-
MENA Research Team
After moves towards increased accessibility over the past seven
years, the Saudi Arabian cabinet has now authorised the Capital
Market Authority to allow foreign institutions to trade
stocks on the Saudi stock market, paving the way for potentially
a complete opening of the market in 2015
We believe valuations should see a positive effect from the
potential inclusion of the stocks in various equity indices, which
could follow soon after the opening of the market
In this report we provide a macro overview of the market, and
look at this new opportunity from an equity strategy, industry
sector and stock perspective
Raj Sinha*Head of EEMEA equity researchHSBC Bank Middle East
Limited, Dubai+971 4 423 6932 [email protected]
United Arab EmiratesAybek Islamov*AnalystHSBC Bank Middle East
Limited, Dubai+971 4 423 [email protected]
Sriharsha Pappu*AnalystHSBC Bank Middle East Limited, Dubai+971
4 423 [email protected]
Vikram Viswanathan*AnalystHSBC Bank Middle East Limited,
Dubai+971 4 423 [email protected]
Nicholas Paton*AnalystHSBC Bank Middle East Limited, Dubai+971
4423 [email protected]
Simon WilliamsChief Economist, Middle East and North AfricaHSBC
Bank Middle East Limited, Dubai+971 4 423
[email protected]
Rana NasserSenior Economist, Middle East and North AfricaHSBC
Bank Middle East Limited, Dubai+971 4423
[email protected]
EgyptShirin Panicker*AnalystHSBC Securities, Egypt, S.A.E.+202
2529 [email protected]
Saudi ArabiaPatrick Gaffney*, CFAAnalystHSBC Saudi Arabia
Limited+966 11 299 [email protected]
Ammash Aljuraid*AnalystHSBC Saudi Arabia Limited+966 11 299
[email protected]
Sagar Kumar*AnalystHSBC Saudi Arabia Limited+966 11 299
[email protected]
Yazeed M Alturki*AnalystHSBC Saudi Arabia Limited+966 11 299
[email protected]
TelecomHerve Drouet*AnalystHSBC Bank Plc+44 20 7991
[email protected]
Oilfield servicesPeter Hitchens*AnalystHSBC Bank plc+44 20 7991
[email protected]
UtilitiesLevent Bayar*AnalystHSBC Yatirim Menkul Degerler
A.S.+90 212 [email protected]
Equity StrategyJohn Lomax*Head of Equity Strategy, GEMsHSBC Bank
plc, London+44 20 7992 [email protected]
Issuer of report: HSBC Bank Middle East Limited, Dubai
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/qualified pursuant to FINRA regulations.
Sau
di A
rabia
Eq
uities
July 2014
Saudi Arabia
By the MENA Research Team
A guide to the market
Disclosures and Disclaimer This report must be read with the
disclosures and analystcertifications in the Disclosure appendix,
and with the Disclaimer, which forms part of it
EquitiesSaudi Arabia
July 2014
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Equities Saudi Arabia July 2014
abc
Middle Eastern markets continue to be a focus for global
investors with the announcement from the Saudi Capital Market
Authority that its equity markets could open to foreign investors
in the first half of 2015. Should this occur, we would expect Saudi
stocks to become eligible for admission to global benchmark
indices, as such implying significant fund inflows both from active
funds tracking FTSE, MSCI and other indices as well as from the
passive funds. In this report we provide a guide to the structural
drivers in the key equity sectors and details of 44 stocks we
cover, and we include profiles on an additional 17 stocks with
interesting profiles but lower liquidity. We have also provided the
views of our Economics, Equity Strategy and Equity Quant teams.
Saudi Arabia's oil-funded expansionary fiscal stance will remain
the prime driver of growth in the country, with current and capital
spending set to rise from last year's record high. Longer-term,
Saudi's demographics look attractive with 60% of the population
under the age of 30 and a middle class set to grow from less than
20m today to 40m by 2050 (OECD). Furthermore, the local stock
market is well-established, with a healthy return of 120% since
2004, buoyed by rising oil prices and a GDP that has averaged 6.4%
per annum, albeit with a high level of volatility due to retail
investors representing 90% of volumes.
In Saudi Arabia, both the cyclical and secular narratives remain
attractive, in our view, with the announcement regarding the
opening of market to foreign investors acting as an additional
catalyst. The obstacles however relate more to valuations and more
challenging bottom-up stock selection. Nevertheless, from an equity
strategy perspective we continue to favour an off-benchmark
exposure, emphasising the petrochemical sector as a whole as well
as selected consumer and telecom stocks. We are also positive on
the banks sector in the Kingdom again from an equity strategy
perspective.
We see significant advantages in many of the sectors in the
Kingdom, most of which are difficult to replicate. Saudi banks have
access to one of the cheapest source of funds from low interest
deposits while the vast energy resources of the Kingdom should help
industrials to get cheap electricity and fuel. However
petrochemical and fertiliser companies benefit the most as they
have access to one the cheapest sources of feedstock globally. We
also see strong growth potential for Saudi consumer-facing
companies as they gain from Saudiasation (moves that encourage
employers to hire more Saudis) and employment growth in the
Kingdom. On the other hand telecom companies should see a growth
rate that is among the highest in the world in data usage as other
forms of entertainment are limited in the Kingdom.
