Saudi Arabia Banking Sector - GulfBase.comBank AlBilad 5,790 3,459 354 10.8% 16.4 1.7 Industry...

Global Research

Sector - Banking

July 06, 2011

Saudi Arabia Banking Sector

Saudi Arabia banks hold good chances of strong revival Well capitalized balance sheet supportive of lending expansion Enhanced public spending to catalyze banking sector growth Top Picks: SAMBA, RIBL and BSF

Saudi Arabia banks hold good chances of strong revival Saudi banking assets increased by 4.3% YoY in 2010 and posted CAGR (2005-10) of 13.3%. Global Research expects Saudi banks to continue to expand, recording asset growth of 9.1% in 2011. Some of the distinguishing factors of Saudi Arabia’s robust banking system include conservative loan to deposit limit of 85%, NPL coverage of more than 100%, Net interest margin (2006-10) at 3.5% or above, capital adequacy (TIER 1) ratio above 11%, and equity to assets ratio at around 15%.

Well capitalized balance sheet supportive of lending expansion

During times of global financial distress, as the banks globally took up grave challenges of coping with the deleveraging process, managing exposure to toxic assets, and recapitalizing the balance sheets, the Saudi banks confident of their strong fundamentals remained focused to re-position themselves for growth in the recovery period. Our optimism for improvement of business conditions and start of the downhill journey for provisions leads us to project net income increase of 17.8% YoY and provisions to deflate by 33.1% YoY in 2011. Overall, Global Research forecasts total assets and loans to record CAGR (2010-14e) of 10.8% & 13.8%, respectively.

Enhanced public spending to catalyze banking sector growth

Saudi government’s robust sovereign muscle to support enhanced public spending is an enviable position for any country. Ambitious public spending (latest announcement 1Q11 of massive social benefits of USD100bn - 22% of GDP2010, Ninth Development Plan of five year spending (2010-14) of USD385bn - 85% of GDP2010), and low credit penetration (loan to GDP of c. 40%) are some of the promising factors for the growth of lending institutions.

Recommendation We maintain Neutral to Positive outlook on the sector. The banks’ strong fundamentals coupled with attractive business potential, driven by innate domestic demand, offer significant growth potential. We recommend BUY on Samba Financial Group (Samba), Riyad Bank (RIBL) and Banque Saudi Fransi (BSF) stocks.

Global Research –KSA Banking

CMP Mkt. Cap P/E P/BV ROAE Target Upside Rating

SAR SAR mn 2011e 2011e 2011e Price Potential

Al Rajhi Bank 74.0 111,000 14.2 3.8 27.7% 70.3 -5.0% HOLD

Samba Financial Group 50.8 45,675 9.8 1.6 17.6% 57.6 13.5% BUY

Riyad Bank 24.0 36,000 11.6 1.2 10.9% 27.1 13.0% BUY

Banque Saudi Fransi 44.2 31,965 10.3 1.7 17.3% 49.2 11.4% BUY

Saudi British Bank 41.9 31,425 13.0 1.9 15.6% 40.5 -3.3% HOLD

Arab National Bank 29.7 25,245 11.6 1.6 14.4% 30.6 2.9% HOLD

AlInma Bank 10.1 15,075 104.0 1.0 0.9% 11.0 9.6% HOLD

Saudi Investment Bank 19.0 10,423 11.6 1.2 10.4% 20.7 9.3% HOLD

Saudi Hollandi Bank 28.9 9,559 9.7 1.3 14.6% 31.0 7.3% HOLD

Bank AlJazira 18.4 5,520 26.9 1.1 4.2% 19.9 8.3% HOLD

Bank AlBilad 19.3 5,790 16.4 1.7 10.8% 20.7 7.2% HOLDSource: Global Research (CMP as per closing prices on TASI on 02 July, 2011)

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Mohammad Ali Shah

Senior Financial Analyst [email protected] Tel: (966) 1 299 4106 Global Investment House www.globalinv.net

Global Research – Saudi Arabia Banking Sector

July 2011 2

TABLE OF CONTENTS

Valuation & Recommendation..…………………………………………………………………... 3

Saudi Arabia Banks –Top Picks…......…………………………………………………………… 5

Sensitivity Analysis....……..……….……………………………………………………………….. 6

Key Risks to Valuations....……..……….………………………………………………………….. 8

Saudi Arabia Banking Sector………………………………………………………………………. 9

Comparative Charts……………………………………………………………………...………….. 13

Company Profiles………………..………………………………………………………………….. 19

Al Rajhi Banking & Investment Corp.……………………………………………………. 20

Samba Financial Group..…..…………..….………………………………………………... 24

Riyad Bank………………….……………….………………………………………………... 28

Banque Saudi Fransi.…………………………………………………..……………………. 32

The Saudi British Bank….…………………………………………………………………… 36

Arab National Bank.…………………………………………………………………………. 40

AlInma Bank……..……………………………………………………………………………. 44

The Saudi Investment Bank...………………………………………………………………. 49

Saudi Hollandi Bank………........……………………………………………………………. 53

Bank AlJazira…………………..…..…………………………………………………………. 57

Bank AlBilad……..……………..…..…………………………………………………………. 62

Global Research - Saudi Arabia Banking Sector

July 2011 3

Valuation & Recommendation

Valuation methodology For arriving at the fair value of our banks, we have used a blend of two valuation methods:

1. Cash flow approach represented by the Dividend Discount Model. 2. Relative valuation using peer group P/BV multiple

Dividend Discount Model - DDM The DDM is based on a 4-year forecast of dividends as cash flows (2011-14). The terminal is calculated using the multiples approach. Long-term justified P/BV multiple is derived on the basis of an adaptation of the Gordon Growth Model. This method uses the sustainable return on average equity (ROAE), cost of equity (COE) and expected growth in earnings (g) to calculate the target P/BV of the bank using the formula:

P/BV = (ROE - g) / (COE - g) The dividends for the forecasted period and the terminal value are then discounted back at the cost of equity to arrive at the total net present value (NPV) of the company. Cost of Equity is derived using the Capital Asset Pricing Model (CAPM) using: 1. Yield of the government long term bond (10 years) as the risk free rate. 2. Market risk premiums range from 6.5% and 7.0%. 3. Beta of 5 years monthly figures. If the actual beta of the bank is less than 1, to more appropriately reflect associated risk, we have taken it as 1.

Relative valuation using weighted P/BV multiple of the peer group In order to incorporate the impact of market forces into our valuation we are using the weighted 2011e P/BV multiple of the peer group as an indicator for price movement. This weighted P/BV is then multiplied with the BV/share of the bank at the next year end, in our case the BV/share at December 31, 2011 to arrive at the fair value of the bank over a medium term investment horizon.

Blended Price The blended price is then calculated after applying weight of 80% to the value from DDM and 20% to the value from Relative valuation method.

Valuations

SAR RJHI SAMBA RIBL BSF SABB ANB BINM SAIB SHB BJZ BBLD

Rating HOLD BUY BUY BUY HOLD HOLD HOLD HOLD HOLD HOLD HOLD

Upside Potential/(Downside) -5.0% 13.5% 13.0% 11.4% -3.3% 2.9% 9.6% 9.3% 7.3% 8.3% 7.2%

Fair Value: 70.3 57.6 27.1 49.2 40.5 30.6 11.0 20.7 31.0 19.9 20.7

Fair Value - DDM (weight: 80%) 70.3^ 57.5 25.2 49.5 40.6 29.8 9.2 18.7 29.2 17.7 20.8

Fair Value - Peer Group P/BV (weight: 20%) 0.0 58.1 34.8 48.2 40.1 33.5 18.4 28.8 38.2 29.0 20.2

Current Price 74.0 50.8 24.0 44.2 41.9 29.7 10.1 19.0 28.9 18.4 19.3

DDM

PV of dividends (SAR mn) 105,412 51,729 37,867 35,805 31,158 25,364 14,085 10,279 9,661 5,302 6,674

Yr 1 5,544 1,589 2,075 1,109 660 1,071 - - 186 39 -

Yr 2 5,872 1,626 2,247 1,058 675 1,151 - - 347 76 -

Yr 3 6,364 1,756 2,573 1,030 714 1,259 96 - 464 171 198

Yr 4 6,722 1,854 2,804 1,016 810 1,354 195 - 501 207 225

Terminal 80,910 44,904 28,168 31,592 28,299 20,529 13,794 10,279 8,163 4,809 6,251

Terminal Assumptions:

LT - ROE 30.4% 18.4% 15.2% 19.0% 19.0% 17.1% 15.0% 14.0% 15.5% 14.5% 18.5%

Perpetual growth rate (g) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Justified P/BV Multiple (x) 2.9x 1.6x 1.3x 1.7x 1.7x 1.5x 1.2x 1.1x 1.3x 1.2x 1.6x

Source: Global Research (^trades significantly higher than peer group PBV, so in our fair value calculation, 100% weight assigned to DDM method)


July 2011 4

Relative valuation: P/BV RJHI SAMBA RIBL BSF SABB ANB BINM SAIB SHB BJZ BBLD

Peer Group P/BV multiple (x) 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8

BV /share - 2011e 19.5 31.6 19.3 26.1 21.7 18.6 10.5 16.5 21.7 16.6 11.5

COE: 12.3% 12.6% 12.6% 12.6% 12.6% 12.6% 12.6% 12.6% 12.6% 12.6% 12.6%

Rf 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6%

Risk Premium 6.5% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Beta 1.1 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

Source: Global Research Industry Multiples

Figures in SAR mn Mkt. Cap Equity Profit ROAE P/E P/BV

Current 2011e 2011e 2011e

Al Rajhi Bank 111,000 29,276 7,832 27.7% 14.2 3.8

Samba Financial Group 45,675 28,409 4,681 17.6% 9.8 1.6

Riyad Bank 36,000 28,971 3,100 10.9% 11.6 1.2

Banque Saudi Fransi 31,965 18,871 3,097 17.3% 10.3 1.7

Saudi British Bank 31,425 16,280 2,412 15.6% 13.0 1.9

Arab National Bank 25,245 15,818 2,184 14.4% 11.6 1.6

AlInma Bank 15,075 15,766 145 0.9% 104.0 1.0

Saudi Investment Bank 10,423 9,061 895 10.4% 11.6 1.2

Saudi Hollandi Bank 9,559 7,179 989 14.6% 9.7 1.3

Bank AlJazira 5,520 4,977 205 4.2% 26.9 1.1

Bank AlBilad 5,790 3,459 354 10.8% 16.4 1.7

Industry 327,677 178,067 25,894 13.3% 12.7 1.8 Source: Global Research Relative Valuation –Global Research GCC Banking Universe

NBK

KFH

Burgan

RJHI

ANB

BSF

RIBL

SABB

SAMBA

SHB

SIBC

Bilad

NBAD

ENBD

FGBUNB

ADCB

QNB

CBQ

Doha Bank

QIB

Bank Muscat

NBO

Bank Dhofar

Ahli Bank

BJZ

BINM

0%

4%

8%

12%

16%

20%

24%

28%

0.5 0.8 1.1 1.4 1.7 2.0 2.3 2.6 2.9 3.2 3.5 3.8 4.1

20

11

e R

OE

2011e P/BV Source: Global Research


July 2011 5

Saudi Arabia Banks -Top Picks

Stocks Mkt. Weight Target Upside Rating Key Factors

(% of TASI) Price (SAR) Potential

Samba Financial Group 3.5% 57.6 13.5% BUY * Ample liquidity & loan to deposit room for growth

* Well capitalized & healthy NPL coverage

* Diversified revenue stream

* Strong corporate relationships

Riyad Bank 2.8% 27.1 13.0% BUY * Strong position to capture infrastructure development business

* Attractive cross-selling potential & under utilized retail network

* Well developed linkages with public entities

* Healthy equity base

Banque Saudi Fransi 2.4% 49.2 11.4% BUY * Good potential to build on retail services offering

* Benefits from set of global expertise (merit of foreign shareholder)

* Good credit cushion to support expansion plans

* Developed corporate franchise Source: Global Research

Saudi Banking Sector Snapshot

Saudi banks’ assets at SAR1,504bn (USD401bn) as of Apr11, recorded CAGR (2005-10) of 13.3%.

Saudi banking assets to GDP ratio currently at around 84%.

Sector comprises of 12 Saudi and 8 foreign banks.

11 banks listed on Tadawul All Share Index (TASI), having a total market weight of c. 25.0%.

Al Rajhi Bank holds the highest market capitalization weight of 8.4% of TASI.

Samba Financial Group with a market share of 17.1% of total banking assets, leads the universe of the listed banks.

Amongst the top five sector heavy weights, Banque Saudi Fransi recorded the highest net income growth of 13.5% YoY in 2010.

National Commercial Bank, the unlisted bank, has overall the highest market share of 20.5% in terms of total sector assets.

Saudi Banks Market Weight in TASI

RIBL, 2.8% BJZ, 0.4%

SAIB, 0.8%

SHB, 0.7%

BSF, 2.4%

SABB, 2.4%

ANB, 2.0%SAMBA,

3.5%

RJHI, 8.4%

BBLD, 0.4% BINM, 1.2%

Source: Tadawul & Global Research


July 2011 6

Sensitivity Analysis Terminal Growth vs. COE ROE vs. COE

RJHI

2.0% 2.5% 3.0% 3.5% 4.0%

11.3% 79.0 79.0 79.0 79.0 79.0

11.8% 74.4 74.4 74.4 74.4 74.4

12.3% 70.3 70.3 70.3 70.3 70.3

12.8% 66.6 66.6 66.6 66.6 66.6

13.3% 63.3 63.3 63.3 63.3 63.3

CO

E

g

29.5% 30.0% 30.5% 31.0% 31.5%

11.3% 76.7 77.8 79.0 80.1 81.2

11.8% 72.3 73.3 74.4 75.4 76.5

12.3% 68.3 69.3 70.3 71.3 72.2

12.8% 64.8 65.7 66.6 67.5 68.4

13.3% 61.6 62.4 63.3 64.1 65.0

CO

E

ROE

SAMBA

2.0% 2.5% 3.0% 3.5% 4.0%

11.6% 63.8 63.8 63.8 63.8 63.8

12.1% 60.5 60.5 60.5 60.5 60.5

12.6% 57.6 57.6 57.6 57.6 57.6

13.1% 55.0 55.0 55.0 55.0 55.0

13.6% 52.6 52.6 52.6 52.6 52.6

CO

E

g

17.4% 17.9% 18.4% 18.9% 19.4%

11.6% 60.8 62.3 63.8 65.2 66.7

12.1% 57.7 59.1 60.5 61.9 63.3

12.6% 55.0 56.3 57.6 58.9 60.2

13.1% 52.6 53.8 55.0 56.2 57.4

13.6% 50.3 51.5 52.6 53.7 54.9

CO

E

ROE

RIBL

2.0% 2.5% 3.0% 3.5% 4.0%

11.6% 29.6 29.6 29.6 29.6 29.6

12.1% 28.3 28.3 28.3 28.3 28.3

12.6% 27.1 27.1 27.1 27.1 27.1

13.1% 26.2 26.2 26.2 26.2 26.2

13.6% 25.2 25.2 25.2 25.2 25.2

CO

E

g

14.2% 14.7% 15.2% 15.7% 16.2%

11.6% 28.1 28.9 29.6 30.3 31.0

12.1% 27.0 27.6 28.3 29.0 29.6

12.6% 25.9 26.5 27.1 27.7 28.4

13.1% 25.0 25.6 26.2 26.7 27.3

13.6% 24.2 24.7 25.2 25.8 26.3

CO

E

ROE

BSF

2.0% 2.5% 3.0% 3.5% 4.0%

11.6% 54.6 54.6 54.6 54.6 54.6

12.1% 51.8 51.8 51.8 51.8 51.8

12.6% 49.2 49.2 49.2 49.2 49.2

13.1% 47.0 47.0 47.0 47.0 47.0

13.6% 44.9 44.9 44.9 44.9 44.9

CO

E

g

18.0% 18.5% 19.0% 19.5% 20.0%

11.6% 52.1 53.4 54.6 55.9 57.1

12.1% 49.4 50.6 51.8 52.9 54.1

12.6% 47.1 48.1 49.2 50.3 51.4

13.1% 44.9 45.9 47.0 48.0 49.0

13.6% 43.0 43.9 44.9 45.9 46.8

CO

E

ROE

SABB

2.0% 2.5% 3.0% 3.5% 4.0%

11.6% 40.4 40.9 41.5 42.2 43.0

12.1% 39.9 40.4 41.0 41.7 42.4

12.6% 39.4 40.0 40.5 41.2 41.9

13.1% 39.0 39.5 40.1 40.7 41.4

13.6% 38.5 39.0 39.6 40.2 40.9

CO

E

g

18.0% 18.5% 19.0% 19.5% 20.0%

11.6% 39.6 40.6 41.5 42.5 43.4

12.1% 39.1 40.1 41.0 42.0 42.9

12.6% 38.7 39.6 40.5 41.5 42.4

13.1% 38.2 39.1 40.1 41.0 41.9

13.6% 37.8 38.7 39.6 40.5 41.4

CO

E

ROE

ANB

2.0% 2.5% 3.0% 3.5% 4.0%

11.6% 33.7 33.7 33.7 33.7 33.7

12.1% 32.1 32.1 32.1 32.1 32.1

12.6% 30.6 30.6 30.6 30.6 30.6

13.1% 29.3 29.3 29.3 29.3 29.3

13.6% 28.2 28.2 28.2 28.2 28.2

CO

E

g

16.1% 16.6% 17.1% 17.6% 18.1%

11.6% 32.0 32.8 33.6 34.4 35.2

12.1% 30.5 31.3 32.0 32.7 33.5

12.6% 29.2 29.9 30.6 31.3 31.9

13.1% 28.0 28.6 29.3 29.9 30.6

13.6% 26.9 27.5 28.1 28.7 29.3

CO

E

ROE

Source: Company reports & Global Research


July 2011 7

Sensitivity Analysis Terminal Growth vs. COE ROE vs. COE

BINM

2.0% 2.5% 3.0% 3.5% 4.0%

11.6% 12.1 12.1 12.1 12.1 12.1

12.1% 11.6 11.6 11.6 11.6 11.6

12.6% 11.0 11.0 11.0 11.0 11.0

13.1% 10.6 10.6 10.6 10.6 10.6

13.6% 10.2 10.2 10.2 10.2 10.2

CO

E

g

14.0% 14.5% 15.0% 15.5% 16.0%

11.6% 11.4 11.8 12.1 12.5 12.8

12.1% 10.9 11.2 11.6 11.9 12.2

12.6% 10.4 10.7 11.0 11.3 11.6

13.1% 10.0 10.3 10.6 10.9 11.1

13.6% 9.6 9.9 10.2 10.4 10.7

CO

E

ROE

SAIB

2.0% 2.5% 3.0% 3.5% 4.0%

11.6% 23.0 23.0 23.0 23.0 23.0

12.1% 21.8 21.8 21.8 21.8 21.8

12.6% 20.7 20.7 20.7 20.7 20.7

13.1% 19.8 19.8 19.8 19.8 19.8

13.6% 18.9 18.9 18.9 18.9 18.9

CO

E

g

13.0% 13.5% 14.0% 14.5% 15.0%

11.6% 21.4 22.2 22.9 23.7 24.5

12.1% 20.3 21.0 21.8 22.5 23.2

12.6% 19.3 20.0 20.7 21.4 22.1

13.1% 18.5 19.1 19.7 20.4 21.0

13.6% 17.7 18.3 18.9 19.5 20.1

CO

E

ROE

SHB

2.0% 2.5% 3.0% 3.5% 4.0%

11.6% 34.1 34.1 34.1 34.1 34.1

12.1% 32.4 32.4 32.4 32.4 32.4

12.6% 31.0 31.0 31.0 31.0 31.0

13.1% 29.7 29.7 29.7 29.7 29.7

13.6% 28.5 28.5 28.5 28.5 28.5

CO

E

g

14.6% 15.1% 15.6% 16.1% 16.6%

11.6% 32.2 33.1 34.0 34.9 35.8

12.1% 30.7 31.6 32.4 33.3 34.1

12.6% 29.4 30.2 31.0 31.8 32.5

13.1% 28.2 28.9 29.7 30.4 31.1

13.6% 27.1 27.8 28.5 29.2 29.9

CO

E

ROE

BJZ

2.0% 2.5% 3.0% 3.5% 4.0%

11.6% 21.9 21.9 21.9 21.9 21.9

12.1% 20.9 20.9 20.9 20.9 20.9

12.6% 19.9 19.9 19.9 19.9 19.9

13.1% 19.1 19.1 19.1 19.1 19.1

13.6% 18.4 18.4 18.4 18.4 18.4

CO

E

g

13.5% 14.0% 14.5% 15.0% 15.5%

11.6% 20.6 21.3 21.9 22.6 23.2

12.1% 19.7 20.3 20.9 21.5 22.1

12.6% 18.8 19.4 19.9 20.5 21.1

13.1% 18.1 18.6 19.1 19.6 20.2

13.6% 17.4 17.9 18.4 18.8 19.3

CO

E

ROE

BBLD

2.0% 2.5% 3.0% 3.5% 4.0%

11.6% 23.0 23.0 23.0 23.0 23.0

12.1% 21.8 21.8 21.8 21.8 21.8

12.6% 20.7 20.7 20.7 20.7 20.7

13.1% 19.6 19.6 19.6 19.6 19.6

13.6% 18.7 18.7 18.7 18.7 18.7

CO

E

g

17.5% 18.0% 18.5% 19.0% 19.5%

11.6% 22.0 22.5 23.1 23.7 24.3

12.1% 20.8 21.3 21.8 22.4 22.9

12.6% 19.7 20.2 20.7 21.2 21.7

13.1% 18.8 19.2 19.7 20.2 20.6

13.6% 17.9 18.3 18.8 19.2 19.7

CO

E

ROE



July 2011 8

Key Risks to Valuations

Revival in private sector participation falls below expectations

The government of Saudi Arabia’s public spending initiatives through various projects aims at further boosting economic activity and private sector confidence. A relatively slower increase in private sector participation (both domestic & foreign) in the Kingdom’s project development could hamper the demand for credit & advisory requirements by corporations.

