature for internet banking
transactions, which will allow the users to receive authentication codes on their cellular phones before processing any internet banking
transaction. The new feature will decrease the possibility of theft and piracy.
Recently, the bank`s branch in Kuwait raised its paid-in capital to KWD 21.5 million from KWD 20.5 million. Management also unveiled an
ambitious plan to expand the bank`s geographical presence in general and its Kuwaiti operations in particular. It is worthwhile mentioning
that Al Rajhi`s operations outside KSA recorded losses of SAR 15 million.
The bank has undergone management change in early 2012. Suliman Abdulaziz Azzabin succeeded Abdullah Sulaiman Al Rajhi as the chief
executive officer, while Mr. Al Rajhi will maintain his board membership. In addition, Mr. Saeed Al Ghamdi resigned from his position as
deputy CEO during the same period before joining National Commercial Bank as chief executive officer. We think the appointment of Mr.
Azzabin as a good corporate governance step due to the segregation between ownership and management.
Loan Geographical Breakdown H1 2012
Loans Breakdown H1 2013
8% 0%
4%
20%
Mutajara
Installment Financing
KSA
Murabaha
Overseas
Visa
72%
96%
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Al Rajhi Bank – Al Rajhi
25 September 2013
Financial Analysis
Income Statement
In 2012, the bank`s operating income grew by 11.85%, in comparison to the previous year, reaching SAR 13,983 million; whereby net
financing and investment income and net fees from banking services, which represent 90% of total operating income, grew by 4.75% and
34.28%, respectively.
Operating Income
Income from Financing & Investment - million SR
Fees from Services - million SR
Exchange Income - million SR
Other Operating Income - million SR
Total Operating Income - million SR
2011
9,070
2,298
799
884
12,502
2012
9,501
3,086
898
498
13,983
Growth
%4.74
%84.28
%02.40
%48.84
%88.11
Total operating expenses increased by 19.02% to SAR 6,098 million, which was mainly attributed to the significant increase in the
impairment charge for financing by 40.97% to reach SAR 2,319 million. The SG&A expenses as well as salaries and employee related
benefits also increased by 15.07% and 7.10%, respectively. Thus, the fiscal year ending December 2012 showed an increase in net income
by 6.86% to SAR 7,885 million, compared to SAR 7,378 million in 2011.
In the first half of 2108, Al Rajhi Bank’s operating income grew by 2.72%, in comparison to the same period last year, reaching SAR 7,041
million. The increase in the operating income was mainly triggered by the growth in net financing and investment income of 3.36%
Operating Income
Income from Financing & Investment - million SR
Fees from Services - million SR
Exchange Income - million SR
Other Operating Income - million SR
Total Operating Income - million SR
H1 2011
4,811
0,488
444
287
55111
H1 2013
4,754
1,525
478
283
150,8
Growth
%8.88
%2.48%4.29
%09.48
%2.12
Total operating expenses grew by 4.22% to SAR 2,866 million. Thus, during 2013 first half, Al Rajhi realized an increase in net income by
1.71%, compared to the first half of 2012, recording SAR 4,174 million, with a slight decline in net profit margin by 59 basis points to reach
59.29%.
Balance Sheet
In 2012, total assets grew by 21.13%, in comparison to the previous year, reaching SAR 267,383 million and by 2.20% in 2013 first half to
SAR 273,276 million, compared to the ending balance in December 2012.
Key highlights:
1.
Increase in 2012 net financing by 22.54% compared to 2011 and by 16.86% during first half of 2013 compared to the same
period last year to reach SAR 184,889 million.
2.
Increase in 2102 customer deposits’ ending balance by 24.44% compared to last year and by 16.87% during 2013 first half
compared to the same period last year to reach SAR 223,662 million in June 2013.
Liabilities Breakdown H1 2013
Assets Breakdown H1 2013
0%
1%
27%
51%
21%
22%
Brokerage
Brokerage
Treasury
Treasury
Corporate
Corporate
Retail
Retail
77%
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Al Rajhi Bank – Al Rajhi
25 September 2013
Financial Analysis
Loans and Deposits
In the past five years, the bank`s deposits grew faster than net loans which in turn pushed loans to deposits ratio from 94% to 78%.
However, the return on assets (ROA) and return on equity (ROE) decreased to 2.92% and 21.3%, respectively. We attribute the decline to
the squeeze in the bank`s spread.
Total Assets
300,000
Loans
Deposits
250,000
250,000
Loan to Deposit
95%
200,000
90%
200,000
150,000
150,000
85%
100,000
100,000
80%
50,000
50,000
-
2008
2009
2010
2011
2012
75%
2008
2009
2010
ROE
2011
2012
2012
2013
ROA
24%
5%
24%
4%
23%
23%
3%
22%
2%
22%
21%
1%
21%
20%
2009
2010
2011
2012
2013
0%
2009
2010
2011
Net Income and Total Assets
During the first half, corporate banking and investment banking net income plunged by 22% and 13%, respectively. On the other hand,