Since 2007 the market has been open for investment for citizens
of the Gulf Cooperation Council (GCC) and since 2008 it has been
accessible to non-GCC investors via swap agreements. A formal
opening to non-GCC investors would carry a much more significant
impact from direct investment and the potential inclusion or
upgrade in equity market indices. Should Saudi Arabia be admitted
to the EM indices we estimate that it would constitute 4% of the
MSCI EM index.
Summary
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HSBC Saudi Arabia coverage
Company Ticker Rating MCap CP TP _____ PE ______ _____
EV/EBITDA_______ ________ RoE __________ Perf. (USDm) 2013 2014e
2015e 2013 2014e 2015e 2013 2014e 2015e YTD
Abdullah Al-Khodari 1330.SE OW 722 51.00 44.00 42.1 28.2 17.6
16.2 13.7 11.1 8.1% 11.4% 16.3% 53.5%Abdullah Al Othaim 4001.SE N
1,302 108.50 82.00 25.4 19.5 17.1 16.4 12.8 11.4 25.8% 28.8% 29.5%
79.4%Advanced Petro Chem. 2330.SE N (V) 2,160 49.40 45.00 14.5 15.8
15.9 10.5 10.8 10.7 25.9% 22.2% 21.1% 28.0%Al Mouwasat Medical
4002.SE OW 1,443 108.25 126.00 26.9 25.9 20.2 21.2 19.4 14.5 24.4%
22.5% 26.1% 17.5%Alinma Bank 1150.SE N 7,939 19.85 21.30 29.3 24.5
21.5 NM NM NM 6.0% 6.9% 7.3% 0.0%Almarai 2280.SE N 11,678 73.00
67.00 29.2 25.0 18.0 16.7 14.5 12.2 17.0% 16.6% 20.9% 37.3%Alrajhi
Banking 1120.SE N 29,354 67.75 74.00 14.8 14.2 13.4 NM NM NM 21.6%
20.6% 20.1% 0.0%Arab National Bank 1080.SE OW 7,759 29.10 37.00
11.5 10.0 9.1 NM NM NM 14.2% 14.8% 14.9% 0.0%Astra Industrial
1212.SE N 947 47.90 63.00 14.0 11.4 9.3 19.3 13.6 9.8 13.5% 15.9%
17.9% -6.3%Banque Saudi Fransi 1050.SE N 10,766 33.50 37.00 16.8
13.2 12.4 NM NM NM 10.7% 12.5% 12.0% 0.0%Dallah Healthcare 4004.SE
OW 1,309 104.00 115.00 35.9 31.0 25.1 27.0 22.7 18.7 11.9% 12.9%
14.6% 52.3%Dar Al Arkan 4300.SE N 3,916 13.60 14.00 21.6 15.5 12.6
17.5 13.5 11.5 4.1% 5.4% 6.4% 40.9%Etihad Etisalat(Mobily) 7020.SE
N 17,853 86.96 98.00 10.0 9.8 9.6 8.3 7.9 7.5 29.8% 26.9% 24.8%
2.9%Fawaz Alhokair 4240.SE N 6,019 107.50 90.50 36.5 28.6 23.0 30.7
22.6 17.2 36.1% 35.5% 36.8% 53.8%Herfy Food Services 6002.SE N
1,287 104.50 107.86 25.2 23.2 20.6 20.4 18.0 16.0 34.1% 32.4% 32.1%
31.2%Jabal Omar 4250.SE N 13,133 53.00 47.00 0.0 40.9 40.6 0.0 39.6
35.1 -0.4% 12.6% 11.3% 71.2%Jarir Marketing 4190.SE OW 4,799 200.00
237.00 27.6 23.8 20.4 27.2 23.0 19.3 59.3% 58.6% 57.4% 26.5%Maaden
1211.SE N 9,175 37.20 38.00 10.6 7.8 6.5 26.5 37.7 21.4 17.2% 22.0%
25.8% 17.7%Methanol Chemicals 2001.SE N (V) 531 16.50 16.00 27.6
14.8 16.1 10.6 8.1 8.0 4.6% 8.3% 7.4% 7.1%NIC (Tasnee) 2060.SE N
6,349 35.60 35.00 21.6 11.5 11.7 11.4 8.1 7.9 9.2% 16.6% 15.2%
7.0%National Medical Care 4005.SE N 879 73.50 78.00 35.6 28.8 25.3
26.0 22.5 19.5 13.0% 13.8% 15.1% 35.3%National Petrochemical
2002.SE N (V) 4,402 34.40 28.00 0.0 14.3 15.2 35.0 11.2 10.8 -1.6%
25.3% 20.6% 30.3%Qassim Cement 3040.SE N 2,328 97.00 101.00 14.9
14.6 16.7 11.4 11.1 12.7 29.4% 29.7% 25.6% 10.1%PetroRabigh 2380.SE
OW 7,852 33.62 45.00 82.0 12.1 8.6 26.7 10.2 7.6 4.1% 25.0% 29.8%
33.3%Riyad Bank 1010.SE N 14,678 18.35 20.40 13.9 12.9 11.8 NM NM
NM 12.5% 12.8% 13.3% 0.0%Sahara Petrochemical 2260.SE N 2,761 23.60
23.00 17.9 14.4 13.8 17.1 12.2 9.7 10.3% 12.0% 11.8% 22.8%Samba
Financial Group 1090.SE OW 13,438 42.00 55.00 11.2 10.5 9.7 NM NM
NM 14.0% 13.7% 13.6% 0.0%Saudi Airlines Catering 6004.SE OW 4,236
193.75 186.00 30.4 27.4 22.2 26.7 23.1 18.6 47.1% 47.4% 52.5%
34.8%Saudi Arabian Amiantit 2160.SE N 557 18.10 16.40 20.6 12.5
10.7 8.8 7.6 7.2 6.5% 10.6% 12.2% 16.8%Saudi Arabian Fertilizer