Lenders’ risk-appetite refrains from easing

Since the beginning of 2011, on monthly basis till Apr11, the private sector credit has consistently shown rising trend ranging between 0.5% to 1.2%. This rising growth pattern is an encouraging sign, indicating the increase in banks risk appetite in the wake of investors’ financing needs. However, any restraint in the easing of lenders’ risk appetite could pose a challenge to the pickup of lending activity.

Asset quality improvement encounters a shock

The severity of asset quality deterioration witnessed by the banks in the last couple of years touched the peak in 2009. An eruption of unforeseen asset quality deterioration, due to domestic /regional credit worries or global economic events, could not only subdue the improving confidence of financial institutions, but will also lead to unexpected pressure on the bottom-line results.

Interest rates do not increase as per expectations

We estimate the interest rates to start increasing in 2013, and expect this situation to largely benefit the banking spreads as the banks’ cost of funding would remain downward sticky. Any unfavorable changes in the interest rates in coming years could have negative impact on our future earnings forecasts.

Provisions build up fails to slow down

We believe that Saudi banks have carried out thorough pruning of their loan and investment portfolios, and have already realized the majority of provisioning necessary against those assets. Therefore, going forward the provisions are expected to consolidate at lower levels, providing support to the banks’ overall earnings. Although the chances are slim, in case banks go on increasing their provisions to higher levels, it could have a dampening effect on our profitability estimates.

Transparency issues of conglomerates

Although the Kingdom’s relatively conservative banking approach has largely facilitated the country’s financial system to escape severe repercussions of global financial crisis, the lack of transparency of family-owned conglomerates could pose a potential threat.


July 2011 9

Saudi Arabia Banking Sector

The Kingdom of Saudi Arabia continued to expand (real GDP growth of 2010: 3.8%, and 2009: 0.6%; average 2007-10 of 2.7%) even during the times of hampered global economic growth. Saudi Arabia, reaping astounding benefits from relatively high oil prices, has developed a stronger sovereign muscle to cope well with the repercussions of global economic distress. The optimistic forecast for gradual yet continued global economic recovery, Saudi government’s enhanced public spending, supportive demographic factors influencing local demand, allure for both foreign & domestic corporations to expand operations, and willingness & capability of the financial system to support growth portrays an attractive outlook for the Kingdom’s economic growth. Global Research expects KSA to record real GDP growth of 5.5% to 6.0% in 2011.

Saudi Economic & Banking Sector Growth

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2007 2008 2009 2010 2011e

GDP growth (LHS) Loan growth (RHS) Asset growth (RHS)

Source: Central Bank, Ministry of Economy & Planning, & Global Research

Saudi banking assets (avg. growth of 13.6% during 2007-10) recorded an increase of 4.3% YoY in 2010, while loans (avg. growth of 12.2% during 2007-10) rose by 5.3% during the year. Global Research expects Saudi banks to continue growing and could record assets & loan growth of 9.1% & 11.9%, respectively, in 2011. Saudi Arabia’s robust banking system maintains:

Conservative loan to deposit limit of 85%

NPL coverage of more than 100%

Net Interest Margin (2006-10) at 3.5% or above

Capital adequacy (TIER-1) ratio above 11%

Equity to assets ratio at around 15%

The government’s initiatives for ambitious public spending (latest announcement 1Q11 of massive social benefits of USD100bn - 22% of GDP2010, Ninth Development Plan of five year spending (2010-14) of USD385bn - 85% of GDP2010), and low credit penetration (loan to GDP of c. 40%) are some of the promising factors for the growth of lending institutions. Overall we forecast total assets and loan to record CAGR (2010-14e) of 10.8% & 13.8%, respectively.

Asset base Lending Activity

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2009 2010 2011e 2012e 2013e 2014e

(SAR bn)

Assets Assets /GDP Asset growth

Source:Company reports, Ministry of Economy & Planning, & Global Research

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

2009 2010 2011e 2012e 2013e 2014e

Loan /Deposit Loan /GDP


July 2011 10

KSA banks’ profitability expected to continue rising Our GCC banking universe witnessed an aggregate net income increase of 8.8% YoY in 2010, while the provisions recorded a decline of 11.0%, over this period. The profitability growth was led by Kuwaiti banks recording a rise of 30.4% YoY, while the Saudi banks posted lowest growth witnessing a marginal increase of 1.7% YoY in 2010. Saudi banks’ net income increase was mainly driven by the decline in provisions by 11.5% YoY in 2010. The banks’ net interest income declined by 2.0% YoY in 2010. Global Research expects Saudi banks to record net income increase of 17.8% YoY in 2011 and CAGR (2010-14e) of 22.8%. Although the sector ROAE decreased in 2010, it remained above 13.0%. The enhancement of the banks’ equity base with expectation to capture higher future growth potential, did not show the matching returns for the time being. Global Research expects the banks’ return ratios to start improving from 2012, and we project ROAE at 23.5%, and ROAA to reach 3.4% by 2014.

Profitability Return Ratios

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0

10,000

20,000

30,000

40,000

50,000

60,000

2009 2010 2011e 2012e 2013e 2014e

CAGR (2009-14e): 17.6%

(SAR mn)

Net Profit Net Profit growth

Source: Company reports, & Global Research

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2009 2010 2011e 2012e 2013e 2014e

ROAE (LHS) ROAA (RHS)

Credit cushion builds up, provisions to move downhill Having provided adequately for Saad and Algosaibi groups in 2009, provisions saw a decline of 7.0% YoY in 2010. This is expected to be the start of the downhill journey from historically high levels. With increasing clarity of situation on both domestic & regional fronts, and relatively improved business confidence, we expect the banks to start easing the earlier aggressive stance of recording provisions. Global Research expects provisions to decline by 33.1% YoY in 2011 and record CAGR (2010-14e) of -23.0%. Additionally, the increase in NPL coverage to 115.4% in 2010 is also somewhat comforting for the banks.

Provisions Expense Credit Quality

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2009 2010 2011e 2012e 2013e 2014e

CAGR (2009-14e): -20.0%

(SAR mn)

Provisions % change


2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

80.0%

90.0%

100.0%

110.0%

120.0%

130.0%

140.0%

150.0%

2009 2010 2011e 2012e 2013e 2014e

NPL coverage (LHS) NPL ratio (RHS)

In the wake of global financial crisis and home grown credit worries (esp. from Saad and Algosaibi groups), the Saudi banks in 2009 followed a very cautious approach in recording provisions and extending new loans. The banks also carried out stricter pruning of their credit portfolios. The decline in loan portfolio coupled with inflated NPLs led to sharp rise in NPL ratio to 3.2% in 2009, which has retreated to 2.7% in 2010. We expect the NPL ratio to stay around the current level in 2011 but is projected to start improving from 2012, reaching 2.2% by 2014. The dip in NPL coverage is also forecasted to be on its way to improvement, expected to increase to 127.5% in 2011 and could reach up to 144.6% by 2014.


July 2011 11

Margins stabilize here, before rising from 2013 Although the SAIBOR3M indicated marginal upward trend over the last few quarters, at large we expect the banks’ spreads to stay around 3.5% till 2012. During the past year, despite the drop in yield on assets, the banks were somewhat able to manage the pressure by being able to match the re-pricing of their liabilities. The decline in yields on assets by around 60bps was matched by the reduction in cost of funds by around 52bps, leading to the banks’ spreads being maintained at around 3.5% level in 2010. As Saudi Arabia in consonance with global economic developments took decisions of policy interest rate cuts, taking cues from the recent global economic developments (esp. in US economy), we forecast the policy interest rates to have higher chances of marked increase in 2013. Global Research also expects the banking spreads to start increasing from 2013, and could reach up to 4.0% by 2014. However, the movement in spreads remains closely linked to how policy rates play out in the coming years. Banking Spreads Core Income Performance

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2009 2010 2011e 2012e 2013e 2014e

Yield on Assets (LHS) Cost of Funds (LHS) Spreads (RHS)


70.0%

70.2%

70.4%

70.6%

70.8%

71.0%

71.2%

71.4%

71.6%

71.8%

72.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2009 2010 2011e 2012e 2013e 2014e

NII growth (LHS) NII to Operating Inc. (RHS)

The low interest rate environment, coupled with less than expected rise in lending led to weaker core banking results in 2010. Although we do not expect an increase in the interest rates before 2013, the market rates could marginally firm up in 2011 based on our expectations of relatively improved lending activity in the market (esp. considering the Saudi government’s initiatives to go on with infrastructure development projects). Global Research expects the banks’ net interest income to increase by 7.8% YoY in 2011 and record CAGR (2010-14e) of 15.6%.

Repo & Reverse Repo Rates SAIBOR3M & LIBOR (US) Rates

0%

1%

2%

3%

4%

5%

6%

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

Official Repo Rate Reverse Repo Rate Fed Fund rate

Source: SAMA, & Bloomberg

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

LIBOR (US) SAIB3M Gap (SAIB-LIBOR)

In the light of global developments and monitoring the domestic market conditions, the KSA’s official repo rate at 2.0% and reverse repo rate at 0.25% have been maintained since 2Q09. However, Global Research expects the gap between Saudi’s official repo rate and Fed rate to start narrowing down over the medium term. The LIBOR (US) that largely led the SAIBOR since 2007, showed a changing position from mid 2009. Besides other market factors, we believe that relatively significant liquidity injection and softer economic activity in foreign markets eased the interbank rates on a faster pace as compared to the Saudi market rates.


July 2011 12

Loan portfolio & customer deposits to expand from hereon Saudi banks’ loan portfolio seems to be back on the rising path. The loan book of the listed banks after recording an increase of 3.9% YoY in 2010, are expected to record even stronger growth of 12.1% YoY in 2011. Furthermore, any debt restructuring deals (i.e. debt financing in distressed scenarios) on the face of it may appear as troubled corporations asking for support; but it also provide opportunities for the banks to renegotiate facilities at higher interest rates (due to raised risk profile of the clients), thus generating extra interest income for the banks. With sector loan to deposit ratio currently at around 82%, there is still ample growth opportunity before the banks reach the domestic regulatory limit of 85%. Our optimism regarding loan growth in near future is based on the revival of business confidence, the banks’ willingness (with caution) to loosen up credit extension, enhanced public spending with various infrastructure projects in the pipeline, and higher private sector participation to fulfill innate domestic demand. We expect the loan portfolio to record CAGR (2010-14e) of 13.9%. The Saudi banks’ customer deposit base remains dominated by demand deposits that constitute around 57% of total customer deposits. Having posted a rise of 3.7% YoY in 2010, we forecast the banks to record an increase of 12.2% YoY in 2011 and CAGR (2010-14e) of 12.5%. Loan Portfolio Customer Deposits

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

200

400

600

800

1,000

1,200

2009 2010 2011e 2012e 2013e 2014e

CAGR (2009-14e): 11.7%

(SAR bn)

Loans Loan growth


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

200

400

600

800

1,000

1,200

1,400

2009 2010 2011e 2012e 2013e 2014e

CAGR (2009-14e): 10.7%

(SAR bn)

Deposits Deposit growth

Healthy equity base to support growth The well capitalized and relatively low leveraged Saudi banks (not carrying the serious concerns prevalent with other international /regional financial institutions) are in a good position to harness future growth opportunities. Saudi banks’ equity to asset ratio consistently above 13.5% (since 2008) is expected to reach 14.6% by 2014, indicating a higher proportion of the total assets being financed by the equity base.

Equity to Assets TIER-1 Capital Ratio

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

2009 2010 2011e 2012e 2013e 2014e

Equity to Assets (LHS) Equity growth (RHS)


0%

4%

8%

12%

16%

20%

RJ

HI

AN

B

BS

F

RIB

L

SA

BB

SA

IB

SA

MB

A

SH

B

BB

LD

BJZ

NC

B

Basel III: 6%

Basel II : 4%

2009 2010

Saudi banks’ Tier 1 capital ratio above 11% in 2010 remains well above the minimum requirement of 4% under Basel II and 6% under Basel III. Even during the times of severe global financial fears, KSA banks kept their head high with Tier 1 capital ratio above 8% adequately meeting the requirements. As the banks globally took up the challenges of coping with various financial issues (including recapitalizing of balances sheets), the Saudi banks largely confident of their strong fundamentals are well placed to even handle any severe credit issues.


July 2011 13

COMPARATIVE CHARTS


July 2011 14

Global Research GCC Banking Sector Net Income Provisions Expense

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Kuwait KSA Oman Qatar UAE

(USD mn)

2009 2010

0

500

1,000

1,500

2,000

2,500

3,000

3,500


(USD mn)

2009 2010

Assets Loan to Deposit

0

50

100

150

200

250

300

350


(USD bn)

2009 2010

60%

70%

80%

90%

100%

110%

120%


2009 2010

Return on Average Equity Return on Average Assets

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%


2009 2010



July 2011 15

GCC Banking Sector Comparison (2010) Profitability Provisions Expense

Kuwait, 11%

KSA, 46%

Oman, 3%

Qatar, 17%

UAE, 22%

Kuwait, 22%

KSA, 34%

Oman, 2%

Qatar, 5%

UAE, 38%

Net Interest Income Assets

Kuwait, 15%

KSA, 43%

Oman, 4%

Qatar, 12%

UAE, 27%

Kuwait, 17%

KSA, 36%

Oman, 3%

Qatar, 13%

UAE, 30%

Loans Deposits

Kuwait, 16%

KSA, 34%

Oman, 4%

Qatar, 12%

UAE, 33%

Kuwait, 15%

KSA, 40%

Oman, 3%

Qatar, 13%

UAE, 29%



July 2011 16

Saudi Arabia Banks Performance Net Income Provisions Expense

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000R

JH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

(SAR mn)

2010 2011e

0

500

1,000

1,500

2,000

2,500

RJH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

(SAR mn)

2010 2011e

Net Interest Income Banks’ Spreads

0

2,000

4,000

6,000

8,000

10,000

12,000

RJH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

(SAR mn)

2010 2011e

0%

1%

2%

3%

4%

5%

6%

RJH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

2010 2011e

Return on Average Equity Return on Average Assets

0%

5%

10%

15%

20%

25%

30%

RJH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

2010 2011e

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

RJH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

2010 2011e



July 2011 17

Saudi Arabia Banks Performance (contd…) NPL Coverage NPL ratio

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%R

JH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M2010 2011e

0%

1%

2%

3%

4%

5%

6%

7%

8%

RJH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

2010 2011e

Assets Loan to Deposit

0

50

100

150

200

250

RJH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

(SAR bn)

2010 2011e

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

RJH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

2010 2011e

Loans Deposits

0

20

40

60

80

100

120

140

160

RJH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

(SAR bn)

2010 2011e

0

20

40

60

80

100

120

140

160

180

RJH

I

RIB

L

SA

MB

A

SA

BB

AN

B

BS

F

SH

B

SA

IB

BB

LD

BJZ

BIN

M

(SAR bn)

2010 2011e



July 2011 18

Saudi Arabia Banks Peer Comparison (2010) Profitability Provisions Expense

RJHI, 31%

RIBL, 13%

SAMBA, 20%

SABB, 9%

ANB, 9%

BSF, 13%

SHB, 4%

SAIB, 2% BBLD, 0% BJZ, 0% BINM, 0%

RJHI, 25%

RIBL, 11%

SAMBA, 7%

SABB, 16%

ANB, 12%

BSF, 4%

SHB, 5%

SAIB, 11%

BBLD, 4%

BJZ, 5%

BINM, 0%

Net Interest Income Assets

RJHI, 28%

RIBL, 13%

SAMBA, 14%

SABB, 10%

ANB, 10%

BSF, 10%

SHB, 4%

SAIB, 4%

BBLD, 2% BJZ, 2% BINM, 2%

RJHI, 17%

RIBL, 16%

SAMBA, 17%SABB, 11%

ANB, 11%

BSF, 11%

SHB, 5%

SAIB, 5%

BBLD, 2% BJZ, 3%BINM, 2%

Loans Deposits

RJHI, 19%

RIBL, 17%

SAMBA, 13%SABB, 12%

ANB, 10%

BSF, 13%

SHB, 5%

SAIB, 5%

BBLD, 2%BJZ, 3%

BINM, 2%

RJHI, 18%

RIBL, 16%

SAMBA, 17%SABB, 12%

ANB, 10%

BSF, 12%

SHB, 5%

SAIB, 5%

BBLD, 2% BJZ, 3% BINM, 1%



July 2011 19

COMPANY PROFILES


Al Rajhi Banking & Investment Corp.

July 2011 20

Market Data

Bloomberg Code: RJHI AB

Reuters Code: 1120.SE

CMP (02 July 2011): SAR74.0

O/S (mn) 1,500.0

Market Cap (SAR mn): 111,000.0

Market Cap (USD mn): 29,600.0

P/E 2011e (x): 14.2

P/BV 2011e (x): 3.8

Price Performance 1-Yr

High (SAR): 86.0

Low (SAR): 65.8

Average Volume: (000) 1,290.4

1m 3m 12m

Absolute (%) -2.0 -4.2 -1.7

Relative (%) -0.7 -4.7 -10.8

Price Volume Performance

60

65

70

75

80

85

90

0

1,000

2,000

3,000

4,000

5,000

6,000

Jun

-10

Jul-

10

Sep

-10

Oct-

10

No

v-1

0

Jan

-11

Feb-1

1

Mar-

11

May-1

1

Jun

-11

Volume (000) RJHI (SAR)

Source: Zawya

Net income to grow by 15.7% in 2011 & CAGR (2010-14e) of 22.6%

Provisions expected to decline by 30.8% in 2011

Bank’s spreads at 5.8% forecasted to reach 6.4% by 2014

Fair value downgraded, recommendation maintained

Net income expected to strengthen in 2011 RJHI’s net income after stagnating in 2010 grew marginally by 0.9% YoY and 1.9% QoQ in 1Q11. The results were lower by 2.9% from our estimates as the bank’s net operating income did not perform as per our expectations. We have revised downward our full year profitability estimates marginally by 0.6% in 2011. Global Research believes that impairment charges have touched the peak, so decline in provisions coupled with improved operating income will lead to net income rise of 15.7% YoY in 2011 and CAGR (2010-14e) of 22.6%.

