Al Rajhi Bank -Equity Report -17-08-2016

Source: Global Investment House

Downgrade to HOLD from BUY on higher valuations

We have downgraded the stock to HOLD from BUY on higher valuations. Our fair value for RJHI comes at SAR53.5/share, which is 7% below the bank’s current market price of SAR57.6/share as on August 15, 2016. Also, RJHI is one of the most expensive banks in Saudi Arabia and in the GCC; the stock trades at a significant upside to the market 2016e P/BV of 1.9x vs the sector’s 1.2x indicate a potential downside rather than an attractive investment opportunity.

RJHI’s loan book is worst placed to take advantage of the rise in interest rates from amongst our coverage. With 80% of its book skewed towards the retail segment, RJHI’s yield on assets will be slowest to respond to rising interest rates given that retail loans are mostly fixed. RJHI can however overcome this by shifting its book to the corporate side. We have already observed RJHI’s corporate book jumping by a massive 20%YTD in 2Q16 whereas overall loan book grew by a lower 7%YTD, translating into a 220bps change in the loan mix over the last 2 quarters.

Cost of funds is increasing and reducing the cushion it normally offers NIMs. RJHI’s cost of fund is the lowest among its Saudi peers and also the lowest within our banking universe. This is primarily ascribed to the large zero-cost demand deposit base (more than 91% of total deposit). In 2Q16, the cost of fund was at 0.20%, up from just 12bps for full year 2015; we expect it to increase to 0.33% in 2018e.

We have revised downwards our 2016e estimates for the bank; owing it to slower loans growth expectations and tighter NIMs, we have trimmed our net financing income estimate by 8%. Resultantly, our net income estimates have been reduced by 12%. We have also decreased our financing and deposit estimates by 7.4% and 9.9%, respectively.

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