2020.SE OW 14,264 160.50 176.00 13.2 15.4 12.9 11.7 13.6 11.3 41.1%
32.7% 39.7% 2.4%Saudi Basic Industries 2010.SE OW 98,784 123.50
130.00 14.7 11.7 11.6 8.3 7.1 6.8 16.7% 19.2% 17.6% 13.4%Saudi
Cement Company 3030.SE OW 4,508 110.50 130.00 15.0 14.8 13.3 12.6
12.3 11.2 35.3% 35.3% 38.7% 8.6%Saudi Electricity Co. 5110.SE N
17,997 16.20 15.90 22.2 20.4 17.7 9.9 10.4 10.8 5.5% 5.7% 6.2%
19.2%Saudi Industrial Invst. 2250.SE OW 4,487 37.40 41.00 23.6 10.4
10.9 35.2 11.1 10.8 11.4% 23.8% 20.1% 21.5%Saudi International
Petro 2310.SE N 3,500 35.80 34.00 21.2 15.9 14.4 11.5 9.1 8.1 10.9%
13.8% 14.3% 18.0%Saudi Kayan 2350.SE N 6,039 15.10 16.00 0.0 13.9
13.2 20.5 10.6 9.8 -2.4% 11.0% 10.4% -3.4%Saudi Pharmaceutical
2070.SE N 1,529 47.80 47.08 21.2 17.7 15.1 12.4 11.0 9.3 8.0% 8.5%
9.8% 12.3%Saudi Real Estate 4020.SE N 1,389 43.40 40.00 29.0 31.9
29.7 26.8 23.6 21.9 5.5% 4.9% 5.3% 27.6%Saudi Steel Pipes 1320.SE N
480 35.30 37.50 21.0 15.5 12.9 14.4 11.9 10.0 10.6% 14.0% 16.4%
-3.9%Saudi Telecom Co. 7010.SE OW 38,394 72.00 71.00 13.9 12.1 11.6
7.2 6.7 6.2 19.2% 19.9% 18.9% 31.5%Savola 2050.SE N 11,283 79.25
74.00 24.8 22.7 18.7 12.8 11.2 9.6 18.9% 18.4% 20.9% 31.2%Yamamah
Cement 3020.SE N 3,334 61.75 70.00 15.1 16.4 18.0 10.5 10.8 11.5
22.2% 19.4% 17.6% 8.3%Yanbu Cement 3060.SE N 3,087 73.50 78.00 14.1
14.1 16.7 11.3 10.7 12.4 25.0% 24.9% 20.7% 10.8%Yanbu Petrochemical
2290.SE N 10,501 70.02 77.00 14.9 12.5 12.6 10.6 9.4 9.4 18.9%
20.4% 19.5% -2.9%Zamil Industries 2240.SE N 972 60.75 48.00 15.5
13.6 12.6 11.3 10.0 9.0 15.4% 16.1% 16.2% 42.4%Source: Thomson
Reuters Datastream, HSBC estimates Note: Closing price as on 22 Jul
2014
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Saudi to open its equity market 5
Equity Market Strategy 10
Economics 16
Sectors & companies 17
Banks 19 Arab National Bank 23
Banque Saudi Fransi 26
Riyad Bank 29
Samba Financial Group 32
Alrajhi Banking & Investment 35
Alinma 38
Bank AlBilad 41
Bank AlJazira 43
Saudi Hollandi Bank 45
Saudi Investment Bank 47
Chemicals & fertilisers 49 Advanced Petrochemical 57
Methanol Chemicals Co (Chemanol) 60
Saudi Basic Industries Co (SABIC) 63
National Industrializatio (Tasnee (NIC)) 66
Saudi Industrial Investment (SIIG) 70
National Petrochemical Company (Petrochem) 73
Yansab 76
Kayan 79
Saudi International Petro (Sipchem) 82
Rabigh Refining and Petro (PetroRabigh) 85
Maaden 89
Saudi Arabian Fertiliser Company (SAFCO) 92
Cement & construction 95 Yamamah Cement Company 100
Saudi Cement Company (SACCO) 103
Qassim Cement 106
Yanbu Cement 109
Abdullah A. M. 112 Al-Khodari Sons
Saudi Arabian Amiantit Co. 115
Saudi Steel Pipes 118
Zamil Industries 121
Arabian Pipes Co. 124
Middle East Specialized Cables Co. 126
Saudi Cable Co. 128
Saudi Paper Manufacturing Company 130
Contents
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United Wire Factories Company 132
Consumers 135 Abdullah Al Othaim Markets 138
Almarai 141
Fawaz Abdulaziz Alhokair 144
Jarir Marketing Co. 147
Herfy Food Services 150
Savola 153
Saudi Airlines Catering 156
Al Khaleej Training & Education 159
Al Tayyar Travel Group 161
Budget (United International Transportation Co.) 163
eXtra (United Electronics Co.) 165
Farm Superstores (Saudi Marketing Co.) 167
Halwani Brothers 169
Saudia Dairy & Foodstuff Company 171
Saudi Automotive Services Co. 173
Saudi Ceramic Co. 175
Saudi Fisheries Co. 177
Shaker (Al Hassan Ghazi Ibrahim Shaker Co) 179
Healthcare 181 Astra Industrials Group 185
Dallah Healthcare 188
Al Mouwasat Medical Services Co 191
National Medical Care Co (NMCC) 194