Better control over financing expenses to support net fin. income Although the drop in gross financing income by 1.9% YoY in 1Q11 generated pressure on net financing income, we expect that RJHI’s ability to better control its cost of funds (demand deposits 92% of total) will lead to improved future results. Global Research expects net financing income to record CAGR (2010-14e) of 16.1%. Although RJHI’s spreads decreased (40bps) to reach 5.8% in 2010, they still remain one of the highest in the sector. We forecast the spreads to start showing noticeable increase from 2013 and could reach 6.4% by 2014.

NPF coverage to further strengthen RJHI’s NPF coverage ratio at 135.8% in 2010 is expected to stay strong, rising up to 158.5% in 2014. Although we project NPF ratio to marginally increase to 2.3% in near term (as increase in financing may lead to rise in NPF), we also expect the bank to continue cleansing its portfolio for infected assets. Global Research forecasts NPF ratio to stabilize around 2.0% by 2014. We forecast that RJHI’s provisions have already touched the peak and could decline by 30.8% in 2011 and record CAGR (2010-14e) of -28.1%.

Asset base continues to expand Despite lackluster market conditions, asset base expanded by 17.8% YoY and 9.8% QoQ in 1Q11. RJHI with the largest branch network of 452 branches is expected to further build up on its retail strength. Global Research expects the bank’s assets, financing and deposits to continue growing and could increase by 13.5%, 12.8%, and 17.4%, respectively, in 2011. Overall the total assets are projected to record CAGR (2010-14e) of 12.7%.

Investment Indicators

2010 2011e 2012e 2013e 2014e

Net Profit Growth 0.1% 15.7% 23.9% 28.9% 22.2%

Net Financing Income Growth 5.6% 9.0% 14.3% 20.4% 20.9%

Financing Growth 7.1% 12.8% 14.0% 16.6% 14.2%

Deposits Growth 16.4% 17.4% 10.7% 15.7% 12.7%

Adjusted EPS (SAR) 4.5 5.2 6.5 8.3 10.2

Adjusted BVPS (SAR) 18.2 19.5 21.3 24.0 27.5

ROAE 25.3% 27.7% 31.7% 36.8% 39.6%

Dividend Yield 4.2% 5.3% 6.3% 7.7% 9.1%

P/E Ratio (x)* 18.4 14.2 11.4 8.9 7.3

P/BV Ratio (x)* 4.6 3.8 3.5 3.1 2.7 Source: Company reports & Global Research * Market price for 2011 and subsequent years as per closing prices on TASI on 02 July 2011.

HOLD

Target Price

SAR70.3

Mohammad Ali Shah

Senior Financial Analyst [email protected] Tel: (966) 1 299 4106


July 2011 21

Al Rajhi Banking and Investment Corporation -Financial Update & Outlook

1Q11 Result Summary

2010 2011e 2012e 2013e 2014e

Net Profit Grow th 0.1% 15.7% 23.9% 28.9% 22.2%

Net Financing Income Grow th 5.6% 9.0% 14.3% 20.4% 20.9%

Financing Grow th 7.1% 12.8% 14.0% 16.6% 14.2%

Deposits Grow th 16.4% 17.4% 10.7% 15.7% 12.7%

Adjusted EPS (SAR) 4.5 5.2 6.5 8.3 10.2


ROAE 25.3% 27.7% 31.7% 36.8% 39.6%

Dividend Yield 4.2% 5.3% 6.3% 7.7% 9.1%

P/E Ratio (x)* 18.4 14.2 11.4 8.9 7.3

P/BV Ratio (x)* 4.6 3.8 3.5 3.1 2.7 Source: Company reports, Tadawul & Global Research

RJHI continued to remain strong despite the challenges faced by financial markets globally. Although the net financing income dropped by 2.0% YoY in 1Q11, the rise in non-financing income by 23.6% and drop in provisions by 2.6% YoY provided support to 1Q11 results. Net income posted marginal rise of 0.9% YoY in 1Q11, and we expect the full year results to grow by 15.7% YoY in 2011. In addition to our forecasts for decrease in provisions by 30.8% YoY in 2011, the overall improved performance in various business segments is expected to drive the future results. Global Research expects the net income to post CAGR (2010-14e) of 22.6%. The bank enjoys one of the highest ROAE of 25.3% in the industry and we expect it to increase to 40% by 2014.

Net financing income to continue growing

We expect that RJHI’s ability to better control its cost of funds (demand deposits 92% of total) will lead to an increase in net financing income. Although the drop in gross financing income by 1.9% YoY and marginal rise of 0.6% QoQ in 1Q11 generated pressure on net financing income, we expect the improvement in full year results. Global Research expects net financing income to increase by 9.0% YoY in 2011 and record CAGR (2010-14e) of 16.1%.

Spreads to witness noticeable rise in 2013

We expect RJHI’s banking spreads to remain at around 5.8% for next couple of years. A marginal improvement in yield on earning asset, coupled with relatively slower rise in cost of funds is expected to slightly raise spreads in 2012. RJHI having low cost of funding between 0.1% to 1.0% is expected to largely benefit from escalation in market interest rates. Global Research expects the interest rates to start increasing from 2013, and the bank’s spreads to rise to 6.4% by 2014.

NPF coverage gains strength

RJHI has consistently maintained NPF coverage above 100%, even during the challenging financial conditions. Global Research expects NPF coverage (at 136%) to reach 158.5% by 2014, providing improved cushion against any asset quality deterioration. Although the NPF ratio at 2.2% in 2010 could marginally rise in near term (as increase in financing may lead to rise in NPF), we expect the ratio to stabilize around 2.0% by 2014. We do not expect the repetition of severe asset quality deterioration as witnessed by the sector in the past few years. The bank currently maintains healthy capital adequacy ratio of 20.6%.

Valuation update Based on the bank’s latest financial information, we have adjusted our forward estimates. Relatively lower than expected results led us to revise our financial estimates, resulting in marginal decline in net income forecast for 2011.

2011 (SAR mn) Earlier estimates Revised estimates % change

Gross financing 141,350 140,382 -0.7%

Deposits 164,696 167,899 1.9%

Net financing income 9,771 9,660 -1.1%

Operating profit 9,234 9,153 -0.9%

Provisions (1,355) (1,321) -2.5%

Net income 7,879 7,832 -0.6% Source: Global Research

Global Research has also revised its fair value downward from SAR78.9 to SAR70.3 per share, which at the current market price of SAR74.0 (as on 02 July, 2011) is trading at a premium of 5.0% to our fair value. However, at the current price levels (with drop in share price by 4.3% since our last update in March 2011), our equity rating remains unchanged and we reiterate our HOLD

recommendation on the stock.


July 2011 22

RJHI –Chart Gallery Profitability Return Ratios

-5.0%

0.0%

5.0%

10.0%

15.0%

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0

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4,000

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14,000

16,000

18,000

2009 2010 2011e 2012e 2013e 2014e

(SAR mn)

Net financing income Net income

Net income gorwth

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2009 2010 2011e 2012e 2013e 2014e


Provisions Expense Asset Quality

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

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50%

0%

5%

10%

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2009 2010 2011e 2012e 2013e 2014e

Prov./Net fin. inc. (LHS) Prov./Net income (LHS)

Prov. growth (RHS)

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0.0%

20.0%

40.0%

60.0%

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100.0%

120.0%

140.0%

160.0%

180.0%

2009 2010 2011e 2012e 2013e 2014e

NPF coverage (LHS) NPF /Gross fin. (RHS)

Banking Spreads Financing and Deposit Base

5.4%

5.6%

5.8%

6.0%

6.2%

6.4%

6.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2009 2010 2011e 2012e 2013e 2014e

Yield on Earning Assets (LHS) Cost of Funds (LHS) Spreads (RHS)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0

50

100

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200

250

300

2009 2010 2011e 2012e 2013e 2014e

(SAR bn)

Financing Deposits

Financing growth Deposit growth

FTD



July 2011 23

Financial Statements(SAR mn) 2008 2009 2010 2011e 2012e 2013e 2014e

Financing Income 9,423 8,960 9,091 9,998 11,513 14,134 17,356

Payment to Depositors (927) (570) (230) (338) (475) (842) (1,280)

Net Financing Income 8,497 8,390 8,861 9,660 11,038 13,292 16,076

Fee & Commission Income 1,241 1,427 1,634 1,814 2,068 2,502 2,878

Investment Income - 964 250 263 284 335 375

Other Income 837 724 916 813 901 1,112 1,278

Total Non-Financing Income 2,079 3,116 2,800 2,890 3,253 3,949 4,530

Total Operating Income 10,575 11,505 11,661 12,550 14,291 17,241 20,606

Provisions expense (1,227) (1,761) (1,909) (1,321) (728) (557) (510)

Operating Expenses (2,823) (2,977) (2,981) (3,397) (3,857) (4,175) (4,804)

Profit Before Taxation 6,525 6,767 6,771 7,832 9,706 12,510 15,292

Taxation & Minority Interest - - - - - - -

Net Profit Attributable to Parent 6,525 6,767 6,771 7,832 9,706 12,510 15,292

Cash Balances 11,302 11,413 19,475 20,263 20,134 19,610 19,449

Deposits with Banks & FIs 2,892 14,335 11,118 12,952 11,009 12,330 13,317

Investment Securities 1,610 27,139 28,887 35,177 38,701 45,203 50,951

Gross Financings 144,627 116,340 123,681 140,382 160,035 186,281 212,360

Financing Loss Reserve (3,950) (4,192) (3,616) (4,937) (5,665) (6,222) (6,732)

Net Financings 140,677 112,148 120,065 135,444 154,370 180,059 205,628

Investment in Associates - - - - - - -

Investment Properties - - - - - - -

Net Fixed Assets 2,868 3,182 3,395 3,624 4,150 4,706 5,276

Other Assets 4,024 2,513 1,901 2,262 2,624 2,992 3,291

Total Assets 163,373 170,730 184,841 209,722 230,989 264,900 297,912

Deposits from Banks & FIs 7,902 6,102 5,414 5,716 5,979 6,350 6,712

Deposits from Customers 118,741 122,862 143,064 167,899 185,844 215,022 242,247

Other Borrowings 1,875 - - - - - -

Other Liabilities 7,824 13,025 6,045 6,831 7,172 7,531 7,757

Paid-up Capital 15,000 15,000 15,000 15,000 15,000 15,000 15,000

Retained Earnings 121 744 206 206 2,001 6,005 11,204

Other Reserves 11,911 12,997 15,112 14,070 14,992 14,992 14,992

Shareholders' Equity 27,032 28,741 30,318 29,276 31,993 35,997 41,196

Minority Interest - - - - - - -

Total Equity & Liability 163,373 170,730 184,841 209,722 230,989 264,900 297,912

Return on Average Assets 4.5% 4.1% 3.8% 4.0% 4.4% 5.0% 5.4%

Return on Average Equity 28.2% 27.1% 25.3% 27.7% 31.7% 36.8% 39.6%

Net Financing Income/Operating Income 80.3% 72.9% 76.0% 77.0% 77.2% 77.1% 78.0%

Recurring Income/Operating Income 92.1% 85.3% 90.0% 91.4% 91.7% 91.6% 92.0%

Financing Assets Yield 7.5% 6.6% 6.0% 6.0% 6.1% 6.6% 7.0%

Cost of Funds 0.8% 0.4% 0.2% 0.2% 0.3% 0.4% 0.5%

Net Spread 6.7% 6.2% 5.8% 5.8% 5.8% 6.1% 6.4%

Cost to Income Ratio 26.7% 25.9% 25.6% 27.1% 27.0% 24.2% 23.3%

OPEX/Average Assets 2.0% 1.8% 1.7% 1.7% 1.8% 1.7% 1.7%

Net Financing to Customer Deposits 118.5% 91.3% 83.9% 80.7% 83.1% 83.7% 84.9%

Non Performing Financing 2,766 3,866 2,662 3,299 3,681 4,003 4,247

Financing Loss Reserve 3,950 4,192 3,616 4,937 5,665 6,222 6,732

NPFs to Gross Financing 1.9% 3.3% 2.2% 2.3% 2.3% 2.1% 2.0%

NPF Coverage 142.8% 108.4% 135.8% 149.7% 153.9% 155.4% 158.5%

Cost of Risk (bps) 97.7 134.9 159.1 100.1 48.5 32.1 25.6

Equity to Gross Financing 18.7% 24.7% 24.5% 20.9% 20.0% 19.3% 19.4%

Equity to Total Assets 16.5% 16.8% 16.4% 14.0% 13.9% 13.6% 13.8%

Dividend Payout Ratio 73.1% 65.8% 77.5% 75.0% 72.0% 68.0% 66.0%

Adjusted EPS (SAR) 4.3 4.5 4.5 5.2 6.5 8.3 10.2

Adjusted BVPS (SAR) 15.9 17.4 18.2 19.5 21.3 24.0 27.5

Market Price (SAR) * 56.0 71.3 83.0 74.0 74.0 74.0 74.0

Dividend Yield 5.7% 4.2% 4.2% 5.3% 6.3% 7.7% 9.1%

P/E Ratio (x) 12.9 15.8 18.4 14.2 11.4 8.9 7.3

P/BV Ratio (x) 3.5 4.1 4.6 3.8 3.5 3.1 2.7

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* Market price for 2011 and subsequent years as per closing prices on TASI on 02 July, 2011.


Samba Financial Group

July 2011 24

Market Data

Bloomberg Code: SAMBA AB


CMP (02 July 2011): SAR50.8

O/S (mn) 900.0



P/E 2011e (x): 9.8

P/BV 2011e (x): 1.6


High (SAR): 64.3

Low (SAR): 44.1

Average Volume: (000) 239.0

1m 3m 12m

Absolute (%) -3.8 -10.6 -9.8

Relative (%) -2.5 -11.0 -19.0


35

40

45

50

55

60

65

70

0

200

400

600

800

1,000

1,200

Jun

-10

Jul-

10

Sep

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Oct-

10

No

v-1

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Jan

-11

Feb-1

1

Mar-

11

May-1

1

Jun

-11

Volume (000) SAMBA (SAR)

Net income estimated to increase by 5.1% in 2011

NII growth to revive at CAGR (2010-14e) of 13.8%

Provisions start to decline, to record CAGR (2010-14e) of -20.5%

Fair value downgraded, but attractive stock returns at current levels

Profitability to recover in 2011 Samba’s net income decline of 7.2% YoY in 1Q11 was in contrast to our expectation of 3.4% increase during the quarter (falling short of our estimates by 11.5%). The difference arose mainly because of weaker than forecasted NII performance. However, we still believe there is a good chance of revival in near future. Global Research expects NII to start improving, which coupled with provisions decline could lead to net income increase of 5.1% YoY in 2011 and CAGR (2010-14e) of 16.8%.

NII pressure to see relief Although the bank’s NII decreased by 8.7% YoY in 1Q11, the rise of 1.4% QoQ seems to have begun the upward trend. We expect revival of lending activity to support core-income performance and estimate NII to record an increase of 5.3% YoY in 2011. We expect the bank’s spreads to witness a marked increase from 2013, and could reach 3.8% by 2014. The non-commission income is expected to decline by 4.7% YoY in 2011, as we do not forecast the net gains on non-trading investments to be sustained at the current high levels.

Credit quality deterioration not a major threat A healthy NPL coverage currently at 118% provides the bank with adequate cushion against any possible asset quality deterioration. We expect the NPL coverage ratio to increase further in the coming years and could reach up to 136.6% by 2014. Although we project the rise in NPLs to slowdown to 5.0% YoY in 2011, the increase in lending activity is projected to lead to a decrease in NPL ratio from the high of 3.9% to 3.7% in 2011. We expect NPL ratio to continue improving in the future, reaching 2.6% by 2014. The bank continued to maintain a healthy capital adequacy ratio that currently stands at 18.9%.

Asset growth to pick up gradually The bank’s total assets, after recording an increase of 1.9% QoQ and 2.7% YoY in 1Q11, are expected to increase by 5.5% YoY in 2011. The customer deposits and loan portfolio, having risen by 0.7% & 1.3%, respectively, in 1Q11, are expected to pick up during the year. Samba with loan to deposit ratios at 63% (one of the lowest in the industry), has ample room for expanding its lending activity. Global Research expects assets, loan and deposits to record CAGR (2010-14e) of 7.0%, 13.6% & 8.0%, respectively.


2010 2011e 2012e 2013e 2014e

Net Profit Growth -2.7% 5.1% 14.8% 29.6% 18.8%

NII Growth -10.5% 5.3% 10.3% 23.3% 16.9%

Loan Growth -4.6% 8.8% 13.9% 19.0% 13.0%

Deposits Growth -9.3% 5.9% 10.2% 9.9% 5.8%

Adjusted EPS (SAR) 4.9 5.2 5.9 7.7 9.2


ROAE 19.0% 17.5% 17.8% 20.3% 21.0%

Dividend Yield 2.9% 3.7% 4.2% 5.2% 6.1%

P/E Ratio (x)* 12.4 9.8 8.5 6.6 5.5


Mohammad Ali Shah


BUY

Target Price

SAR57.6


July 2011 25

Samba Financial Group -Financial Update & Outlook

1Q11 Result Summary

(SAR mn) 1Q10 4Q10 1Q11 QoQ YoY

Income Statement

Net Interest Income 1,171 1,054 1,069 1.4% -8.7%

Fees & Commission Income 319 294 361 23.0% 13.3%

Operating Income 1,841 1,559 1,701 9.1% -7.6%

Provision Expense (160) (183) (93) -49.3% -42.1%

Net Profit 1,211 901 1,123 24.7% -7.2%

Balance Sheet

Net Loans 85,197 80,251 81,320 1.3% -4.6%

Deposits 137,247 133,463 134,454 0.7% -2.0%

Assets 185,885 187,416 190,900 1.9% 2.7% Source: Company reports, Tadawul & Global Research

Although the bank’s net income decreased by 7.2% YoY in 1Q11, it recorded an increase of 24.7% QoQ in 1Q11. Lackluster core-income performance in 1Q11 could not be revived, even by the significant reduction in provisions expense by 42.1% YoY and 49.3% QoQ in 1Q11. The improvement in banks’ lending and consolidation of provisions at lower levels will usher positive results on the financial performance. Global Research expects NII to start improving, which coupled with reduction in provisions during the year could lead to net income posting an increase of 5.1% YoY in 2011. Over the medium term, Global Research forecasts the provisions and net income to record CAGR (2010-14e) of -20.5% and 16.8%, respectively.

NII to grow amidst better control over cost of funds

During 1Q11, the bank’s efforts to significantly reduce its special commission expense did succeed (reducing by around 25% both in QoQ & YoY basis), but were not adequate to overcome the pressure from top-line. Samba’s loan to deposit ratio at around 63.0% (significantly below regulatory limit of 85%) offers ample room for lending growth opportunities. We expect this ratio to range between 64% to 77% (2010-14e). Global Research expects NII to increase by 5.3% YoY in 2011 and post CAGR (2010-14e) of 13.8%. Overall, we project operating income to grow by 1.8% YoY in 2011 and post CAGR (2010-14e) of 12.4%.