income from retail banking and treasury showed modest growth of 7% and 5%, respectively. Moreover, retail banking assets leaped by
18% and the treasury division assets` showed double digit growth of 13%. Corporate banking and investment banking assets marginally
increased by 8% and 7%, respectively
Net Income Growth H1 2013
Assets Growth H1 2013
10%
20%
15%
5%
18%
7%
5%
0%
-5%
13%
10%
-13%
-10%
8%
5%
7%
-15%
-22%
-20%
-25%
0%
Retail
Corporate
Treasury
Investment
Banking
Retail
Corporate
Treasury
Investment
Banking
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Al Rajhi Bank – Al Rajhi
25 September 2013
Valuation and Recommendation
We valued Al Rajhi Bank`s share using the Dividend Discount Model, Price to Earnings Ratio and Price to Book Value. We projected the
dividends for the period 2013-2016 and applied equity risk premium of 9.7% and terminal growth rate of 2.75%. In addition, we valued the
bank`s share using the relative valuation multiples compared to the Saudi Banking sector. Thus, we assign Neutral recommendation with
weighted average fair value of SAR 86.12, which is 9.36% higher than the market price.
Dividend Discount Model
2011
2012
2013E
2014F
2015F
2016F
Net Income (million SR)
Dividends Paid (million SR)
Discounted Dividends Paid (million SR)
7,378
4,875
-
7,885
4,875
-
8,594
7,305
6,975
9,798
8,524
7,419
11,267
10,140
8,045
13,521
12,845
9,290
PE and BV Valuation Model
Bank
Price
Market Cap.
EPS
BVPS
PE
P/BV
RIBL
BJAZ
Saudi Investment
Saudi Hollandi
Saudi Fransi
SABB
Arab National
SAMBA
Al Rajhi
Al Bilad
Alinma
26.30
31.00
23.75
36.20
34.50
39.50
30.20
52.00
78.75
31.50
14.25
39,450
9,300
13,063
14,371
31,188
39,500
25,670
46,800
118,125
12,600
21,375
2.34
1.67
1.84
3.30
3.22
3.33
2.82
4.83
5.29
1.43
0.54
21.22
17.21
16.95
20.68
25.84
20.02
20.77
35.4
23.68
11.31
11.26
11.22
18.54
12.88
10.97
10.72
11.85
10.72
10.77
14.90
22.00
26.58
1.24
1.80
1.40
1.75
1.34
1.97
1.45
1.47
3.33
2.79
1.27
371,442
30.61
224.34
12.97
1.77
Sector
Fair Value (SR)
86.12
Share Price (SR)
Expected Return
78.75
9.36%
Recommendation
Neutral
8
Al Rajhi Bank – Al Rajhi
25 September 2013
Balance sheet (million SR)
H1
2012
H1
2013
Balance sheet (million SR)
2080
2088
2082
Cash in Bank and SAMA
484191
334,22
%4.6,
Cash in Bank and SAMA
4841,1
324148
224921
%1268
Due from Banks
48498.
494128
%,62-
Due from Banks
444449
414.22
4.411,
%4261
4194349
4914998
%4.68
Net Financing
43242.1
4124242
4,44814
%3361
Investments
224,3,
124221
%496.
Investments
39431,
294923
124992
%161
Other Assets
.4999
,4342
%16,
Other Assets
1482,
.418.
,4322
%863
Total Assets
3294343
3,243,.
%416,
Total Assets
4914914
3324,24
3.,4292
%3464
Customer Deposits
48442,8
3324..3
%4.68
Customer Deposits
41242.1
4,,4,22
3344212
%3161
14219
14333
%263
Due to Banks
14141
34,4,
34321
%4,69%962
Net Financing
Due to Banks
Change
,428,
,4221
%462-
Other Liabilities
214.,9
2,429,
%,69
Shareholders' Equity
Liabilities & Shareholders' Equity
3294343
3,243,.
%416,
Liabilities & Shareholders' Equity
Income statement (million SR)
H1
2012
H1
2013
Change
Income statement (million SR)
2080
Total Operating Income
11,661
Other Liabilities
Shareholders' Equity
Change
.4211
.4,83
,422.
224249
224198
2.41.8
%968
4914914
3324,24
3.,4292
%3464
2088
2082
Change
12,502
13,983
Total Operating Income
6,855
7,041
%36,
Salaries and Employees Benefits
1,056
1,148
%96,
Salaries and Employees Benefits
1,732
1,961
2,100
%,64
Provision for Credit Losses
845
870
%368
Provision for Credit Losses
1,909
1,645
2,319
%1462
A&M Expenses
641
646
%269
A&M Expenses
901
1,110
1,277
%4164
Depreciation & Amortization
209
203
%36.-
Depreciation & Amortization
349
408
402
%461-
Total Operating Expenses
2,750
2,866
%163
Total Operating Expenses
4,890
5,124
6,098
%4862
Net Income
4,104
4,174
%46,
Net Income
6,771
7,378
7,885
%.68
Cash flow statement (million SR)
H1
2012
H1
2013
Change
Cash flow statement (million SR)
4,104
4,174
%46,
Net Income
Depreciation and Amortization
211
207
%468-
Depreciation and Amortization
Provision for Credit Losses
845
870
%368
Provision for Credit Losses
Deposit at SAMA
(820)
(1,681)
%42162
Due to Banks
3,158
(1,874)
%41861-
(18,648)
(13,633)
13,646
2,319
43
(77)
Other Payables
2,646
2,395
%861-
Cash flow from Investments
4,513
551
%9,69-
Dividends
(3,000)
(3,000)
Beginning Balance
18,622
26,415
Ending Balance
25,320
16,667
%2163-
Net Income
Financing
Customer Deposits
Other receivables
2080
2088
2082
%4469
Change
%.68
6,771
7,378
7,885
353
401
402
%263
1,909
1,645
2,319
%1462
Deposit at SAMA
(1,398)
(1,317)
(1,597)
%3463
Due to Banks
(1,007)
(4,712)
(2,953)
%2,62-
%3.68-
Financing
(9,826)
(21,926)
(33,925)
%116,
%9262-
Customer Deposits
20,202
33,609
43,610
%3869
211
(1,110)
242
Other Payables
(8,362)
(890)
27
Cash flow from Investments
(1,914)
(10,556)
(3,343)
%.962-
%262
Dividends
(4,500)
(4,125)
(4,875)
%4963
%1469
Beginning Balance
17,784
20,225
18,622
%,68-
Ending Balance
20,225
18,622
26,415
%1469
-
Other receivables
-
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Al Rajhi Bank – Al Rajhi
25 September 2013
Definitions