Saudi Pharmaceuticals (SPIMACO) 197
Al Hammadi Dev. & Investment Co. 200
Real Estate 203 Dar Al Arkan 208
Jabal Omar 211
Saudi Real Estate Co. 214
Emaar Economic City 217
Insurance 219 The Mediterranean & Gulf Insurance &
Reinsurance Co (Medgulf) 222
The Company for Cooperative Insurance (Tawuniya) 224
Malath Cooperative Insurance & Reinsurance Co (Malath)
226
Telecoms 229 Etihad Etisalat (Mobily) 233
Saudi Telecom Company 236
Zain KSA 239
Utilities 241 Saudi Electricity Company (SEC) 244
Disclosure appendix 249
Disclaimer 252
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Saudi stock market to open in 1H 2015 Saudi Arabias authorities
announced on Tuesday, 22 July 2014, their plan to open the
country's listed stock market to foreign investors in the first
half of 2015. This is the first time the Saudi authorities are
expected to allow foreign institutional investors to directly trade
equities in the Tadawul, without restrictions. Since 2008, the
Kingdom has only allowed foreign investors indirect access to the
market through swaps and p-notes and investors needed AUM of at
least USD 5bn to be considered.
Next steps for the Saudi authorities The Capital Market
Authority has been given
scope to complete and publish the regulatory requirements over
the next 30 days
Investors and Authorised Participants will have the opportunity
to provide feedback in the following 90 days.
Market consultations to commence Index providers are expected to
commence consultations on country / market classifications for the
Saudi market based on the following criteria: openness to foreign
ownership; ease of capital inflows and outflows; efficiency of the
operational framework and stability of the institutional framework.
In terms of market accessibility, factors that will need to be
assessed will include: foreign ownership limits; equal rights to
foreign investors; market regulations; competitive landscape of
brokers; information
flow; clearing and settlement (T+0); custody and transferability
with respect to the needs and requirements of global investors.
Potential global index benchmark impact Given the uncertainty
regarding the potential market classification of Saudi Arabia;
Developed, Emerging or Frontier, in the tables which follow, we
simulate the potential impact to MSCI indices, on the basis of the
following:
1) Saudi is classified as an Emerging Market
2) Saudi is classified as a Frontier Market
Scenario analysis In our analysis, we assume the following: the
current domestic inclusion factor is equivalent to the investable
free float for Saudi stocks; we apply minimum size criteria of
USD1.4bn at the company level. Using these criteria we estimate the
new opportunity set for Saudi Arabia will consist of 45 stocks.
Saudi to open its equity market
Vijay Sumon* Head of IndexationHSBC Bank plc+44 20 7991
[email protected]
Joaquim de Lima * Head of Equity Quantitative Research HSBC Bank
plc+44 20 7991 [email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/ qualified pursuant to FINRA regulations
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Saudi as an Emerging Market We now examine, in detail, the
potential impact on investors benchmarked to MSCI EM in the event
of Saudi being classified as an Emerging Market. In what follows,
we assume all passive funds will rebalance fully to match the new
benchmark.
Impact of Saudi entering MSCI EM Country and Regional impact We
find the Saudi market would account for 4% in terms of weight in
MSCI EM and potentially be the ninth largest country in terms of
weighting.