Bank’s spreads to show marked increase in 2013

The bank’s spreads currently at 3.2% are expected to witness a slight upward blip (of 2bps) in 2012 before recording a clear rise from 2013 onwards. Although we do not forecast an increase in interest rates before 2013, the rates could marginally firm up based on improved lending activity in the market (esp. considering the Saudi government’s initiatives to go on with infrastructure development projects). Global Research expects Samba’s spreads to rise to 3.6% in 2013 and could reach up to 3.8% by 2014.

NPL coverage to continue rising

Samba maintains adequate NPL coverage currently at 118%. A healthy NPL coverage ratio provides the bank with sufficient cushion against any possible asset quality deterioration. We expect NPLs to grow at an average (2010-14e) of 2.7%, which coupled with necessary provisioning is expected to enhance NPL coverage. Global research forecasts NPL coverage to reach up to 137% by 2014. We also expect the provision to NII to drop (from 12.3%) to 7.5% in 2011. Our projections for slowdown in NPL formation, accompanied by loan growth (8.8% YoY in 2011), are expected to lead to improved NPL ratio of 3.7% in 2011.

Valuation update Based on the bank’s latest financial information, we have adjusted our forward estimates. Relatively lower than expected financial performance has led us to revise our financial estimates, resulting in decline in net income forecast for 2011.


Gross loans 96,307 91,388 -5.1%

Deposits 143,664 141,321 -1.6%

Net interest income 5,309 4,776 -10.0%

Operating income 7,031 7,028 0.0%

Provisions (418) (359) -14.2%


Global Research has revised its fair value downward from SAR63.1 to SAR57.6 per share, which still offers an upside of 13.5% over the current market price of SAR50.8 (as on 02 July, 2011). However, at the current price levels (with decline in share price by 17.1% since our last update in January 2011), we have upgraded our equity rating on the stock to BUY.


July 2011 26

SAMBA –Chart Gallery Profitability Return Ratios

-5.0%

0.0%

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2009 2010 2011e 2012e 2013e 2014e

(SAR mn)

Net interest income Net income Net income gorwth

1.0%

1.5%

2.0%

2.5%

3.0%

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2009 2010 2011e 2012e 2013e 2014e



-40%

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2009 2010 2011e 2012e 2013e 2014e

Prov./Net interest inc. (LHS) Prov./Net income (LHS)

Prov. growth (RHS)

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

105.0%

110.0%

115.0%

120.0%

125.0%

130.0%

135.0%

140.0%

2009 2010 2011e 2012e 2013e 2014e

NPL coverage (LHS) NPL /Gross loan (RHS)

Banking Spreads Loan and Deposit Base

2.9%

3.0%

3.1%

3.2%

3.3%

3.4%

3.5%

3.6%

3.7%

3.8%

3.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2009 2010 2011e 2012e 2013e 2014e


-20.0%

-10.0%

0.0%

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80.0%

90.0%

0

20

40

60

80

100

120

140

160

180

200

2009 2010 2011e 2012e 2013e 2014e

(SAR bn)

Loan Deposits Loan growth

Deposit growth LTD Source: Company reports & Global Research


July 2011 27


Interest/Financing Income 8,426 6,351 5,195 5,557 6,064 7,664 9,218

Interest Expense/Payment to Depositors (3,365) (1,282) (658) (781) (794) (1,165) (1,618)

Net Interest/Financing Income 5,061 5,070 4,536 4,776 5,270 6,499 7,600


Investment Income (122) 461 690 470 557 778 892

Other Income 449 369 416 424 465 523 579

Total Non-Interest/Financing Income 1,951 2,040 2,364 2,252 2,503 3,004 3,413


Provisions expense (458) (605) (559) (359) (272) (197) (223)



Taxation & Minority Interest 11 7 3 - - - -


Cash Balances 13,800 35,847 32,581 31,173 26,752 24,260 20,592

Deposits with Banks & FIs 878 3,499 2,491 2,827 3,223 3,577 3,863


Gross Loans & Financings 101,220 87,522 83,958 91,388 103,780 122,913 138,527

Loan Loss Reserve (3,073) (3,376) (3,707) (4,066) (4,338) (4,535) (4,758)

Net Loans & Financings 98,147 84,147 80,251 87,322 99,442 118,377 133,768

Investment in Associates 6 9 - - - - -


Net Fixed Assets 870 896 970 1,071 1,288 1,626 1,809

Other Assets 10,977 6,154 6,240 6,353 6,988 8,246 9,482

Total Assets 178,891 185,518 187,416 197,646 210,317 229,366 245,818



Other Borrowings 1,873 1,874 1,875 - - - -


Paid-up Capital 9,000 9,000 9,000 9,000 9,000 9,000 9,000

Retained Earnings 4,332 6,214 8,328 11,334 14,787 19,401 24,882

Other Reserves 6,514 7,096 8,102 7,889 7,880 7,866 7,846


Minority Interest 216 192 173 173 173 173 173




Net Interest Income/Operating Income 72.2% 71.3% 65.7% 68.0% 67.8% 68.4% 69.0%


Interest Earning/Financing Assets Yield 5.9% 4.4% 3.7% 3.7% 3.8% 4.3% 4.7%

Cost of Funds 2.4% 0.8% 0.4% 0.5% 0.5% 0.7% 0.9%

Net Spread 3.5% 3.5% 3.2% 3.2% 3.3% 3.6% 3.8%



Net Loans to Customer Deposits 75.4% 59.5% 62.9% 64.7% 66.6% 71.8% 76.4%

Non Performing Loans 1,840 2,907 3,139 3,295 3,354 3,406 3,484

Loan Loss Reserve 3,073 3,376 3,707 4,066 4,338 4,535 4,758

NPLs to Gross Loans 1.9% 3.4% 3.9% 3.7% 3.3% 2.9% 2.6%

NPL Coverage 167.0% 116.1% 118.1% 123.4% 129.3% 133.2% 136.6%

Cost of Risk (bps) 49.6 64.1 65.2 40.9 27.9 17.4 17.1

Equity to Gross Loans 19.8% 25.7% 30.5% 31.1% 30.7% 29.6% 30.2%



Adjusted EPS (SAR) 4.9 5.1 4.9 5.2 5.9 7.7 9.2


Market Price (SAR) * 51.3 50.5 61.3 50.8 50.8 50.8 50.8

Dividend Yield 3.5% 3.5% 2.9% 3.7% 4.2% 5.2% 6.1%

P/E Ratio (x) 10.4 10.0 12.4 9.8 8.5 6.6 5.5

P/BV Ratio (x) 2.4 2.1 2.2 1.6 1.4 1.3 1.1

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* Market price for 2011 and subsequent years as per closing prices on TASI on 02 July, 2011


Riyad Bank

July 2011 28

Market Data

Bloomberg Code: RIBL AB


CMP (02 July 2011): SAR24.0

O/S (mn) 1,500.0



P/E 2011e (x): 11.6

P/BV 2011e (x): 1.2


High (SAR): 31.2

Low (SAR): 21.1


1m 3m 12m

Absolute (%) -4.4 -9.4 -13.4

Relative (%) -3.1 -9.9 -21.5


18

20

22

24

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30

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2,000

4,000

6,000

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Jun

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Jul-

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Jan

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Feb-1

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Mar-

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May-1

1

Jun

-11

Volume (000) RIBL (SAR)

Profitability projected to increase by 9.8% in 2011

Healthy NPL coverage eases off credit quality concerns

Asset growth to pick up, posting CAGR (2010-14e) of 8.3%


Provisions pressure expected to reduce RIBL’s net income posted an increase of 8.3% YoY in 1Q11 as the provisions dropped by 17.3% YoY. The quarterly results turned out to be 3.1% higher than our estimates, as the provisions dropped more than our expectations. Global Research believes that the severity of asset quality deterioration is already behind them. Thus, the decrease in provisions by 9.2% YoY, coupled with improved operating performance, could result in increase in net income by 9.8% YoY in 2011. We also expect net income to record CAGR (2010-14e) of 20.6%.

Bank’s spreads to show noticeable rise in 2013 The bank’s spreads are expected to continue hovering around 2.8% in 2011. With our expectations for increase in interest rates in 2013, we expect the spreads to witness an increase of around 27bps (from current level) reaching 3.1% in 2013. We expect the spreads to increase up to 3.3% by 2014. Our expected steady increase in loan activity (as the year progresses) is estimated to lead to net interest income (NII) increase of 3.8% YoY in 2011. Also supported by non-commission income, overall we forecast the operating income to record an increase of 5.8% YoY in 2011.

NPL coverage remains strong RIBL currently maintains comfortable credit cushion at 126.2%, even though the NPL coverage dropped as compared to the prior year. We expect NPL coverage to strengthen in the coming years reaching 160.4% by 2014. Our expectations of NPLs growth at an average (2010-14e) of 11.1%, coupled with expansion in lending activities is expected to consolidate NPL ratio at around 1.6% by 2014. Global Research expects provisioning expense to follow downhill path over the medium term and could record CAGR (2010-14e) of -20.9%.

Asset base expansion to pick up gradually The total assets after witnessing an increase of 3.7% YoY and 4.1% QoQ in 1Q11 are expected to record full year growth of 7.2% YoY in 2011. RIBL’s current loan to deposit ratio at 83.5% is expected to remain within the range of 85% till 2014. Global Research expects loans & deposits to grow by 11.4% & 12.0%, respectively, in 2011. Investment Indicators

2010 2011e 2012e 2013e 2014e


NII Growth -4.7% 3.8% 12.0% 20.6% 18.4%

Loan Growth -0.5% 11.4% 10.1% 11.4% 11.4%

Deposits Growth 1.3% 12.0% 10.5% 11.5% 10.0%

Adjusted EPS (SAR) 1.9 2.1 2.5 3.2 4.0


ROAE 10.2% 10.9% 12.8% 15.8% 18.4%

Dividend Yield 4.9% 5.9% 7.2% 9.3% 11.4%

P/E Ratio (x)* 14.1 11.6 9.5 7.4 6.0


Mohammad Ali Shah


BUY

Target Price

SAR27.1


July 2011 29

Riyad Bank -Financial Update & Outlook

1Q11 Result Summary


Income Statement

Net Interest Income 1,012 1,042 984 -5.6% -2.8%


Operating Income 1,469 1,486 1,527 2.8% 3.9%

Provision Expense (194) (160) (160) 0.1% -17.3%

Net Profit 685 764 741 -2.9% 8.3%

Balance Sheet

Net Loans 106,277 106,035 109,362 3.1% 2.9%

Deposits 128,105 126,945 133,140 4.9% 3.9%


RIBL’s net income posted an increase of 8.3% YoY in 1Q11 as the provisions decreased by 17.3% YoY and operating income expanded during the period. Global Research believes that the severity of asset quality deterioration has already passed and does not pose a threat for near future. We expect provisioning expense to decline by 9.2% YoY in 2011 and record CAGR (201-14e) of -20.9%. The reduction in provisions coupled with improved operating performance will facilitate higher profitability growth. Global Research expects net income to increase by 9.8% YoY in 2011 and record CAGR (2010-14e) of 20.6%. Overall, over the medium term, we expect assets, loans and deposits to record CAGR (2010-14e) of 8.3%, 11.1%, and 11.0%, respectively.

NII to improve from hereon Although the bank was able to reduce its special commission expense at a relatively higher rate as compared to drop in special commission income during 1Q11, it was not enough to post NII growth. The bank’s NII recorded a decline of 2.8% YoY in 1Q11. Global Research expects NII to increase by 3.8% YoY in 2011 and post CAGR (2010-14e) of 13.5%. The bank spreads, currently at 2.8% are expected to stay around these levels in 2011. Although we do not forecast interest rates to increase before 2013, the bank’s spreads may increase by around 3bps in 2012 (as enhanced lending activity could firm up lending rates). As per our forecast the bank’s spreads picking up pace from 2013, could reach 3.3% by 2014. We expect the non-commission income to continue supporting core-income results, therefore leading to operating income increase of 5.8% YoY in 2011 and CAGR (2010-14e) of 13.8%.

NPL coverage remains strong Although the bank’s NPL coverage dropped to 126.1% during the past year, it provides adequate credit cushion against NPLs portfolio. The increase in NPLs also led to increase (by 52bps) in NPL ratio to 1.7% during the past year. We do not forecast any significant change in NPL ratio over the medium term and expect it to consolidate at around 1.6% by 2014. However, Global Research expects the increase in NPLs to be adequately matched by the rise in balance sheet provisions, resulting in NPL coverage to reach 160.4% by 2014. We also expect the provision to NII (20.5%) and provisions to net income (30.1%) to drop to 18.0% & 24.9%, respectively, during 2011. The bank currently maintains healthy capital adequacy ratio of 18.2%.

Valuation update Based on the bank’s latest financial information, we have adjusted our forward estimates. Relatively higher than expected financial performance has led us to revise our financial estimates, resulting in marginal increase in net income forecast for 2011.


Gross loans 113,468 121,136 6.8%

Deposits 135,197 142,179 5.2%


Operating income 6,339 6,330 -0.1%

Provisions (818) (772) -5.6%

Net income 3,062 3,100 1.3% Source: Global Research

Global Research has revised its fair value downward from SAR28.7 to SAR27.1 per share, which still offers an upside of 13.0% over the current market price of SAR24.0 (as on 02 July, 2011). However, at the current price levels (with a decline in share price by 5.9% since our last update in Feb 2011), our equity rating remains unchanged and we reiterate our BUY recommendation on

the stock.


July 2011 30

RIBL –Chart Gallery Profitability Return Ratios

-10.0%

-5.0%

0.0%

5.0%

10.0%

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8,000

2009 2010 2011e 2012e 2013e 2014e

(SAR mn)

Net interest income Net income

Net income gorwth

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

0.0%

2.0%

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6.0%

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10.0%

12.0%

14.0%

16.0%

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2009 2010 2011e 2012e 2013e 2014e



-40%

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2009 2010 2011e 2012e 2013e 2014e


Prov. growth (RHS)

1.0%

1.1%

1.2%

1.3%

1.4%

1.5%

1.6%

1.7%

1.8%

1.9%

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120.0%

140.0%

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180.0%

2009 2010 2011e 2012e 2013e 2014e



2.5%

2.6%

2.7%

2.8%

2.9%

3.0%

3.1%

3.2%

3.3%

3.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2009 2010 2011e 2012e 2013e 2014e


0.0%

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40.0%

50.0%

60.0%

70.0%

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100.0%

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50

100

150

200

250

2009 2010 2011e 2012e 2013e 2014e

(SAR bn)




July 2011 31



Interest Expense/Payment to Depositors (2,790) (1,467) (731) (779) (1,011) (1,411) (1,974)



Investment Income (230) (25) 124 86 92 103 109

Other Income 344 415 297 292 317 350 384








Cash Balances 11,078 23,419 23,179 21,512 19,369 18,143 16,665








Net Fixed Assets 1,630 1,830 1,863 1,969 2,296 2,729 3,117

Other Assets 3,928 3,623 3,969 4,048 4,372 4,788 5,027

Total Assets 159,653 176,399 173,556 186,046 200,130 218,911 238,435



Other Borrowings 1,874 1,873 1,874 - - - -


Paid-up Capital 15,000 15,000 15,000 15,000 15,000 15,000 15,000

Retained Earnings 275 513 611 735 886 1,081 2,515

Other Reserves 10,415 12,722 13,623 13,236 14,219 15,478 15,807









Cost of Funds 2.4% 1.1% 0.5% 0.5% 0.6% 0.8% 1.0%

Net Spread 3.2% 3.0% 2.8% 2.8% 2.9% 3.1% 3.3%




Non Performing Loans 1,270 1,254 1,813 2,240 2,337 2,576 2,734



NPL Coverage 131.9% 140.9% 126.2% 136.6% 155.3% 157.3% 160.4%

Cost of Risk (bps) 62.7 71.4 78.5 67.3 44.7 30.0 21.1




Adjusted EPS (SAR) 1.8 2.0 1.9 2.1 2.5 3.2 4.0


Market Price (SAR) * 21.2 26.9 26.6 24.0 24.0 24.0 24.0

Dividend Yield 6.6% 4.9% 4.9% 5.9% 7.2% 9.3% 11.4%

P/E Ratio (x) 12.1 13.3 14.1 11.6 9.5 7.4 6.0

P/BV Ratio (x) 1.3 1.5 1.4 1.2 1.2 1.1 1.1

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Banque Saudi Fransi

July 2011 32

Market Data

Bloomberg Code: BSFR AB


CMP (02 July 2011): SAR44.2

O/S (mn) 723.2



P/E 2011e (x): 10.3

P/BV 2011e (x): 1.7


High (SAR): 50.0

Low (SAR): 35.6


1m 3m 12m

Absolute (%) -3.1 -10.2 2.3

Relative (%) -1.9 -10.6 -6.9


25

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35

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55

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100

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300

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700

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Jun

-10

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Dec-1

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Feb-1

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Mar-

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Ap

r-11

Jun

-11

Volume (000) BSF (SAR)

Net income to rise 10.6% in 2011, provisions seem under control

Provisions expected to post CAGR (2010-14e) of -25.5%

Credit quality remains healthy, NPL coverage at 147%

Fair value and recommendation upgraded

Profitability to continue on the growth path BSF recorded a marginal increase in net income by 1.1% YoY and 0.4% QoQ in 1Q11. The results were lower by 4.5% from our estimates, as the bank’s operating income did not perform as per our expectations. We expect the bank’s NII growth, accompanied by reduced provisions to support the annual profitability results during the year. Provisions are expected to decline by 29.7% YoY in 2011, having fallen 58.8% YoY in 1Q11. Global Research believes that BSF’s robust NII & non-commission income generation capability, coupled with supportive credit quality could lead to net income growth of 10.6% YoY in 2011 and CAGR (2010-14e) of 19.4%.

NII keeps rising, while bank’s spreads to increase in 2013 Having posted a rise of 4.8% YoY in 1Q11, we expect the bank’s NII to record an increase of 6.9% YoY in 2011 and CAGR (2010-14e) of 15.1%. In addition to our expectations of loan growth at an average (2010-14e) of 10.1%, we expect the balance between yield on earning assets and cost of funds to result in NII growth over the coming years. Global Research expects the bank’s spreads to remain around 3.0% till 2012, after which in consonance with our forecast of interest rates rise in 2013, we project the bank’s spreads to escalate reaching 3.6% by 2014.

Non-commission income offers valuable support The bank’s non-commission income (led by fees & commission income) is believed to continue providing vital support to the overall performance. The non-commission income that grew by 12.6% YoY in 1Q11 is estimated to increase by 7.9% YoY in 2011 and record CAGR (2010-14e) of 12.8%.

Healthy NPL coverage maintained BSF maintains comfortable credit cushion with NPL coverage rising to 147.0% during the past year. We expect the NPL coverage to increase further up to 161.5% by 2014, as any increase in NPLs is believed to be adequately matched by increase in balance sheet provisions. The bank’s bad debts write off that declined during the past year stood at around 0.5% of gross loans. We expect NPL formation at an average (2010-14e) of 7.1%, which coupled with rising loan portfolio is expected to result in NPL ratio stabilizing around 1.1% by 2014. Overall, we expect the bank’s total assets after posting rise of 2.7% YoY in 1Q11 could record increase of 7.9% YoY in 2011. Investment Indicators

2010 2011e 2012e 2013e 2014e


NII Growth 0.5% 6.9% 11.1% 22.3% 20.7%

Loan Growth 3.4% 10.2% 9.6% 11.8% 8.8%

Deposits Growth 2.5% 11.2% 9.0% 12.0% 9.0%

Adjusted EPS (SAR) 3.9 4.3 5.0 6.4 7.9


ROAE 17.7% 17.3% 18.0% 20.2% 21.5%

Dividend Yield 2.7% 3.3% 3.6% 3.9% 4.3%

P/E Ratio (x)* 11.5 10.3 8.9 6.9 5.6


Mohammad Ali Shah


BUY

Target Price

SAR49.2


July 2011 33

Banque Saudi Fransi -Financial Update & Outlook

1Q11 Result Summary


Income Statement

Net Interest Income 723 789 757 -4.0% 4.8%




Net Profit 714 709 717 1.1% 0.4%

Balance Sheet

Net Loans 79,578 80,977 83,944 3.7% 5.5%

Deposits 87,709 93,529 96,032 2.7% 9.5%


BSF’s first quarter results in 2011 indicate a growth trend. Although the bank posted marginal profitability rise in 1Q11, net income rose by 1.1% YoY & 0.4% QoQ in 1Q11. The reduction in provisions by 58.8% YoY & 52.3% QoQ in 1Q11, reaffirms our expectation of provisions decline of 29.7% YoY in 2011. We project BSF’s robust core and non-core income generation capability, along with supportive credit quality, would lead to net income rise of 10.6% YoY in 2011. Global Research expects provisions and net income to record CAGR (2010-14e) of -25.5% & 19.4%, respectively. We expect the bank’s balance sheet footing to strengthen over the coming years. Overall, we expect assets, loans, and deposits to record CAGR (2010-14e) of 9.5%, 10.1%, and 10.3%, respectively.