Earnings Per Share
It is an indicator of the company's profit in Saudi Riyals per each outstanding share. It is calculated by dividing the company’s net income of by the
number of outstanding shares.

Revenue
Is the amount of income that is brought into a company by its business activities.

Gross profit
A company’s profit after deducting the cost associated directly with its sales or production. Does not include indirect cost like depreciation, interest, tax
and non-operating expense.

Price-to-earnings (P/E) Ratio
It is the price paid by the company’ shareholders for the earnings of one of its shares. It is used to compare the prices of the company’s shares with that
of another company within the same sector. If the P/E is higher than the sector’s average, it indicates either the share is overpriced or that there is a
greater expectation for the company to generate more profits in the future, and vice versa. It is calculated by dividing the price of a share by the share’s
earnings in Saudi Riyals

Book value per share
The company's book value represents the value of the company in the event of liquidation or exit. Dividing the book value by the company’s number of
issued shares represents the book value of a share.

Price-to-book (P/B) ratio
It represents the market price per share vis-à-vis its book value. It is used to compare between companies within the same sector and comparing them
to the sector’s average. If the number is higher than the average, it means that the company’s price is traded higher than its book value. This means
that either the share is overpriced or that the company is in a growth state; and vice versa. The number is calculated by dividing the share’s market
price by its book value.
Return on equity

It is a percentage representing the extent of the company's efficiency in achieving earnings from the shareholders’ investment. It is calculated by
dividing the company’s net income by Shareholders' equity. The higher the percentage, the higher the efficiency, and vice versa.

Net Debt
Total long-term debt after deducting cash on hand and in banks.

Enterprise Value
It is the market capitalization plus net debt.

Time horizon
We recommend using a Time horizon of 9 to 12 months, during which the current price might reach the Target price

Target price
It is the price we expect the current share price to reach during the Time horizon.
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 ≥ 04%. We expected the share price to reach the Target price over the
next 9-12 months
Neutral:
The Target share price exceeds the current share price by less than 15%. We expected the share price to reach the Target price
over the next 9-12 months
Revise:
The Target share price is less than the current share price by less than 10%. We expected the share price to reach the Target
price over the next 9-12 months
Underweight:
The Target share price is less than the current share price by ≥ 01%. We expected the share price to reach the Target price over
the next 9-12 months
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Al Rajhi Bank – Al Rajhi
25 September 2013
Albilad Capital
Client Services
E-mail:
[email protected]
Tel:
+966-11-203-9888
Toll-free: 800-116-0001
Research & Advisory
E-mail:
Tel:
[email protected]
+966-11-203-9892
Brokerage
E-mail:
Tel:
[email protected]
+966-11-203-9840
Asset Management
Investment Banking
E-mail:
Tel:
E-mail:
Tel:
[email protected]
+966-11-203-9870
[email protected]
+966-11-203-9859
Disclaimer
AlBilad Investment Co. exerted utmost efforts to ensure that the information included in this report is accurate and correct. However, AlBilad Investment Co., 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
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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 Investment Co. preserves all rights associated with this report.
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