We would expect China, South Korea, Taiwan and Brazil to be the
most negatively impacted in terms of weight changes and likely to
see decreases of between 49-78 basis points individually.
In terms of regions, we believe EM Asia is set to be the most
negatively impacted with a decrease of 260 basis points, followed
by Latam with a decrease of 80 basis points whilst we would expect
EMEA to experience an increase of 350 basis points.
Table 1: Simulated MSCI Emerging Market regional indices + Saudi
Arabia
_______Current EM Index_______ ____Potential EM regional Indices
+ Saudi Arabia____ Region Number of stocks Weight % Number of
stocks Weight % Weight change % Net flow USDm
Asia 535 62.2% 535 59.6% -2.6% -5,480 EMEA 159 18.1% 204 21.6%
3.5% 7,215 Latam 140 19.7% 140 18.9% -0.8% -1,735
Total 834 100% 879 100% 0.0% 0 Source: MSCI, HSBC estimates.
Data as of 21 July 2014
Table 2: Simulated MSCI Emerging Market country indices + Saudi
Arabia
______ Current EM Index______ ______Potential EM country Indices
+ Saudi Arabia ______ Country Number of stocks Weight % Number of
stocks Weight % Weight change % Net flow USDm
Saudi Arabia 0 0.0% 45 4.2% 4.2% 8,808 Egypt 4 0.2% 4 0.2% 0.0%
-18 Hungary 3 0.2% 3 0.2% 0.0% -18 Czech Republic 3 0.2% 3 0.2%
0.0% -19 Peru 3 0.4% 3 0.4% 0.0% -38 Qatar 10 0.5% 10 0.4% 0.0% -41
UAE 9 0.5% 9 0.5% 0.0% -47 Greece 10 0.7% 10 0.7% 0.0% -62
Philippines 20 1.0% 20 0.9% 0.0% -86 Colombia 14 1.0% 14 1.0% 0.0%
-90 Chile 20 1.5% 20 1.4% -0.1% -130 Poland 23 1.6% 23 1.6% -0.1%
-143 Turkey 25 1.8% 25 1.7% -0.1% -155 Thailand 29 2.3% 29 2.2%
-0.1% -201 Indonesia 30 2.7% 30 2.6% -0.1% -235 Malaysia 43 3.9% 43
3.7% -0.2% -342 Russia 22 4.9% 22 4.6% -0.2% -428 Mexico 30 5.2% 30
5.0% -0.2% -461 India 68 6.6% 68 6.3% -0.3% -584 South Africa 50
7.5% 50 7.2% -0.3% -661 Brazil 73 11.5% 73 11.0% -0.5% -1,016
Taiwan 101 12.1% 101 11.6% -0.5% -1,067 Korea 103 15.2% 103 14.6%
-0.6% -1,340 China 141 18.4% 141 17.7% -0.8% -1,624
Total 834 100% 879 100% 0.0% 0 Source: MSCI, HSBC estimates.
Data as of 21 July 2014
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Sector impact We believe Materials, Financials and Telecoms
sectors could be positively impacted in terms of weight changes, up
110, 50 and 20 basis points respectively. We believe these sectors
combined could account for 35 of the 45 Saudi stocks that could
potentially enter MSCI EM.
The Information Technology, Energy, Consumer Discretionary and
Industrial sectors could potentially experience weight decreases,
in the range of 20-70 basis points.
Table 3: Simulated MSCI Emerging Market sectors + Saudi
Arabia
_______Current EM Index_______ ____Potential EM sectors + Saudi
Arabia____ Sector Number of
stocks Weight % Number
of stocks Weight
% Weight
change % Net flow USDm
Materials 98 8.80% 114 9.90% 1.10% 2,313 Financials 210 27.10%
226 27.60% 0.50% 968 Telecom. Services 46 7.10% 49 7.20% 0.20% 338
Consumer Staples 81 8.30% 83 8.20% -0.10% -262 Health Care 30 1.90%
30 1.80% -0.10% -164 Utilities 52 3.60% 53 3.50% -0.10% -143
Consumer Discretionary 88 9.10% 91 8.90% -0.20% -453 Industrials
112 6.50% 114 6.30% -0.20% -353 Energy 51 10.50% 53 10.20% -0.40%
-735 Information Technology 66 17.10% 66 16.40% -0.70% -1,510 Total
834 100% 879 100% 0.0% 0 Source: MSCI, HSBC estimates. Data as of
21 July 2014
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Saudi as a Frontier Market In this section we detail the
potential impact on investors benchmarked to MSCI FM in the event
of Saudi being classified as a Frontier Market. In what follows, we
assume all passive funds will rebalance fully to match the new
benchmark.
Impact of Saudi Arabia entering Frontier Markets Country and
regional impact We find the Saudi market would dominate the MSCI FM
index, accounting for 62% in terms of weight. We would expect
Kuwait, Nigeria, Argentina and Pakistan to be the most
negatively
impacted in terms of weight changes and could see decreases
ranging between 5 and 15%.