Net interest income growth expected to pick up pace The bank after posting an increase of 4.8% YoY in 1Q11 is projected to record NII growth of 6.9% YoY in 2011. An increase in special commission income by 5.2% YoY in 1Q11 indicates the bank’s ability to manage its income generation capability even in the low interest rate environment. Global Research expects the NII to record CAGR (2010-2014e) of 15.1%. We also project the bank’s spreads to continue hovering around 3.0% till 2012. However, we expect the spreads to start rising from 2013 and could reach up to 3.6% by 2014. Non-commission income to rise further The bank’s non-commission (dominated by fees & commission income constituting 67% of the total) after recording an increase of 12.6% YoY in 1Q11 is expected to record an increase of 7.9% YoY in 2011. We expect the fees and commission income (rise of 20.5% YoY in 1Q11) to continue growing and is projected to increase by 10.0% YoY in 2011. Global Research also expects the overall non-commission income and operating income to record CAGR (2010-14e) of 12.8% and 14.4%, respectively.

Healthy NPL coverage maintained BSF maintains comfortable credit cushion with NPL coverage currently at 147.0%, which we expect to increase to 161.5% by 2014. The NPL ratio currently at 1.2% is expected to stay at current level for a couple of years and could consolidate around 1.1% by 2014. BSF’s capital adequacy position improved over the year, currently at 14.7%.

Valuation update Based on the bank’s latest financial information, we have adjusted our forward estimates. Relatively lower than expected financial performance has led us to revise our financial estimates, resulting in marginal decrease in net income forecast for 2011.


Gross loans 88,287 91,004 3.1%

Deposits 101,479 104,005 2.5%


Operating income 4,734.0 4,712 -0.5%

Provisions (260) (239) -8.3%


Global Research has revised its fair value upward from SAR48.2 to SAR49.2 per share, which still offers an upside of 11.4% over the current market price of SAR44.2 (as on 02 July, 2011). However, at the current price levels (with a decline in share price by 5.4% since our last update in Feb 2011), we have upgraded our equity rating on the stock to BUY.


July 2011 34

BSF –Chart Gallery Profitability Return Ratios

-15.0%

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Net income gorwth

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-60%

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2009 2010 2011e 2012e 2013e 2014e


Prov. growth (RHS)

1.0%

1.1%

1.1%

1.2%

1.2%

1.3%

1.3%

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180.0%

2009 2010 2011e 2012e 2013e 2014e



0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

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0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2009 2010 2011e 2012e 2013e 2014e


-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0

20

40

60

80

100

120

140

160

2009 2010 2011e 2012e 2013e 2014e

(SAR bn)




July 2011 35



Interest Expense/Payment to Depositors (2,478) (1,039) (471) (496) (607) (937) (1,271)


Fee & Commission Income 834 840 887 976 1,093 1,290 1,496

Investment Income 446 208 222 220 240 276 319

Other Income 291 196 221 239 264 300 335






Taxation & Minority Interest 12 (27) 4 4 6 9 11


Cash Balances 5,773 12,631 10,864 10,304 9,969 10,111 10,841




Loan Loss Reserve (848) (1,276) (1,493) (1,731) (1,922) (2,049) (2,154)


Investment in Associates 177 144 186 193 216 251 286


Net Fixed Assets 591 606 586 592 644 750 844

Other Assets 6,502 4,284 5,573 4,737 5,685 6,253 6,879

Total Assets 125,865 120,572 123,218 132,979 145,281 162,085 177,409



Other Borrowings 4,927 4,946 4,894 4,894 4,894 4,431 3,920


Paid-up Capital 5,625 7,232 7,232 7,232 7,232 7,232 7,232

Retained Earnings 6 869 1,878 2,869 4,649 7,788 11,831

Other Reserves 8,416 7,632 8,894 8,731 9,296 9,388 9,502









Cost of Funds 2.6% 1.0% 0.5% 0.5% 0.5% 0.7% 0.9%

Net Spread 2.9% 2.9% 3.0% 3.0% 3.0% 3.3% 3.6%




Non Performing Loans 764 1,008 1,016 1,128 1,237 1,282 1,334

Loan Loss Reserve 848 1,276 1,493 1,731 1,922 2,049 2,154


NPL Coverage 111.0% 126.6% 147.0% 153.4% 155.4% 159.8% 161.5%

Cost of Risk (bps) 70.8 79.6 41.9 27.5 20.0 12.0 9.0




Adjusted EPS (SAR) 3.9 3.4 3.9 4.3 5.0 6.4 7.9


Market Price (SAR) * 35.1 40.7 44.7 44.2 44.2 44.2 44.2

Dividend Yield 2.8% 2.5% 2.7% 3.3% 3.6% 3.9% 4.3%

P/E Ratio (x) 9.1 11.9 11.5 10.3 8.9 6.9 5.6

P/BV Ratio (x) 1.9 2.0 1.9 1.7 1.5 1.3 1.1

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The Saudi British Bank

July 2011 36

Market Data

Bloomberg Code: SABB AB


CMP (02 July 2011): SAR41.9

O/S (mn) 750.0



P/E 2011e (x): 13.0

P/BV 2011e (x): 1.9


High (SAR): 47.4

Low (SAR): 33.9


1m 3m 12m

Absolute (%) -5.0 -7.9 -0.2

Relative (%) -3.7 -8.4 -9.4


25

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35

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Jan

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Feb-1

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Mar-

11

May-1

1

Jun

-11

Volume (000) SABB (SAR)

Profitability to bottom out, est. rise of 28.1% in 2011

NII under pressure, expected to improve at CAGR (2010-14e) 15.3%

Provisions forecasted to reduce by 31.8% in 2011

Fair value upgraded, recommendation maintained

Subdued profitability to improve this year SABB net income recording an increase of 21.0% YoY and 89.5% QoQ in 1Q11 is projected to record an increase of 28.1% YoY in 2011. The 1Q11 results were higher by 7.1% from our estimates, as the bank’s provision expense dropped more than our expectations. A significant decline in provisions by 61.9% YoY in Q11 was also the main driver for the profitability growth. Global Research believes that the reduction in provisions by 31.8% YoY in 2011 will be the main facilitator leading to net income increase of 28.1% YoY in 2011.

NII expected to bottom out at current levels Although the bank’s NII recorded a decrease of 5.8% YoY in 1Q11, we are confident that the ongoing efforts in better managing its cost of funds (special commission expense dropped by 14.5% YoY in 1Q11) would support the NII growth. Our expectation of loan growth by 9.3% YoY in 2011, coupled with cost of funds control would lead to NII increase of 6.7% YoY in 2011. The customer deposits that are expected to increase by 8.5% YoY in 2011 are projected to continue following the trend of enhancing the proportion of demand deposits. We expect the bank’s spreads to remain at current levels of around 3.0% till 2012, which could start increasing from 2013 reaching 3.4% by 2014.

Non-commission income to start growing again The non-commission income having witnessed a decline in the past year, recorded an increase of 14.8% YoY in 1Q11. Although not too large, we expect the non-commission income to record an increase of 1.9% YoY in 2011. The growth trend is also expected to continue for the coming years.

Credit cushion enhancement is a valuable buffer The bank really pulled up its NPL coverage ratio (from 50%) to reach current levels of 100.0%. We expect the NPL coverage ratio to continue building up, reaching up to 135% by 2014. The current NPL ratio at 3.4% is expected to stabilize here for a couple of years and is expected to improve to around 3.1% by 2014. The bank’s capital adequacy ratio also increased over the last year, presently at 14.2%. Overall we expect the bank’s total assets to grow by 6.7% YoY in 2011.


2010 2011e 2012e 2013e 2014e


NII Growth -5.6% 6.7% 12.5% 21.3% 21.3%

Loan Growth -1.7% 10.1% 12.1% 17.5% 11.7%

Deposits Growth 6.2% 8.5% 10.0% 16.8% 11.0%

Adjusted EPS (SAR) 2.5 3.2 3.8 5.1 6.5


ROAE 13.6% 15.6% 16.6% 19.4% 21.2%

Dividend Yield 1.8% 2.1% 2.4% 2.9% 3.7%

P/E Ratio (x)* 16.1 13.0 10.9 8.2 6.4

P/BV Ratio (x)* 2.1 1.9 1.7 1.5 1.3 Source: Company reports & Global Research * Market price for 2011 and subsequent years as per closing prices on TASI on 02 July 2011

Mohammad Ali Shah


HOLD

Target Price

SAR40.5


July 2011 37

The Saudi British Bank -Financial Update & Outlook

1Q11 Result Summary


Income Statement

Net Interest Income 770 730 726 -0.6% -5.8%




Net Profit 621 397 751 89.5% 21.0%

Balance Sheet

Net Loans 75,699 74,248 76,242 2.7% 0.7%

Deposits 93,364 100,149 102,463 2.3% 9.7%


SABB’s net income result after posting significant rise of 21.0% YoY and 89.5% QoQ in 1Q11 is projected to record considerable growth during the current year. This steep increase in net income was mainly driven by provisions being scaled down from historically high levels seen in 2009 & 2010. Provision expense witnessed significant decline of 61.9% YoY (from SAR176.4mn in 1Q10 to SAR67.2mn in 1Q11) and 71.8% QoQ in 1Q11, and was the leading factor in profitability growth. We expect current year’s profitability performance to be driven by the reduction in provisions. Global Research expects the provisions to decline by 31.8% YoY in 2011 and the bank’s net income to record an increase of 28.1% YoY in 2011. Over the medium term, we forecast provisions and net income to post CAGR (2010-14e) of -21.8% and 27.0%, respectively.

NII to grow amidst rise in loan volumes

The bank’s continuing focus to manage its cost of funds led to decrease in special commission expense by 22.4% QoQ and 14.5% YoY in 1Q11. Although the bank was able to maintain NII (in 1Q11) at somewhat similar levels as recorded in 4Q10, on annual basis it dropped by 5.8% YoY in 1Q11. We are confident in the bank’s ability to manage its cost of funds, which coupled with loan growth would lead to NII increase of 9.3% YoY in 2011. Global Research expects NII and loan growth to record CAGR (2010-14e) of 15.3% and 12.6%, respectively. We also project the bank’s spread to remain at current levels of around 3.0% till 2012, and (with our forecast of increase in interest rate in 2013) could start increasing from 2013 reaching 3.4% by 2014. The improved core-income performance, coupled with projected rise in non-commission income, is expected to result in operating income growth of 5.2% YoY in 2011.

NPL coverage to continue strengthening

The bank’s successful build up of NPL coverage (from 50.3%) reached the current level of 100.0%. We expect NPL to grow at average (2010-14e) of around 10.0% and balance sheet provisions to increase by 19.0% for the period, thus resulting in strengthening of NPL coverage to reach up to 135.0% by 2014. Global Research expects NPL ratio to stabilize around 3.1% by 2014. We expect the highs of provision to NII at 38.3% and provision to net income at 66.0% to drop to 24.5% and 35.1%, respectively, in 2011. The bank’s capital adequacy ratio improved during the past year reaching 14.2% at present.

Valuation update Based on the bank’s latest financial information, we have adjusted our forward estimates. Relatively higher than expected financial performance has led us to revise our financial estimates, resulting in an increase in net income forecast for 2011.


Gross loans 81,286 84,641 4.1%

Deposits 100,353 102,720 2.4%

Net interest income 3,404 3,462 1.7%


Provisions (901) (848) -5.9%

Net income 2,268 2,412 6.4% Source: Global Research

Global Research has revised its fair value upward from SAR38.3 to SAR40.5 per share, which at the current market price of SAR41.9 (as on 02 July, 2011) is trading at the premium of 3.3% to our fair value. However, at the current price levels (with a rise in share price by 5.3% since our last update in Mar 2011), our equity rating remains unchanged and we reiterate our HOLD

recommendation on the stock.


July 2011 38

SABB –Chart Gallery Profitability Return Ratios

-40.0%

-30.0%

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0.0%

10.0%

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2009 2010 2011e 2012e 2013e 2014e

(SAR mn)


Net income gorwth

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

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15.0%

20.0%

25.0%

2009 2010 2011e 2012e 2013e 2014e



-100%

-50%

0%

50%

100%

150%

200%

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10%

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30%

40%

50%

60%

70%

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2009 2010 2011e 2012e 2013e 2014e


Prov. growth (RHS)

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

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2009 2010 2011e 2012e 2013e 2014e



2.7%

2.8%

2.9%

3.0%

3.1%

3.2%

3.3%

3.4%

3.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

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2009 2010 2011e 2012e 2013e 2014e


-20.0%

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60.0%

80.0%

100.0%

0

20

40

60

80

100

120

140

160

2009 2010 2011e 2012e 2013e 2014e

(SAR bn)


Deposit growth LTD



July 2011 39



Interest Expense/Payment to Depositors (2,658) (1,137) (482) (536) (626) (951) (1,443)




Other Income 141 160 153 153 166 184 203



Provisions expense (458) (1,496) (1,243) (848) (718) (568) (460)



Taxation & Minority Interest 108 46 41 45 58 72 91


Cash Balances 11,328 16,615 15,144 13,954 12,258 12,155 12,195








Net Fixed Assets 561 594 559 607 685 779 932

Other Assets 3,581 3,245 3,185 3,249 3,347 3,547 3,796

Total Assets 131,661 126,838 125,373 133,739 146,108 166,173 182,991





Paid-up Capital 6,000 7,500 7,500 7,500 7,500 7,500 7,500

Retained Earnings 1,331 695 1,545 2,654 4,006 6,195 9,870

Other Reserves 4,303 4,851 6,127 6,126 6,857 7,556 7,563









Cost of Funds 2.7% 1.0% 0.5% 0.5% 0.5% 0.7% 1.0%

Net Spread 3.3% 3.1% 3.0% 3.0% 3.0% 3.2% 3.4%







NPL Coverage 325.0% 50.3% 100.0% 118.9% 128.4% 131.4% 134.9%

Cost of Risk (bps) 63.9 188.2 160.4 105.0 80.0 55.0 39.0




Adjusted EPS (SAR) 3.9 2.7 2.5 3.2 3.8 5.1 6.5


Market Price (SAR) * 43.2 43.4 40.3 41.9 41.9 41.9 41.9

Dividend Yield 1.9% 1.9% 1.8% 2.1% 2.4% 2.9% 3.7%

P/E Ratio (x) 11.1 16.0 16.1 13.0 10.9 8.2 6.4

P/BV Ratio (x) 2.8 2.5 2.1 1.9 1.7 1.5 1.3

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Arab National Bank

July 2011 40

Market Data

Bloomberg Code: ARNB AB


CMP (02 July 2011): SAR29.7

O/S (mn) 850.0



P/E 2011e (x): 11.6

P/BV 2011e (x): 1.6


High (SAR): 45.3

Low (SAR): 26.3


1m 3m 12m

Absolute (%) -6.0 -14.4 -25.0

Relative (%) -4.7 -15.1 -33.9


15

20

25

30

35

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45

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800

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Jun

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Jul-

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Sep

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Jan

-11

Feb-1

1

Mar-

11

May-1

1

Jun

-11

Volume (000) ANB (SAR)

Provisions drag starting to ease off from 2011

Spreads to stabilize here before increasing from 2013

Credit cushion being built up again currently at 108%


Profitability to revive as provisions deflate The bank’s net income decline of 7.3% YoY in 1Q11, while an increase of 94.9% QoQ in 1Q11 was mainly linked to reduction in the heightened provisions witnessed during the past year. The provision expense recorded a drop of 83.4% QoQ and 29.8% YoY in 1Q11. The 1Q11 results were lower by 10.1% from our estimates, as the bank’s provision expense did not decline as much as we had earlier projected. Global Research forecasts that the decline in provisions by 41.3% YoY will offer major support to the bank’s overall performance, leading to net income increase of 14.3% YoY in 2011.

NII to start improving from hereon Although the bank’s NII recorded marginal decrease of around 1.0% on both YoY & QoQ basis in 1Q11, we expect things to improve ahead. Our optimism is based on improvement in lending activity, along with tighter control on cost of funds. Global Research expects loan portfolio and NII to increase by 8.5% and 6.1% YoY, respectively, in 2011. Global research expects the bank’s spreads to stabilize at current level of 3.2%, and could start rising from 2013 to reach 3.5% by 2014.

Non commission income to increase again from 2012 Although we project non-commission income to decrease by 9.8% YoY in 2011 (due to absence of high investment income /gains of earlier year), we expect it to start growing from 2012. Overall the operating income is estimated to record marginal increase of 1.3% YoY in 2011 and CAGR (2010-14e) 11.1%.

Improvement in NPL coverage a good relief The decrease in NPL coverage currently at 108.1% was pulled up during the past year. We expect the bank to further build up on this credit cushion and its NPL coverage could reach 137.3% by 2014. Our estimate of NPL growth at an average (2010-14e) of 6.3%, accompanied by loan growth of 13.5% over the same period would lead to improvement in NPL ratio. Global Research expects NPL ratio to stay at 3.0% in 2011 but is forecasted to start improving from 2012 reaching 2.3% by 2014. The bank’s current capital adequacy ratio stands at comfortable level of 17.0%. Investment Indicators

2010 2011e 2012e 2013e 2014e


NII Growth -8.6% 6.1% 10.1% 18.8% 18.6%

Loan Growth -0.9% 8.5% 15.3% 17.0% 14.5%

Deposits Growth 1.8% 12.1% 11.8% 12.9% 10.1%

Adjusted EPS (SAR) 2.2 2.6 3.1 4.0 4.8


ROAE 13.5% 14.4% 16.1% 18.9% 20.6%

Dividend Yield 2.9% 4.2% 5.1% 6.3% 7.6%

P/E Ratio (x)* 16.8 11.6 9.6 7.5 6.2


Mohammad Ali Shah


HOLD

Target Price

SAR30.6


July 2011 41

Arab National Bank -Financial Update & Outlook

1Q11 Result Summary


Income Statement

Net Interest Income 803 800 794 -0.7% -1.1%


Operating Income 1,125 1,135 1,114 -1.8% -0.9%


Net Profit 634 301 587 94.9% -7.3%

Balance Sheet

Net Loans 65,444 66,203 67,320 1.7% 2.9%

Deposits 77,651 84,199 88,483 5.1% 13.9%


The escalated provision levels of the past year are expected to reduce significantly during 2011, and we expect it to be the main performance driver for this year. The provisions seem to have started the downward journey as the decrease in provisions by 29.8% YoY & 83.4% QoQ in 1Q11 led to net income rise of 94.9% QoQ in 1Q11. Global Research expects the provisions to decline by 41.3% YoY and net income to increase by 14.3% YoY in 2011. The bank also increased its share capital (via bonus share issue) to SAR8.5bn in 2011. Over the medium term, we forecast the provisions and net income to post CAGR (2010-14e) of -32.5% and 21.0%, respectively.

NII expected to improve

Although NII declined in the first quarter, it showed relative improvement recording marginal decrease on both YoY & QoQ basis in 1Q11. Although the bank tried to somewhat manage the effect of lower (1.8% YoY) special commission income by reducing special commission expense by 8.1% YoY in 1Q11, it was still not enough to completely absorb the pressure on NII. We expect the NII to record CAGR (2010-14e) of 13.2%. We expect non-commission income to decrease by 9.8% YoY in 2011, as we do not project the rise in net gains on non-trading investments by 5.3 times to be sustainable in 2011. However, we expect the non-commission income to recover in 2012.

Bank’s spreads to witness marked rise in 2013

Global Research expects ANB’s spreads to remain at 3.2% for the next couple of years, before rising again from 2013. Although during 2010-12 the spreads could rise by 2-3bps, they will not be enough to show any significant change in spreads position. We expect the bank’s spreads to start experiencing a significant increase from 2013 and could reach up to 3.5% by 2014.


The bank successfully managed to pull up its NPL coverage (from 76%) to current levels of 108.1%. We expect the bank to have gained better control over its NPL situation, so matching it with required provisions will increase the NPL coverage ratio to 137.3% by 2014. Our expectations of relatively higher loan growth, accompanied by relatively lower NPLs are expected to improve NPL ratio to 2.3% by 2014.

Valuation update Based on the bank’s latest financial information, we have adjusted our forward estimates. Relatively lower than expected financial performance has led us to revise our financial estimates, resulting in decrease in net income forecast for 2011.


Gross loans 76,529 74,613 -2.5%

Deposits 91,402 94,374 3.3%



Provisions (515) (566) 9.9%


Global Research has revised its fair value downward from SAR39.0 to SAR30.6 per share, which still offers an upside of 2.9% over the current market price of SAR29.7 (as on 02 July, 2011). However, at the current price levels (with a decline in share price by 31.1% since our last update in Mar 2011), our equity rating remains unchanged and we reiterate our HOLD recommendation

on the stock.


July 2011 42

ANB –Chart Gallery Profitability Return Ratios

-30.0%

-20.0%

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2009 2010 2011e 2012e 2013e 2014e

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Net income gorwth

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2009 2010 2011e 2012e 2013e 2014e


Prov. growth (RHS)

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2009 2010 2011e 2012e 2013e 2014e



2.9%

3.0%

3.1%

3.2%

3.3%

3.4%

3.5%

3.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2009 2010 2011e 2012e 2013e 2014e


-20.0%

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60.0%

80.0%

100.0%

0

20

40

60

80

100

120

140

2009 2010 2011e 2012e 2013e 2014e

(SAR bn)


Deposit growth LTD



July 2011 43



Interest Expense/Payment to Depositors (2,285) (778) (297) (375) (499) (773) (1,079)


Fee & Commission Income 839 563 545 588 647 751 841


Other Income 414 419 438 430 464 524 579

Total Non-Interest/Financing Income 782 1,037 1,346 1,214 1,313 1,503 1,677





Taxation & Minority Interest (7) 5 16 14 20 27 29


Cash Balances 12,051 10,457 11,997 15,529 13,815 12,846 12,228








Net Fixed Assets 935 1,240 1,261 1,282 1,357 1,558 1,758

Other Assets 2,492 2,131 2,025 1,681 1,765 1,817 1,854

Total Assets 121,307 110,297 116,035 125,968 136,876 152,501 167,027





Paid-up Capital 6,500 6,500 6,500 8,500 8,500 8,500 8,500

Retained Earnings 1,217 2,266 2,706 1,208 1,816 2,662 3,797

Other Reserves 4,954 5,603 6,085 6,004 6,701 7,587 8,679


Minority Interest - 110 106 106 106 106 106







Cost of Funds 2.5% 0.8% 0.3% 0.4% 0.4% 0.6% 0.8%

Net Spread 3.5% 3.4% 3.2% 3.2% 3.2% 3.4% 3.5%







NPL Coverage 349.0% 75.9% 108.1% 121.5% 128.3% 132.8% 137.3%

Cost of Risk (bps) 8.7 73.2 141.1 79.2 46.0 23.5 18.7




Adjusted EPS (SAR) 2.9 2.8 2.2 2.6 3.1 4.0 4.8


Market Price (SAR) * 31.2 42.4 37.7 29.7 29.7 29.7 29.7

Dividend Yield 2.6% 1.9% 2.9% 4.2% 5.1% 6.3% 7.6%

P/E Ratio (x) 10.7 15.2 16.8 11.6 9.6 7.5 6.2

P/BV Ratio (x) 2.2 2.6 2.2 1.6 1.5 1.3 1.2

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Alinma Bank

July 2011 44

Market Data

Bloomberg Code: ALINMA AB


CMP (02 July 2011): SAR10.1

O/S (mn) 1,500.0



P/E 2011e (x): 103.7

P/BV 2011e (x): 1.0


High (SAR): 12.4

Low (SAR): 8.9

Average Volume: (000) 18,141.0

1m 3m 12m

Absolute (%) -1.0 1.0 -7.6

Relative (%) 0.3 0.5 -16.4


6

7

8

9

10

11

12

0

10,000

20,000

30,000

40,000

50,000

60,000

Jun

-10

Jul-

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Sep

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Oct-

10

No

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Jan

-11

Feb-1

1

Mar-

11

May-1

1

Jun

-11

Volume (000) ALINM (SAR)

Strong capital base, attractive growth potential

Assets expected to expand at CAGR (2010-14e) 42.0%

Financing & deposit growth est. at 70% & 135%, respectively in 2011

Startup stage, business penetration success yet to be seen

Initiating Coverage Global Research initiates its coverage on Alinma Bank (BINM). BINM is an Islamic bank, which was formed in March 2006. The bank provides banking services through its 25 branches across the Kingdom. Its asset base at SAR26.7bn in 2010 has grown at CAGR (2008-10) of 30.9%.

Profitability growth getting back on the track BINM recorded net income of SAR70.2mn in 1Q11, which was an encouraging improvement in comparison to both net loss of 1Q10 and annual net income of SAR15.2mn in 2010. However, the past year results were discouraging as net income posted decline of 97.5% YoY in 2010. The bank is still in relatively nascent stage and has a long way to go to come at par with well established market players. Global Research expects the net income to jump start by rising 8.6 times YoY in 2011, and is estimated to record CAGR (2010-14e) of 156.3%.

Recovery in core-income to lead the way The bank’s net financing income recorded an increase of 19.0% QoQ, and 3.6 times YoY in 1Q11. Although the bank’s core-income declined in the past year, the year 2011 has started on a positive note for the bank. We expect the net financing income to record 42.3% YoY increase in 2011 and CAGR (2010-14e) of 44.0%. The bank spreads that dropped to 2.7% in 2010 are expected to reach 3.4% by 2014.

Non-commission income follows upward trend The non-commission income recorded an increase of 50.7% YoY in 1Q11. Although non-commission income is presently driven by fees from banking services, it only constitutes 6.5% of the total operating income. We expect the non-commission income to rise by 2.2 times in 2011 and record CAGR (2010-14e) of 90.8%.

Asset base continues to expand The bank’s asset base posted an increase of 11.6% QoQ in 1Q11. The growth trend in both financing & deposits during 1Q11 is expected to continue in 2011. Overall, we expect assets, financing and deposits to record CAGR (2010-14e) of 42.0%, 43.8% & 73.0%, respectively. Investment Indicators

2010 2011e 2012e 2013e 2014e


Net Financing & Invst. Income -34.5% 42.3% 32.7% 54.0% 48.1%


Deposits Growth 454.0% 135.0% 45.0% 86.0% 41.2%

Adjusted EPS (SAR) 0.0 0.1 0.1 0.2 0.4


ROAE 0.1% 0.9% 1.2% 1.8% 4.0%

Dividend Yield 0.0% 0.0% 0.0% 0.9% 2.0%

P/E Ratio (x)* 1,036.2 103.7 81.4 52.6 23.0

P/BV Ratio (x)* 1.0 1.0 0.9 0.9 0.9 Source: Company reports & Global Research

* Market price for 2011 and subsequent years as per closing prices on TASI on 02 July 2011.

Mohammad Ali Shah


HOLD

Target Price

SAR11.0


July 2011 45

Company overview

Alinma Bank (BINM) was formed in March 2006. The bank started to operate and reported its financial results from May 2008 (the beginning of the first financial year). The bank offers full-fledged banking services divided under the operating segments of retail, corporate, treasury, investment & brokerage and others. The assets are dominated by corporate banking assets, which constitute 52% of the total. BINM provides the financial services through 25 branches and 243 ATMs across Saudi Arabia.

Subsidiaries Alinma Investment Company: This wholly owned subsidiary was established in accordance with the Capital Market Authority

(CMA) directives in May 2009. The subsidiary aims to be in the forefront of leading companies in the provision of full range of Shariah-compliant investment products and services. Al-Tanweer Real Estate Company: This is another wholly owned subsidiary of the bank.

Shareholding structure

In April 2008, BINM offered 1.05bn shares (at SAR10 per share) raising SAR10.5bn in the initial public offering at Saudi Stock Exchange. The IPO was oversubscribed by 1.7 times, as investors offered more than SAR18bn for the share offering. The public sale was equivalent to 70% of the bank's share capital. In terms of market capitalization, BINM is the second largest Islamic bank in Saudi Arabia. Besides the public stake of 70%, the government of Saudi Arabia owns 30% shares through its various entities. Ownership structure

General Organization

for Social Insurance,

10%Public

Pension

Agency, 10%

Public Investment

Fund, 10%

Public, 70%

Source: Zawya

AlInma Bank -Financial Update & Outlook Although BINM’s 1Q11 financial results signal a good start to the year, the last year’s annual results showed bearish performance with net income decline of 97.5% YoY in 2010. During the past year, although non-commission income recorded a considerable increase, it was not enough to overcome the pressures from weak top-line performance. The bank posted net income of SAR70.2mn in 1Q11, which was an encouraging improvement in comparison to both net loss of 1Q10 and annual net income of SAR15.2mn in 2010. Global expects this year is going to be relatively better for the bank (as its business expands), with the net income increasing by 8.6 times YoY in 2011, and recording CAGR (2010-14e) of 156.3%.

1Q11 Result Summary


Income Statement

Net Income from Investments & Fin. 67 201 239 19.0% 255.8%

Fees from Banking Services 11 7 16 142.4% 45.5%

Operating Income 82 209 262 25.4% 219.1%

Provision Expense - (3) (2) -33.3% -

Net Profit (75) 67 70 5.2% -

Balance Sheet

Net Financing 3,596 15,593 20,378 30.7% 466.7%

Deposits 2,975 8,316 11,314 36.1% 280.3%



July 2011 46

Operating income results expected to improve

The financial results of 1Q11 signal improving situation. The bank’s income from investments and financing (top-line) recorded an increase of 3.7 times YoY in 1Q11, which got translated into core-income increase of 3.6 times YoY in 1Q11 (from SAR67.3mn in 1Q10 to SAR239.2mn in 1Q11). The current core-income result was significantly better than the decline of 34.5% YoY in 2010 (mainly linked to decrease of 31.6% YoY in top-line). Global Research expects the net income from financing & investment to post an increase of 42.3% YoY in 2011 and record CAGR (2010-14e) of 44.0%. The non-commission income also recorded an encouraging increase of 50.7% YoY in 1Q11 and is mainly driven by fees from banking services that made up 80% of the non-commission income. We expect the non-commission income to rise by 2.2 times in 2011 and record CAGR (2010-14e) of 90.8%.

Bank’s spreads to increase in 2013

The bank’s spreads currently at 2.7% are expected to remain at these levels during 2011. However, before witnessing a significant increase in 2013, a minor rise of around 3bps in 2012 could marginally inch up the spreads to 2.8%. We expect the bank to explore more avenues of higher income return, while its return paid to depositors may grow at relatively slower pace. We expect the spreads to increase to 3.4% by 2014.

Presently NPF free balance sheet

As the bank’s financing portfolio grew by 13.8 times YoY in 2010, the bank’s existing financing portfolio remains free of any non-performing financing (NPFs). The majority of the bank’s financing, which is around 89% of total, is currently extended to commercial segment. The first time appearance of impairment allowance of SAR3.0mn was also recorded against consumer financing category. Although we expect the bank to gradually start realizing NPFs and impairment charges as the business grows, we forecast the bank to start its NPF coverage above 100% from the start (that could be in 2011). BINM’s balance sheet continues to grow recording an increase of 58.0% YoY and 11.6% QoQ in 1Q11 (from SAR26.7bn in 2010 to SAR29.8bn in 1Q11). The balance sheet remains dominated by corporate segment that constitute 51.7% of the total assets. The bank’s financing portfolio recorded an increase of 30.7% QoQ in 1Q11 (from SAR15.6bn in 2010 to SAR20.4bn in 1Q11). We expect the bank’s assets and financing portfolio to witness growth of 48.5% and 70.0%, respectively in 2011. Overall, we expect assets, financing, and deposits to record CAGR (2010-14e) of 42.0%, 43.8%, and 73.0%, respectively.

Valuation update Based on our in-depth analysis of Alinma Bank, Global Research has come up with the fair value of SAR11.0 per share, which offers an upside of 9.6% over the current market price of SAR10.1 (as on 02 July, 2011). We, therefore, initiate our coverage of Alinma Bank with a HOLD recommendation on the stock.


July 2011 47

BINM –Chart Gallery Profitability Return Ratios

-200%

0%

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0

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2009 2010 2011e 2012e 2013e 2014e

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Net financing income Net income

Net income gorwth

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

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2009 2010 2011e 2012e 2013e 2014e



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2009 2010 2011e 2012e 2013e 2014e


Prov. growth (RHS)

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

0.0%

20.0%

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60.0%

80.0%

100.0%

120.0%

140.0%

2009 2010 2011e 2012e 2013e 2014e



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2009 2010 2011e 2012e 2013e 2014e


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2009 2010 2011e 2012e 2013e 2014e

(SAR bn)

Financing Deposits


FTD Source: Company reports & Global Research


July 2011 48


Financing Income 339 949 650 968 1,336 2,206 3,418

Payment to Depositors - (4) (30) (87) (168) (407) (752)

Net Financing Income 339 945 619 881 1,169 1,799 2,666

Fee & Commission Income - 7 34 69 141 247 383

Investment Income - - - 2 9 20 43

Other Income - 1 9 23 45 93 143

Total Non-Financing Income - 8 43 94 196 361 570

Total Operating Income 339 954 662 975 1,364 2,160 3,236

Provisions Expense - - (3) (34) (129) (247) (327)

Operating Expenses (223) (638) (644) (796) (1,050) (1,626) (2,252)

Profit Before Taxation 116 316 15 145 185 287 656

Taxation & Minority Int. /Pre-op. Income 274 290 - - - - -

Net Profit Attributable to Parent 390 605 15 145 185 287 656

Cash Balances 4 361 658 2,595 5,453 10,826 11,130

Deposits with Banks & FIs - 13,846 5,803 6,036 6,518 7,496 8,920


Gross Financings - 1,126 15,596 26,548 33,291 51,719 67,382

Financing Loss Reserve - - (3) (37) (166) (414) (741)

Net Financings - 1,126 15,593 26,511 33,125 51,306 66,641



Net Fixed Assets 482 922 1,193 1,294 2,023 4,966 7,433

Other Assets 97 50 798 199 219 246 265

Total Assets 15,556 17,306 26,669 39,592 52,302 83,313 108,289

Deposits from Banks & FIs - - 2,254 3,719 7,252 13,417 16,100

Deposits from Customers - 1,501 8,316 19,542 28,336 52,706 74,420

Other Borrowings - - - - - - -

Other Liabilities 166 200 478 564 762 1,082 1,298

Paid-up Capital 15,000 15,000 15,000 15,000 15,000 15,000 15,000

Retained Earnings 390 454 466 575 713 799 996

Other Reserves - 151 155 191 238 309 474






Net Financing Income/Operating Income 100.0% 99.1% 93.5% 90.3% 85.7% 83.3% 82.4%


Financing Assets Return 2.3% 6.1% 3.2% 3.3% 3.3% 3.9% 4.4%

Cost of Funds 0.0% 0.5% 0.5% 0.5% 0.6% 0.8% 1.0%

Net Spread 2.3% 5.6% 2.7% 2.7% 2.8% 3.1% 3.4%



Net Financing to Customer Deposits 0.0% 75.0% 187.5% 135.8% 117.5% 98.1% 90.5%

Non Performing Financing - - - 34 149 349 601

Financing Loss Reserve - - 3 37 166 414 741

NPFs to Gross Financing 0.0% 0.0% 0.0% 0.1% 0.4% 0.7% 0.9%

NPF Coverage 0.0% 0.0% 0.0% 107.8% 111.6% 118.4% 123.3%

Cost of Risk (bps) - - 3.6 16.2 43.2 58.2 55.0

Equity to Gross Financing 0.0% 1385.4% 100.2% 59.4% 47.9% 31.1% 24.4%



Adjusted EPS (SAR) 0.3 0.4 0.0 0.1 0.1 0.2 0.4


Market Price (SAR) * 12.7 10.5 10.5 10.1 10.1 10.1 10.1

Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.9% 2.0%

P/E Ratio (x) 48.8 26.0 1,036.2 103.7 81.4 52.6 23.0

P/BV Ratio (x) 1.2 1.0 1.0 1.0 0.9 0.9 0.9

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The Saudi Investment Bank

July 2011 49

Market Data

Bloomberg Code: SIBC AB


CMP (02 July 2011): SAR19.0

O/S (mn) 550.0



P/E 2011e (x): 11.7

P/BV 2011e (x): 1.2


High (SAR): 22.5

Low (SAR): 15.4


1m 3m 12m

Absolute (%) 0.3 -6.7 -2.1

Relative (%) 1.6 -7.1 -11.2


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Feb-1

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11

May-1

1

Jun

-11

Volume (000) SAIB (SAR)

Net income expected to rise by 2.1 times in 2011

Profitability to be led by drop in provisions

Bank’s spreads to reach 2.8% by 2014

Fair value upgraded, recommendation unchanged

Profitability expected to be driven by lower provisions The bank’s net income increase by 9.0 times YoY in 1Q11 was mainly led by decline in provision expense by 76.0% YoY during the period. The decline in provisions in 1Q11 comes after provisioning charges reached historic highs (SAR845mn) in 2010. The 1Q11 results were lower by 16.3% from our estimates, as the bank’s provision expense did not drop as much as we had earlier projected. Global Research expects significant decline of 49.7% in provisions, and net income to record an increase of 2.1 times YoY in 2011.

Bank’s spreads to stabilize at current levels for a while SAIB’s successful management of cost of funds led to a rise in its spreads by around 80bps in the past year (reaching 2.6%). We believe that with little room for further reduction in cost of funds (while assets yields not expected pick up anytime soon) the bank’s spreads are estimated to stay around current levels till 2012. Global Research expects the spreads to start rising from 2013 reaching 2.8% by 2014.

NII continues to grow Despite the pressure on assets’ yields, the bank is expected to adequately curtail its cost of funds leading to increase in NII. Our expectations of loan growth by 6.3% YoY in 2011, coupled with gradual firming up of yields on assets are projected to support NII growth. We expect the marginal rise in NII by 1.3% YoY in 1Q11, to enhance over the full year basis resulting in an increase of 5.2% YoY in 2011. The non-commission income having dropped over the past year is expected to increase by 7.7% YoY in 2011. The improved NII and non-commission income is projected to lead to operating income increase of 5.8% YoY in 2011. Global Research estimates NII and operating income to record CAGR (2010-14e) of 11.0% and 10.7%, respectively.