Regionally, this could lead to potential distortions in MSCI
Frontier Market representation with EMEA accounting for at almost
92%, Asia dropping to 5% and Latam at 3%.
Table 4: Simulated MSCI Frontier Market regional indices + Saudi
Arabia
_______Current EM Index_______ ____Potential EM regional Indices
+ Saudi Arabia____ Region Number of stocks Weight % Number of
stocks Weight % Weight change % Net flow USDm
Asia 34 14.3% 34 5.4% -8.9% -99 EMEA 87 77.6% 132 91.5% 14.0%
156 Latam 6 8.1% 6 3.1% -5.1% -57
Total 127 100% 172 100% 0.0% 0 Source: MSCI, HSBC estimates.
Data as of 21 July 2014
Table 5: Simulated MSCI Frontier Market index + Saudi Arabia
_______ Current FM index ________ ___________New FM Index +
Saudi Arabia ___________ Country Number of stocks Weight % Number
of stocks Weight % Weight change % Net flow USDm
Saudi Arabia 0 0.0% 45 62.2% 62.2% 695 Lithuania 2 0.2% 2 0.1%
-0.1% -1 Bulgaria 2 0.2% 2 0.1% -0.1% -1 Ukraine 2 0.2% 2 0.1%
-0.1% -2 Serbia 2 0.3% 2 0.1% -0.2% -2 Estonia 2 0.4% 2 0.2% -0.3%
-3 Tunisia 2 0.6% 2 0.2% -0.3% -4 Jordan 3 0.7% 3 0.3% -0.5% -5
Mauritius 2 1.2% 2 0.5% -0.8% -9 Bahrain 3 1.4% 3 0.5% -0.8% -9
Croatia 3 1.7% 3 0.6% -1.1% -12 Bangladesh 4 1.8% 4 0.7% -1.1% -12
Sri Lanka 3 1.9% 3 0.7% -1.2% -13 Romania 4 2.2% 4 0.8% -1.4% -15
Lebanon 4 2.2% 4 0.8% -1.4% -15 Slovenia 4 2.7% 4 1.0% -1.7% -19
Vietnam 12 3.5% 12 1.3% -2.2% -24 Kazakhstan 3 3.7% 3 1.4% -2.3%
-26 Oman 9 4.6% 9 1.7% -2.8% -32 Kenya 5 4.9% 5 1.9% -3.1% -34
Morocco 9 6.1% 9 2.3% -3.8% -42 Pakistan 15 7.2% 15 2.7% -4.5% -50
Argentina 6 8.1% 6 3.1% -5.1% -57 Nigeria 18 19.6% 18 7.4% -12.2%
-137 Kuwait 8 24.8% 8 9.4% -15.4% -172
Total 127 100% 172 100% 0.0% 0 Source: MSCI, HSBC estimates.
Data as of 21 July 2014
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Sector impacts We believe the Materials and Consumer
Discretionary sectors could be positively impacted in terms of
weight changes, up 18% and 2% respectively.
Financials, Energy and Consumer Staple could experience the
largest negative impacts with potential weight decreases of between
3 and 7%.
Table 6: Simulated MSCI Frontier Market sectors + Saudi
Arabia
_______Current FM Index_______ ____Potential FM sectors + Saudi
Arabia____ Sector Number of
stocks Weight % Number of
stocks Weight
% Weight change
% Net flow USDm
Materials 15 5.70% 15 24.00% 18.30% 204 Consumer Discretionary 3
0.50% 3 2.70% 2.10% 24 Utilities 2 0.40% 2 1.40% 1.00% 11
Information Technology 0 0.00% 0 0.00% 0.00% 0 Industrials 5 3.40%
5 2.90% -0.60% -6 Health Care 3 2.70% 3 1.00% -1.70% -19 Telecom.
Services 14 14.50% 14 12.30% -2.20% -25 Consumer Staples 11 10.50%
11 7.30% -3.20% -36 Energy 16 12.10% 16 5.90% -6.20% -69 Financials
58 50.10% 58 42.60% -7.50% -84 Total 127 100% 127 100% 0.0% 0
Source: MSCI, HSBC estimates. Data as of 21 July 2014
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For EM and FM investors, we recommend an off-benchmark exposure
to Saudi Arabia In Saudi Arabia, both the cyclical and secular
narratives remain attractive. The obstacles relate more to
valuations and more challenging bottom-up stock selection.
Nevertheless, we continue to favour an off-benchmark exposure,
emphasising the petrochemical sector as a whole as well as selected
consumer and telecom stocks. We are also positive on the bank
sector.
The long-term, secular dynamic in Saudi Arabia, is grounded in
demographics and middle class growth (see Frontier Market Equity
Strategy: Frontier markets and the rise in middle class spending,
23 July 2014). The total middle class population is forecast to
grow from less than 20m today to 40m by 2050 (OECD). This would be
the fourth-largest middle class population in the frontier
index.