NPL coverage being built up again The bank’s NPL coverage at 110% is expected to continue building up to develop stronger credit cushion against any possible asset quality deterioration. We expect the NPL to grow at an average (2010-14e) 3.5%, which accompanied by balance sheet provisions average (2010-14e) growth of 10.4% is projected to raise NPL coverage to 142.4% by 2014. The increase in gross loans, along with slower rise in NPLs is expected to lead to improvement in NPL ratio (from 5.4%) to 4.4% by 2014.


2010 2011e 2012e 2013e 2014e


NII Growth 29.6% 5.2% 8.3% 16.1% 14.7%

Loan Growth 4.1% 6.3% 8.6% 10.8% 9.9%

Deposits Growth -2.7% 5.7% 7.8% 9.5% 8.1%

Adjusted EPS (SAR) 0.8 1.6 2.2 2.7 3.1


ROAE 5.5% 10.4% 12.7% 13.3% 13.2%

Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0%

P/E Ratio (x)* 28.2 11.7 8.5 7.1 6.2

P/BV Ratio (x)* 1.5 1.2 1.0 0.9 0.8 Source: Company reports & Global Research

* Market price for 2011 and subsequent years as per closing prices on TASI on 02 July 2011.

Mohammad Ali Shah


HOLD

Target Price

SAR20.7


July 2011 50

Saudi Investment Bank -Financial Update & Outlook

1Q11 Result Summary


Income Statement



Operating Income 451 412 414 0.5% -8.2%

Provision Expense (313) (50) (75) 50.0% -76.0%

Net Profit 21 238 208 -12.5% 899.5%

Balance Sheet

Net Loans 30,654 31,002 30,779 -0.7% 0.4%

Deposits 36,511 37,215 37,971 2.0% 4.0%

Assets 49,492 51,491 51,219 -0.5% 3.5% Source: Company reports, Tadawul & Global Research

The bank’s net income rise of 9.0 times YoY in 1Q11 was mainly attributed to drop in provision expense by 76.0% YoY. However, as the provisioning rose by 50% QoQ the profitability declined by 12.5% QoQ in 1Q11. Despite the decline in special commission income, the marginal growth in NII of 1.3% YoY in 1Q11 was led by curtailment of special commission expense. We project provision expense highs to continue reducing over the coming years, and could provide a vital boost to net income results. We estimate net income rise of 2.1 times YoY in 2011 to be led by provisions drop of 49.7% YoY. Over the medium term, Global Research expects provision expense and net income to record CAGR (2010-14e) of -30.7% and 40.8%, respectively. We also expect the bank’s assets, loans and deposits to record CAGR (2010-14e) of 7.8%, 8.9% and 7.7%, respectively.

NII and non-commission income on way to recovery

Despite the decrease in special commission income by 1.2% YoY in 1Q11, a relatively higher drop of 9.0% YoY in special commission expense led to NII growth of 1.3% YoY in 1Q11. Although we project special commission income to start growing in 2011, it is the bank’s tight control over special commission expense that would lead to increase in NII. We expect NII in 2011 to follow a rising trend, but it may not go beyond single digit growth. Global Research expects NII to rise by 5.2% YoY in 2011 and post CAGR (2010-14e) of 11.0%. We also expect the bank’s non-commission income to grow by 7.7% YoY in 2011.

Bank’s spreads to stabilize at current levels

A sharp increase in SAIB’s banking spreads by around 80bps was led by reduction in cost of funds by around 100bps, during the past year. We expect the spreads to stabilize around current levels of 2.6% till 2012, and could increase by around 15bps in 2013. Global Research expects the bank’s spreads to reach 2.8% by 2014. NPL coverage expected to rise further

The bank’s NPL coverage at 110% is expected to grow further. We believe that the bank has gained better control over its NPLs, so matching it with required provisioning will bolster its credit cushion. We expect NPLs and balance sheet provisions to record an average (2010-14e) growth of 3.5% & 10.4%, respectively. Global Research expects NPL coverage to reach 142% by 2014. The increase in loan book, accompanied by proactive monitoring of NPL portfolio is expected to improve current NPL ratio of 5.4% to 4.4% by 2014. The bank’s capital adequacy ratio also increased over the past year and is currently at 17.3%.

Valuation update Based on the bank’s latest financial information, we have adjusted our forward estimates. Relatively lower than expected financial performance has led us to revise our financial estimates, resulting in an increase net income forecast for 2011.


Gross loans 38,127 35,290 -7.4%

Deposits 39,003 39,338 0.9%

Net interest income 1,264 1,383 9.2%


Provisions (381) (425) 11.4%

Net income 843 895 6.1% Source: Global Research

Global Research has revised its fair value upward from SAR19.6 to SAR20.7 per share, which offers an upside of 9.2% over the current market price of SAR19.0 (as on 02 July, 2011). However, at the current price levels (with a decline in share price by 13.6% since our last update in Jan 2011), our equity rating remains unchanged and we reiterate our HOLD recommendation on

the stock.


July 2011 51

SAIB –Chart Gallery Profitability Return Ratios

-40.0%

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2009 2010 2011e 2012e 2013e 2014e

(SAR mn)


Net income gorwth

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

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14.0%

2009 2010 2011e 2012e 2013e 2014e



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-60%

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2009 2010 2011e 2012e 2013e 2014e


Prov. growth (RHS)

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

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5.5%

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80.0%

100.0%

120.0%

140.0%

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2009 2010 2011e 2012e 2013e 2014e



0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2009 2010 2011e 2012e 2013e 2014e


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0.0%

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40.0%

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2009 2010 2011e 2012e 2013e 2014e

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Deposit growth LTD



July 2011 52



Interest Expense/Payment to Depositors (1,514) (828) (359) (368) (432) (580) (751)




Other Income 43 29 28 29 32 35 37

Total Non-Interest/Financing Income 912 503 434 468 515 578 628



Operating Expenses (411) (539) (559) (616) (667) (760) (852)

Profit Before Taxation 530 423 345 810 1,141 1,377 1,575

Taxation & Minority Interest (17) 98 84 84 90 100 111

Net Profit Attributable to Parent 513 522 429 895 1,230 1,477 1,686

Cash Balances 1,427 1,528 1,442 1,384 1,405 1,353 1,326






Investment in Associates 719 817 865 917 972 1,040 1,112


Net Fixed Assets 548 707 748 781 862 1,017 1,170

Other Assets 1,163 1,309 1,332 1,358 1,399 1,483 1,542

Total Assets 53,596 50,148 51,491 53,417 57,896 63,899 69,638



Other Borrowings - 500 500 500 - - -

Other Liabilities 1,076 761 739 776 799 823 848

Paid-up Capital 4,500 4,500 4,500 5,500 5,500 5,500 5,500

Retained Earnings 412 803 1,124 795 1,718 2,826 4,090

Other Reserves 1,669 2,089 2,479 2,710 3,053 3,460 3,929









Cost of Funds 3.6% 1.9% 0.8% 0.9% 1.0% 1.2% 1.4%

Net Spread 1.7% 1.8% 2.6% 2.6% 2.6% 2.8% 2.8%







NPL Coverage 251.9% 70.1% 110.4% 122.1% 130.9% 137.9% 142.4%

Cost of Risk (bps) 368.4 180.8 264.0 124.4 55.6 44.5 43.9




Adjusted EPS (SAR) 0.9 0.9 0.8 1.6 2.2 2.7 3.1


Market Price (SAR) * 16.6 18.0 22.0 19.0 19.0 19.0 19.0

Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

P/E Ratio (x) 17.7 19.0 28.2 11.7 8.5 7.1 6.2

P/BV Ratio (x) 1.4 1.3 1.5 1.2 1.0 0.9 0.8

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Saudi Hollandi Bank

July 2011 53

Market Data

Bloomberg Code: AAAL AB


CMP (02 July 2011): SAR28.9

O/S (mn) 330.8



P/E 2011e (x): 9.7

P/BV 2011e (x): 1.3


High (SAR): 35.4

Low (SAR): 26.1


1m 3m 12m

Absolute (%) -3.7 -3.4 -11.6

Relative (%) -2.4 -4.1 -19.8


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32

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Dec-1

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Feb-1

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Mar-

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Ap

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Jun

-11

Volume (000) SHB (SAR)

Profitability growth of 24% in 2011 led by lower provisions

NII to post modest rise in 2011, and CAGR (2010-14e) of 9.8%

NPL coverage to further increase reaching 140% by 2014


Provisioning story to drive profitability this year The bank’s net income increase of 3.5% YoY and 6.0% QoQ in 1Q11 is expected to further grow during the year. The 1Q11 results were lower by 12.3% from our estimates, as the provisions did not decrease as per our expectations. However, we continue to believe that provision expense will drive the profitability results, leading to net income rise of 24.0% YoY in 2011. Global Research expects provisions to decline by 43.5% YoY in 2011, and record CAGR (2010-14e) of -27.1%.

Core-income to gradually start improving hereon The bank’s core-income posted marginal improvement of 0.7% YoY in 1Q11. Although we expect the bank’s NII to post modest rise of 1.6% YoY in 2011, spreads are not expected to witness a considerable increase till 2013. Global Research expects the bank’s spreads to reach 2.9% by 2014, and NII to record CAGR (2010-14e) of 9.8%. We expect the bank’s non-commission (led by fee income from banking services) to continue providing support to the core-income, and is estimated to rise by 6.0% YoY in 2011 and post CAGR (2010-14e) of 8.2%.

NPL coverage maintained above 100% The bank continued to maintain NPL coverage at a minimum of 100% level, even during the past years of distressed environment. We expect the NPL coverage to further strengthen and could reach 140.0% by 2014. Having written off a major chunk (66%) of NPLs during the past year, we expect the bank’s NPLs to grow at the pace that can comfortably be matched by increase in balance sheet provisions in the coming years. The NPL ratio is expected to stay around 2.8% for the next couple of years, as gross loans start to pick up pace. However, over the medium term we expect NPL ratio to consolidate around 2.5% by 2014.

Balance sheet contraction expected to stabilize The contraction in total assets by 5.3% QoQ and 14.6% YOY in 1Q11 is expected to gradually change direction during the year leading to asset increase of 2.5% YoY in 2011. The customer deposits and loan portfolio also shrank by 7.0% and 9.5% YoY, respectively, in 1Q11. Overall, we expect assets, loans & deposits to record CAGR (2010-14e) of 6.9%, 7.6% & 7.5%, respectively. Investment Indicators

2010 2011e 2012e 2013e 2014e


NII Growth -18.0% 1.6% 6.9% 15.2% 16.1%

Loan Growth -2.7% 2.7% 7.9% 11.0% 9.0%

Deposits Growth -7.2% 4.3% 5.6% 10.9% 9.4%

Adjusted EPS (SAR) 2.4 3.0 3.5 4.2 4.7


ROAE 13.2% 14.5% 15.4% 16.7% 17.1%

Dividend Yield 0.0% 2.1% 4.2% 6.5% 7.9%

P/E Ratio (x)* 12.3 9.8 8.2 6.9 6.2


Mohammad Ali Shah


HOLD

Target Price

SAR31.0


July 2011 54

Saudi Hollandi Bank -Financial Update & Outlook

1Q11 Result Summary


Income Statement




Provision Expense (45) (69) (57) -17.4% 26.7%

Net Profit 230 225 238 6.0% 3.5%

Balance Sheet

Net Loans 36,378 35,039 32,927 -6.0% -9.5%

Deposits 42,484 41,604 39,508 -5.0% -7.0%

Assets 59,740 53,882 51,006 -5.3% -14.6% Source: Company reports, Tadawul & Global Research

SHB recorded a net income increase of 3.5% YoY and 6.0% QoQ in 1Q11, which we expect to convert into full year profitability rise of 24.0% YoY in 2011. We expect the provisions to continue their downward journey and could lead the financial performance for at least a couple of years. Having seen the worst in 2009, we expect that thorough pruning of its credit portfolio and restructuring plans will start showing results from 2011. Global Research expects provisions to decline by 43.5% YoY in 2011, and record CAGR (2010-14e) of -27.1%. We forecast that the normalized provision levels coupled with improved operating performance in coming years, will lead to net income recording an increase at CAGR (2010-14e) of 18.3%. Overall we project assets, loans and deposits to increase by 2.5%, 2.7% and 4.3%, respectively. NII to recover and non-commission to follow upward trend

The NII’s marginal increase of 0.7% YoY in 1Q11 is in line with our expectation of single digit growth for the current year. Global Research expects an increasing upward trend in NII and could increase by 1.6% YoY in 2011. We also forecast NII to record CAGR (2010-14e) of 9.8% over the medium term. The bank’s non-commission income having recorded a rise of 9.9% YoY in 1Q11, is projected to record modest growth of 6.0% in 2011 and record CAGR (2010-14e) of 8.2%.The bank’s spreads currently at around 2.6% are expected to stay at these levels till 2012, and could start increasing from 2013 reaching 2.9% by 2014.


The bank’s NPL coverage has been maintained at 100% even during the slack years like 2009. We expect the bank’s improved control over its NPL situation will be adequately matched with required provisioning, and could lead to NPL coverage reaching 140.3% by 2014. Having already written off significant portion of its bad debts, we expect the NPL to grow at an average (2010-14e) 6.5%, while loan growth at an average of 7.7% over the same period would lead to stabilization of NPL ratio at around 2.5% by 2014. We also expect provisions/NII at 30.9% and provisions/Net income at 50.3% to decline to 17.0% and 22.7%, respectively, in 2011.

Valuation update Based on the bank’s latest financial information, we have adjusted our forward estimates. Relatively lower than expected financial performance has led us to revise our financial estimates, resulting in almost unchanged net income forecast for 2011.


Gross loans 44,202 37,370 -15.5%

Deposits 45,836 43,412 -5.3%



Provisions (377) (225) -40.4%

Net income 976 980 0.4% Source: Global Research

Global Research has revised its fair value upward from SAR27.5 to SAR31.1 per share, which offers an upside of 7.3% over the current market price of SAR28.9 (as on 02 July, 2011). However, at the current price levels (with a decline in share price by 2.4% since our last update in Jan 2011), our equity rating remains unchanged and we reiterate our HOLD recommendation on the

stock.


July 2011 55

SHB –Chart Gallery Profitability Return Ratios

-200.0%

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2010 2011e 2012e 2013e 2014e


Prov. growth (RHS)

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2009 2010 2011e 2012e 2013e 2014e



2.5%

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2.7%

2.8%

2.8%

2.9%

2.9%

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2009 2010 2011e 2012e 2013e 2014e


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2009 2010 2011e 2012e 2013e 2014e

(SAR bn)

Loan Deposits

Loan growth Deposit growth

LTD



July 2011 56



Interest Expense/Payment to Depositors (1,532) (710) (338) (330) (337) (433) (524)




Other Income 89 80 96 103 7 7 7



Provisions expense (78) (1,248) (398) (225) (126) (69) (101)

Operating Expenses (810) (813) (772) (817) (894) (1,014) (1,140)

Profit Before Taxation 1,224 86 790 980 1,159 1,388 1,550


Net Profit Attributable to Parent 1,224 86 790 980 1,159 1,388 1,550

Cash Balances 2,791 9,269 5,000 4,837 4,596 4,486 3,846

Deposits with Banks & FIs 365 139 309 334 367 455 501





Investment in Associates - 20 20 21 23 25 27


Net Fixed Assets 466 497 495 521 576 659 727

Other Assets 1,429 1,030 1,268 1,293 1,332 1,092 1,333

Total Assets 61,436 59,110 53,883 55,224 58,847 64,862 70,482





Paid-up Capital 2,646 3,308 3,308 3,308 3,308 3,308 3,308

Retained Earnings 825 228 821 1,311 1,658 1,867 2,161

Other Reserves 2,244 2,098 2,259 2,554 2,961 3,518 4,015









Cost of Funds 3.1% 1.3% 0.7% 0.7% 0.7% 0.8% 0.9%

Net Spread 2.6% 2.9% 2.6% 2.6% 2.6% 2.8% 2.9%




Non Performing Loans 1,067 2,241 931 1,046 1,110 1,150 1,196



NPL Coverage 107.8% 100.2% 124.4% 132.2% 135.9% 137.2% 140.3%

Cost of Risk (bps) 22.9 322.4 106.9 61.1 32.4 16.2 21.5




Adjusted EPS (SAR) 3.7 0.3 2.4 3.0 3.5 4.2 4.7


Market Price (SAR) * 40.0 30.0 29.4 28.9 28.9 28.9 28.9

Dividend Yield 1.8% 0.0% 0.0% 2.1% 4.2% 6.5% 7.9%

P/E Ratio (x) 10.8 115.9 12.3 9.8 8.2 6.9 6.2

P/BV Ratio (x) 2.3 1.8 1.5 1.3 1.2 1.1 1.0

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Bank AlJazira

July 2011 57

Market Data

Bloomberg Code: BJAZ AB


CMP (02 July 2011): SAR18.4

O/S (mn) 300.0



P/E 2011e (x): 27.0

P/BV 2011e (x): 1.1


High (SAR): 20.3

Low (SAR): 15.0


1m 3m 12m

Absolute (%) -2.9 -4.4 8.6

Relative (%) -1.6 -4.9 -0.6


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Volume (000) BJAZ (SAR)

Net income to increase by 7.1 times YoY in 2011

NII continues to grow, could post CAGR (2010-14e) of 17.3%

Bank’s spreads to increase from 2013, reaching 3.3% by 2014

NPL coverage under 100% to reach 107% by 2012

Initiating Coverage Global Research initiates its coverage on Bank Aljazira (BJZ). BJZ is an Islamic bank with its vision to transform into a multi-specialist Shari’ah compliant financial group. The bank through its subsidiary of Aljazira Capital continued to maintain its leadership position in the local share trading activity (having around 16% of the market share). Net income to start rising from 2011 BJZ’s net income after stabilizing (at SAR29) in 2010, is expected to begin increasing from 2011. The bank converted net loss of 4Q10 into net profit in 1Q11, and recorded an increase of 4.9 times YoY in 1Q11. We project profitability growth to be led by lower provisions during the current year. Global Research expects net income to increase by 7.1 times YoY in 2011 and post CAGR (2010-14e) of 126.1%.

NII growth driven by tighter control on expense side NII continues to show rising trend posting an increase of 8.9% YoY in 1Q11. A relatively slower growth in special commission expense (as compared to special commission income) during the period led to the NII growth. We expect NII to increase by 7.7% YoY in 2011. The bank’s spreads witnessing an increase of around 12bps during the past year, are expected to stabilize at current levels of 2.9% till 2012. However, we expect the spreads to reach 3.3% by 2014. BJZ one of the smallest banks in the sector (assets at SAR33bn), recorded asset growth of 8.8% QoQ in 1Q11 and is projected to post an increase of 11.9% YoY in 2011. We forecast deposit and loan portfolio to also grow, recording an increase of 13.5% & 19.0%, respectively, in 2011.

Credit quality remains under focus Although still not at 100%, the bank’s NPL coverage rose to 84.5% during the past year. In an effort to boost its NPL coverage, we expect the bank to continue with relatively higher provisioning than required, which could reach 107.4% by 2012. The NPL ratio currently at 6.7%, is expected to improve as loan growth is projected to outpace NPL increase in coming years. Global Research expects NPL ratio to reach 3.9% by 2014. Investment Indicators

2010 2011e 2012e 2013e 2014e


NII Growth 7.4% 7.7% 17.3% 25.3% 19.7%

Loan Growth 20.6% 19.0% 20.4% 19.4% 10.5%

Deposits Growth 23.5% 13.5% 14.0% 16.0% 9.0%

Adjusted EPS (SAR) 0.1 0.7 1.2 1.9 2.5


ROAE 0.6% 4.2% 7.1% 10.6% 13.0%

Dividend Yield 0.0% 0.7% 1.6% 4.2% 5.5%

P/E Ratio (x)* 171.2 27.0 15.2 9.6 7.2


Mohammad Ali Shah


HOLD

Target Price

SAR19.9


July 2011 58

Company overview

Bank Aljazira (BJZ) commenced its business in October 1976 with the takeover of The National Bank of Pakistan’s branches in the Kingdom of Saudi Arabia. With relatively small branch network, the bank operates through 50 branches in Saudi Arabia. The bank offers a wide range of banking services under personal, corporate, brokerage & asset management, treasury and others, business segments. The assets are dominated by corporate banking and treasury & other, which constitute 87% of the total.

Subsidiaries Aljazira Capital: Aljazira Capital, the investment arm of Bank AlJazira, is the wholly owned subsidiary of the bank. The subsidiary

is a Shari’ah compliant company licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. Aman Real Estate: This is another wholly owned subsidiary of the bank, which is incorporated in Saudi Arabia. The company

holds and manages the collateral (on behalf of the bank) against the offered lending facilities. Some of the other subsidiaries of Bank Aljazira include: Al-Mashareq Japanese Equities Fund, Al-Khair Global Equities Fund, and Al-Thoraiya European Equities Fund. Shareholding structure

A majority stake of 60.5% of the bank’s share capital is offered to the public .The second major shareholder in the bank are Rashed Abdul Rahman Al Rashed and Sons Company holding a stake of 22.2% in the bank. Ownership structure

Rashed Abdul Rahman Al

Rashed and Sons Co.,

22.2%

Union Brothers for

Development Co., 6.5%

National Bank of Pakistan ,

5.8%

Saleh Abdullah

Mohammed Kamel , 5.0%

Public, 60.5%

Source: Zawya

Bank AlJazira -Financial Update & Outlook Although BJZ’s net income remained meager, the bank’s profitability increased by 5.0% (from SAR27.5mn in 2009 to SAR28.9mn in 2010) during the past year. Our expectations of provision expense reducing significantly in coming years, accompanied up pick up in core and non-commission income will lead to improved future results. The current year has started on an encouraging note for the bank, as the net loss of 4Q10 converted into net profit in 1Q11, and grew by 4.9 times YoY in 1Q11.

1Q11 Result Summary


Income Statement



Operating Income 305 262 276 5.3% -9.5%


Net Profit 13 (27) 62 0.0% 394.4%

Balance Sheet

Net Loans 16,389 18,704 19,942 6.6% 21.7%

Deposits 19,203 27,345 29,758 8.8% 55.0%



July 2011 59

Global expects that the normalization of provisions expense at relatively lower levels will be a major boost in reviving the profitability growth in near future. We project the provision expense decline of 42.8% YoY in 2011, to be the main driver in recording net income increase of 7.1 times YoY in 2011. We expect the improvement in both core and non-commission income to start leading the financial performance from 2012 onwards. The bank’s operating income is estimated to record CAGR (2010-14e) of 16.3%. Global Research expects provisions and net income to record CAGR (2010-14e) of 23.2% and 126.6%, respectively.

NII growth to pick up pace

We are confident of the bank’s ability to better manage special commission expense as compared to special commission income growth. We expect the NII in 2011 to follow rising trend. The rise in NII by 8.8% (YoY) in 1Q11 is expected to lead to full year increase of 7.7% YoY in 2011. Global Research expects NII to record CAGR (2010-14) of 17.3%. During 1Q11, the loan book (at around SAR20bn) recorded an increase of 21.7% YoY. We expect the loan portfolio to grow by 19.0% YoY in 2011 The bank’s total assets recording an increase of 29.2% YoY and 8.8% QoQ in 1Q11 are expected to increase by 11.9% YoY in 2011, and could record CAGR (2010-14e) of 12.1%. BJZ’s banking spreads currently at 2.9% may witness a slight increase of around 3bps during 2010-12e, but a clear jump of around 20bps is expected in 2013. We expect the bank’s spreads to reach 3.3% by 2014.

Non-commission income expected to start growing

The bank’s non-commission income (led by fees & commission income) after posting an increase of 21.5% QoQ in 1Q11, is expected to record a modest growth of 5.1% YoY in 2011. Over the medium term we forecast it to record CAGR (2010-14e) of 14.4%. The improved core and non-commission income results are also expected to lead to operating income increase of 6.7% YoY in 2011 and CAGR (2010-14e) of 16.3%. Credit quality remains under focus

The decline in the bank’s NPL coverage below 100%, started to improve in the past year currently at 84.5%. Although the bank tried to match the rise in NPLs by increase in balance sheet provisions, it was not enough to raise credit cushion to 100% mark. We expect NPL to grow at an average (2010-14e) of around 2.5% and balance sheet provisions to increase by 12.5% over the period, thus resulting in strengthening of NPL coverage to reach up to 123.8% by 2014. We also expect the NPL ratio (under loan growth scenario) to improve from current 6.7% to 3.9% by 2014. The highs of provision to NII at 50.5% and provision to net income at 12.5 times are projected to significantly drop to 26.8% and 101.1%, respectively, in 2011.

Valuation update Based on our in-depth analysis of Bank Aljazira, Global Research has come up with the fair value of SAR19.9 per share, which offers an upside of 8.3% over the current market price of SAR18.4 (as on 02 July, 2011). We, therefore, initiate our coverage of Bank Aljazira with a HOLD recommendation on the stock.


July 2011 60

BJZ –Chart Gallery Profitability Return Ratios

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Yield on Earning Assets (LHS) Cost of Funds (LHS)

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Loan Deposits

Loan growth Deposit growth

LTD Source: Company reports & Global Research


July 2011 61


Interest/Financing Income 1,114 961 868 962 1,122 1,427 1,731

Interest Expense/Payment to Depositors (483) (293) (151) (189) (216) (292) (372)

Net Interest/Financing Income 631 668 717 772 906 1,136 1,359



Other Income 25 23 67 62 68 78 86





Profit Before Taxation 222 28 29 203 358 570 754

Taxation & Minority Interest 1 (0) 0 2 5 7 8

Net Profit Attributable to Parent 222 28 29 205 363 577 762

Cash Balances 2,258 1,405 2,608 2,524 2,331 1,960 1,732




Loan Loss Reserve (382) (794) (1,124) (1,331) (1,519) (1,676) (1,802)




Net Fixed Assets 494 501 462 481 519 588 644

Other Assets 822 1,047 1,117 1,028 1,090 1,177 1,189

Total Assets 27,520 29,977 33,018 36,963 41,678 47,855 52,144

Deposits from Banks & FIs 1,367 2,691 389 428 496 635 749



Other Liabilities 515 449 479 522 538 554 559

Paid-up Capital 3,000 3,000 3,000 3,000 3,000 3,000 3,000

Retained Earnings 189 28 49 161 343 545 812

Other Reserves 1,448 1,458 1,467 1,523 1,623 1,776 1,975









Cost of Funds 2.5% 1.2% 0.6% 0.6% 0.6% 0.8% 0.9%

Net Spread 3.0% 2.8% 2.9% 2.9% 2.9% 3.2% 3.3%





Loan Loss Reserve 382 794 1,124 1,331 1,519 1,676 1,802


NPL Coverage 163.8% 65.2% 84.5% 95.0% 107.4% 117.4% 123.8%

Cost of Risk (bps) 96.0 262.5 200.5 95.4 72.5 50.5 35.5




Adjusted EPS (SAR) 0.7 0.1 0.1 0.7 1.2 1.9 2.5


Market Price (SAR) * 15.1 19.2 16.5 18.4 18.4 18.4 18.4

Dividend Yield 0.0% 3.0% 0.0% 0.7% 1.6% 4.2% 5.5%

P/E Ratio (x) 20.3 208.7 171.2 27.0 15.2 9.6 7.2

P/BV Ratio (x) 1.0 1.2 1.0 1.1 1.0 1.0 0.9

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Bank AlBilad

July 2011 62

Market Data

Bloomberg Code: ALBI AB


CMP (02 July 2011): SAR19.3

O/S (mn) 300.0



P/E 2011e (x): 16.4

P/BV 2011e (x): 1.7


High (SAR): 21.3

Low (SAR): 16.6


1m 3m 12m

Absolute (%) 1.0 -1.3 -6.1

Relative (%) 2.4 -1.7 -14.9


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Volume (000) BBLD (SAR)

Profitability increases, expected to rise by 4.0 times in 2011

Provisions to record CAGR (2010-14e) of 12.9%

Bank’s spreads rising from 2013, to reach 4.3% by 2014


Net loss turned into profit to continue growing The bank’s financial performance continues to increase, recording net income rise of 12.3 times QoQ and 5.5% YoY in 1Q11. Our estimates for the quarter at SAR55mn were in line with 1Q11 actual results. We expect the reduction in provision expense by 31.2% YoY in 2011 to support operating income results. Global Research expects the bank’s net income to increase by 3.8 times YoY in 2011, and record CAGR (2010-14e) of 87.2%.

Core-income expected maintain rising trend The increase in bank’s top-line (income from financing and investing) by 13.4% YoY in 1Q11 was translated well into core-income increase of 11.1% YoY in 1Q11. We expect the bank’s financing growth of 20.0% YoY in 2011 to support its core-income result. Global Research expects net income from financing to increase by 19.9% YoY in 2011 and post CAGR (2010-14e) of 24.5%. The bank’s spreads currently at 3.9% are also expected to grow from 2013, reaching 4.3% by 2014.

Operating income supported by both core & non-core income The bank’s operating income increase of 11.9% YoY in 1Q11, is expected to grow further during the year supported by both core and non-commission income. The bank’s non-commission income having recorded a rise of 14.6% YoY in 1Q11 is expected to rise by 20.9% YoY in 2011. Global Research expects operating income to increase by 20.3% YoY in 2011 and to post CAGR (2010-14e) of 22.3%.

Enhancement in credit cushion We expect the bank to continue building up its credit cushion, as NPF coverage is expected to increase from 89.4% to 103.5% in 2011. Our projection of NPF growth at an average (2010-14e) of 12.9%, coupled with necessary balance sheet provisioning is expected to increase NPF coverage to 115.8% by 2014. We also expect the current NPF ratio of 5.5% to start improving from 2011, reaching 3.7% by 2014. The bank’s capital adequacy ratio currently stands at 17.4%. Global Research forecasts assets, financing, and deposits to increase by 18.0%, 11.6% and 23.4%, respectively, during 2011. Investment Indicators

2010 2011e 2012e 2013e 2014e

Net Profit Growth - 283.0% 58.4% 58.2% 28.0%

Net Income from Financing Growth 14.0% 19.9% 23.4% 30.6% 24.4%


Deposits Growth 23.4% 20.0% 21.5% 25.0% 14.0%

Adjusted EPS (SAR) 0.3 1.2 1.9 3.0 3.8


ROAE 3.0% 10.8% 15.0% 20.4% 22.5%

Dividend Yield 0.0% 0.0% 0.0% 4.6% 5.9%

P/E Ratio (x)* 63.7 16.4 10.3 6.5 5.1


Mohammad Ali Shah


HOLD

Target Price

SAR20.7


July 2011 63

Bank AlBilad -Financial Update & Outlook

1Q11 Result Summary


Income Statement

Net Income from Financing 148 161 165 2.4% 11.1%

Fee & Commission Income 90 91 95 4.7% 6.1%


Provision Expense (43) (93) (51) -45.2% 18.6%

Net Profit 53 5 55 1131.1% 5.5%

Balance Sheet

Net Financing 11,190 12,290 12,616 2.7% 12.7%

Deposits 14,317 16,932 17,514 3.4% 22.3%


The bank’s net income increase by 12.3 times QoQ and 5.5% YoY in 1Q11, is expected to continue following the growth trend during the current year. The profitability growth is expected to be driven by overall improved performance, which will largely be supported by reduction in provision expense from the recent historic highs. We expect operating income increase of 20.3% YoY, coupled with provision expense decline of 31.2% YoY in 2011, to lead to net income increase of 3.8 times YoY in 2011. Global expects the provisions and net income to record CAGR (2010-14e) of -12.9% and 87.2%, respectively. Overall, Global Research expects assets, financing and deposits to record CAGR (2010-14e) of 18.7%, 25.0% & 20.1%, respectively.

Core-income & non-commission income both remain supportive

We project that the bank’s top-line growth, accompanied by its effective management of cost of funds will continue to support core-income performance. The increase in net income from financing by 11.1% YoY and 2.4% QoQ in 1Q11 is expected to further strengthen during the year, and could increase by 19.9% YoY in 2011. The projected financing growth of 20.0% YoY in 2011 and rise in CAGR (2010-14e) by 25.0% will largely facilitate the bank’s net financing income. Global Research expects net financing income to record CAGR (2010-14e) of 24.5%. Global Research expects the bank’s spreads to stabilize at current levels of 3.9% till 2012, and could start rising from 2013 to reach 4.3% by 2014. In addition to growth in core-income, we also expect the bank’s non-commission income to increase by 20.9% YoY in 2011, and could record CAGR (2010-14e) of 19.1%.

NPF coverage to cross 100% mark in 2011

We expect the bank’s NPF coverage to exceed 100% mark during the current year and could reach up to 116% by 2014. Over the medium term, our forecast for NPF growth at an average (2010-14e) of 12.9% and balance sheet provisions to increase by 20.6% over the period will lead to enhancement of NPF coverage ratio. We also expect the current NPF ratio of 5.5% to improve to 3.7% by 2014. The highs of provisions to net financing income at 46.3% and provisions to net income at 313.6% are expected to decrease significantly to 26.6% and 56.3%, respectively, in 2011.

Valuation update Based on the bank’s latest financial information, we have adjusted our forward estimates that have led to decrease in our net income forecast for 2011.


Gross financing 15,584 15,584 0.0%

Deposits 20,488 20,319 -0.8%

Net income from financing 769 749 -2.6%


Provisions (199) (199) 0.1%

Net income 381 354 -7.2% Source: Global Research

Global Research has revised its fair value upward from SAR17.9 to SAR20.7 per share, which offers an upside of 7.2% over the current market price of SAR19.3 (as on 02 July, 2011). However, at the current price levels (with an increase in share price by 3.2% since our last update in Mar 2011), our equity rating remains unchanged and we reiterate our HOLD recommendation on

the stock.


July 2011 64

BBLD –Chart Gallery Profitability Return Ratios

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Financing Deposits


FTD Source: Company reports & Global Research


July 2011 65


Interest/Financing Income 669 572 646 776 957 1,279 1,619

Interest Expense/Payment to Depositors (91) (24) (21) (27) (33) (72) (117)

Net Interest/Financing Income 578 548 625 749 924 1,207 1,502


Investment Income - 2 11 19 25 31 30

Other Income 80 79 121 151 183 216 241


Total Operating Income 875 908 1,099 1,323 1,625 2,045 2,457



Profit Before Taxation 125 (248) 92 354 560 886 1,133


Net Profit Attributable to Parent 125 (248) 92 354 560 886 1,133

Cash Balances 1,125 1,297 2,497 2,195 2,263 2,188 2,067




Loan Loss Reserve (92) (391) (633) (832) (1,021) (1,162) (1,328)




Net Fixed Assets 537 395 342 374 468 591 595

Other Assets 336 343 344 372 405 426 447

Total Assets 16,052 17,411 21,117 24,924 29,913 36,772 41,958

Deposits from Banks & FIs 1,464 198 382 413 454 495 540



Other Liabilities 404 490 699 734 749 771 794

Paid-up Capital 3,000 3,000 3,000 3,000 3,000 3,000 3,000

Retained Earnings 184 - 69 334 754 1,153 1,663

Other Reserves 29 2 34 124 268 493 781




Return on Average Assets 0.8% -1.5% 0.5% 1.5% 2.0% 2.7% 2.9%

Return on Average Equity 4.0% -8.0% 3.0% 10.8% 15.0% 20.4% 22.5%




Cost of Funds 0.7% 0.2% 0.1% 0.1% 0.1% 0.3% 0.4%

Net Spread 4.1% 3.8% 3.9% 3.9% 3.9% 4.1% 4.3%




Non Performing Loans 101 629 708 804 953 1,040 1,147

Loan Loss Reserve 92 391 633 832 1,021 1,162 1,328


NPL Coverage 90.6% 62.1% 89.4% 103.5% 107.1% 111.7% 115.8%

Cost of Risk (bps) 115.9 367.5 238.0 139.7 106.1 60.5 57.7




Adjusted EPS (SAR) 0.4 (0.8) 0.3 1.2 1.9 3.0 3.8


Market Price (SAR) * 28.0 20.9 19.6 19.3 19.3 19.3 19.3

Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 4.6% 5.9%

P/E Ratio (x) 67.2 (25.2) 63.7 16.4 10.3 6.5 5.1

P/BV Ratio (x) 2.6 2.1 1.9 1.7 1.4 1.2 1.1

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July 2011 66

Disclosure

The following is a list of disclosure.

Disclosure Checklist

Recommendation Bloomberg

Ticker Reuters Ticker Price

(SAR) Company

Al Rajhi Banking & Investment Corp. HOLD RJHI AB 1120.SE 74.0

Samba Financial Group BUY SAMBA AB 1090.SE 50.8

Riyad Bank BUY RIBL AB 1010.SE 24.0

Banque Saudi Fransi BUY BSFR AB 1050.SE 44.2

Saudi British bank HOLD SABB AB 1060.SE 41.9

Arab National Bank HOLD ARNB AB 1080.SE 29.7

AlInma Bank HOLD ALINMA AB 1150.SE 10.1

Saudi Investment Bank HOLD SIBC AB 1030.SE 19.0

Saudi Hollandi Bank HOLD AAAL AB 1040.SE 28.9

Bank AlJazira HOLD BJAZ AB 1020.SE 18.4 Bank AlBilad HOLD ALBI AB 1140.SE 19.3

Global Research: Equity Ratings Definitions

Global Rating Definition

STRONG BUY Fair value of the stock is >20% from the current market price

BUY Fair value of the stock is between +10% and +20% from the current market price

HOLD Fair value of the stock is between +10% and -10% from the current market price

SELL Fair value of the stock is < -10% from the current market price

Disclaimer This material was produced by Global Investment House - Saudia, a firm regulated by the Capital Market Authority of KSA. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities Information and opinions contained herein have been compiled or arrived by Global –Saudia from sources believed to be reliable, but Global- Saudia has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global - Saudia accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global- Saudia for, or sent by Global- Saudia to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Global investment house- Saudia is authorized and regulated by the Capital Market Authority (CMA) in the Kingdom of Saudi Arabia. License Number 07067-37.

Global Investment House -Saudia

Website: www.globalinv.com.sa

CEO

Fahad Al-Hamidi (966) 1 299 4111 [email protected]

Research-Saudia

Mohammad Ali Shah (966) 1 299 4106 [email protected] Research-Kuwait

Faisal Hasan, CFA (965) 2295-1270 [email protected]

Wealth Management - Kuwait

Rasha Al-Qenaei (965) 2295-1380 [email protected]

Wealth Management-International

Fahad Al-Ibrahim (965) 2295-1400 [email protected]

Global Kuwait

Tel: (965) 2 295 1000 Fax: (965) 2 295 1005 P.O.Box 28807 Safat, 13149 Kuwait

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Tel: (973) 17 210011 Fax: (973) 17 210222 P.O.Box 855 Manama, Bahrain

Global UAE

Tel: (971) 4 4477066 Fax: (971) 4 4477067 P.O.Box 121227 Dubai, UAE

Global Egypt

Tel: (202) 24189705/06 Fax: (202) 22905972 24 Cleopatra St., Heliopolis, Cairo

Global Saudi Arabia

Tel: (966) 1 2994100 Fax: (966) 1 2994199 P.O. Box 66930 Riyadh 11586, Kingdom of Saudi Arabia

Global Jordan

Tel: (962) 6 5005060 Fax: (962) 6 5005066 P.O.Box 3268 Amman 11180, Jordan

Global Saudia Wealth Manager

E-mail: [email protected] Tel: (966) 1 2994159

mailto:[email protected]





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Saudi Arabia Banking Sector - GulfBase.comBank AlBilad 5,790 3,459 354 10.8% 16.4 1.7 Industry...

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