Simon Williams, our Chief Middle Eastern Economist, remains
upbeat on the Kingdoms near-term economic prospects, and continues
to look for strong growth in domestic demand, underpinned by high
oil receipts and two more years of fiscal and current account
surplus.
The governments oil-funded expansionary fiscal stance will
remain the prime driver of growth, with current and capital
spending set to rise from last years record high. The government
will also be a prime driver of a raft of other large industrial and
infrastructure development projects (such as the Riyadh metro)
which are state sponsored but not directly state financed.
With inflation low and the dollar peg in place, we also expect
the Saudi Arabian Monetary Agencys (SAMAs) monetary stance to
remain loose.
In aggregate, the equity market is not very expensive, with the
PE relative (compared with GEM) trading a little above its
five-year history. However, neither is it very cheap, and stock
selection is becoming more complicated.
In the domestically-focussed part of the market we like selected
consumer, telecom and banks stocks. For the consumer sector, sales
growth should continue to rebound this year. In aggregate
Saudisation initiatives (policies favouring the employment of
locals) should ultimately help the sector by enhancing purchasing
power. The undertow from the long-term secular story works in the
sectors favour. The impediment is that the discount to the peer
group has closed, so there is less valuation support. The telecoms
sector is another way to play the theme.
Equity Market Strategy Saudi Arabia has a strong cyclical and
secular position
Prospective market liberalisation should provide an additional
catalyst Prefer petrochemicals and selected consumer, telecoms
and
bank exposure
John Lomax* Head of Global Emerging Market Equity Strategy HSBC
Bank plc+44 20 7992 [email protected]
Kishore Muktinutalapati* AssociateBangalore
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/ qualified pursuant to FINRA regulations
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The case for the banks is also slowly coming into view. The
first rise in US interest rates, which positively impacts them, is
no longer extremely distant (Q3 next year in the view of HSBCs US
economist). Sectoral earnings in any case should pick up on the
back of falling loan loss provisions and domestic macro is
supportive. Valuations are looking increasingly attractive.
The petrochemical sector should benefit from both demand and
supply support. Chinese polymer demand should receive support from
the ongoing strength of the Chinese economy. Unlike, other parts of
the global material sector, Saudi petrochemicals will not be
negatively impacted by the rebalancing of the Chinese economy
towards consumption and away from infrastructure spending since
packaging and autos are the key demand drivers. On the supply side,
the developing supply vacuum should allow room for margin expansion
from current levels. Dividend yield, which has scope to be enhanced
by these developments, is an additional source of sectoral
support.
Saudi Arabias Equity Market The Saudi equity market has
performed strongly over the last 10 years. The main index, the
Tadawul All-Share Index (TASI), has returned a healthy 121% since
2004, buoyed by rising oil prices and GDP growth that has averaged
6.4% per annum. However, the volatility has been significant in a
market with over 90% of trading volumes accounted for by Saudi
retail investors. The TASI returned a 720% from early 2002 to
February 2006, but investors who bought at the peak in February
2006 have lost 53%, even though the market has returned 95% since
early 2009. The market has been open for investment since 2007 for
citizens of the nations within the Gulf Co-operation Council (which
also includes the UAE, Kuwait, Qatar, Bahrain and Oman). Since
2008, non-GCC investors have been able to access the market via
swap agreements.
The Saudi equity market tends to trade at a premium to the MSCI
emerging markets index, reflecting its vast hydrocarbon wealth and
one of the most attractive demographic profiles globally, including
a very young population and a labour force growing at nearly 3% per
annum. The Saudi bourse, the largest in the Middle East, is open
for trading in equities between 11.00am and 3.30pm (one session)
Sunday through Thursday.
164 stocks are listed on the Tadawul exchange. SABIC and Saudi
Telecom both account for c25% of the Tadawul All Share Index, with
the top 5 names representing c38% of the market. The top 10 names
account for about 52% of the index total market capitalization, and
have an average free float of about 30%. This means that the Saudi
market is more diversified than most other regional exchanges but
it is still is fairly concentrated by developed-market standards.
The materials sector (which includes petrochemical companies)
accounts for 34.6% of the market, followed by a 33.8% weight for
Financials by market capitalisation.
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The Saudi equity market is one of the most heavily traded in the
emerging markets space, with average daily turnover at USD1.4bn in
2013 and USD2.5bn currently. At times, the market turnover has been
higher than the combined turnover in all other CEEMEA equity
markets, even though volumes are still far below the market peak in
2005/06. The ratio of market capitalisation to GDP, at about 51%,
is decent by emerging-market standards.
The Saudi market has exhibited a low correlation to global
equity benchmarks, partly because the market is currently closed
for direct foreign investment. Non-GCC parties can only invest in
Saudi equities through swap contracts and via a limited selection
of exchange traded funds. Several local Saudi brokerage firms offer
swap contracts to international investors. These contracts enable
the investor to
obtain economic exposure while the legal ownership remains with
a Saudi-registered entity.
Market liberalisation According to Reuters (Saudi Arabia
prepares to open $530 billion bourse to foreigners, 22 July 2014),
the Saudi Arabian cabinet authorized the Capital Market Authority
(CMA) at a time it sees as appropriate to allow foreign financial
institutions to buy and sell stocks on the Saudi stock market,
according to rules to be laid down by the CMA.
Sector composition of TADAWUL All Share index Major stocks in
TADAWUL All Share index
Source: Tadawul, Thomson Reuters Da tastream, HSBC Source:
Tadawul, Thomson Reuters Da tastream, HSBC
Tadawul All Share price index Tadawul trading volumes
Source: Tadawul, Thomson Reuters Da tastream Source: Tadawul,
Thomson Reuters Da tastream
Sector Weight (%)Materials 34.6%Financials
33.8%Telecommunication Services 11.0%Consumer Staples 5.5%Consumer
Discretionary 4.5%Industrials 3.9%Utilities 3.6%Energy 2.1%Health
Care 1.0%Total 100.0%
Rank Stock Name Weight (%)1 Saudi Basic Industries 17.5%2 Saudi
Telecom 7.1%3 Al Rajhi Bank 5.4%4 Kingdom Holding 4.5%5 Saudi
Electricity 3.4%Top 5 37.8%6 Etihad Etisalat Co. 3.2%7 Riyad Bank
2.7%8 Saudi Arabia Frtz. 2.7%9 The Saudi British Bk. 2.5%10 Samba
Financial Group 2.4%Top 6-10 13.5%
0
1000
2000
3000
4000
5000
6000
01 02 03 04 05 06 07 08 09 10 11 12 13 14
TADAWUL All Share Index (USD)
0.00.51.01.52.02.53.03.54.0
07 08 09 10 11 12 13 14Tadawul Index 6m ADTV (USDbn)
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If Saudi opens its market to direct foreign investment, it may
potentially be included in the MSCI Emerging Markets index.
According to Sebastien Lieblich, executive director in the index
research team at MSCI, the index provider would wait for the
changes to be implemented before consulting investors, with a
decision as to whether to include it as emerging market unlikely to
be made before June 2015. However, should this materialise, the
Saudi market could take up about 4% of the MSCI EM index. However,
adjusted for the foreign ownership caps, the weight should be
lower.
The high turnover of the Saudi market suggests that it could be
a key constituent of this key benchmark. Inclusion in the MSCI EM
(or even Frontiers EM) index, were it to happen, could be important
for at least two reasons: first, it should allow Saudi to tap the
broad international pool of EM liquidity; second, it has the
potential to stimulate more efficient behaviour from Saudi
equities, allowing them to better reflect market fundamentals.
Implications for equity markets Below we examine the possible
consequences of the decision by the Saudi Arabian Capital Markets
Authority (CMA) to allow limited foreign equity ownership on the
Kingdoms Tadawul Exchange.
The results we would expect include a decrease in the volatility
of returns, and the crowding-out of irrational trading behaviour.
This should push prices to increasingly reflect fundamentals and to
move in line with their intrinsic values.
We believe allowing foreign ownership would render the Saudi
market less volatile, and consequently more efficient.
Additionally, as investors are given greater insight into companies
decision-making processes, financial disclosure and corporate
transparency should also improve while foreign investment, we
think, will also bring additional analyst coverage to the regions
equities, thereby improving the quality of information
available.
The CMA opened Saudi Arabias stock exchange to limited foreign
investment in late 2008. Non-nationals were given the right to
trade shares listed on the exchange by entering into swap
agreements.
We expect market efficiency to have improved since this
liberalisation process. However, given the high transaction costs
associated with this indirect trading mechanism, we believe market
efficiency would further improve once direct foreign ownership is
permitted.
Volatility, liquidity and market efficiency In order to examine
market efficiency, we look at changes in volatility of returns by
comparing the standard deviation of returns for the two-year pre-
(partial) liberalisation period with that of the subsequent
two-year period. (For more details on the methodology see
Mispriced: CEEMEA equity projections, 12 December 2011). Changes in
liquidity are examined by measuring average daily traded volumes
(ADTV) and turnover by volume for the year preceding the (partial)
liberalisation process and comparing them with levels for the
following two-year period. Finally, market efficiency is measured
by investigating the relationship between current and past returns.
A market is more efficient when current returns depend less on
their previous values.
After limited foreign trading was allowed, the weekly standard
deviation of returns decreased substantially from 0.056 to 0.030 a
47.3 % decrease. After December 2008, large spikes in returns have
decreased both in frequency and intensity. We believe this to be
attributable in part to increased market efficiency as a result of
allowing limited foreign investment. However, the period around the
decrease in volatility coincides with a time when the CMA greatly
increased market surveillance in an effort to discourage market
manipulation by groups of wealthy investors. This development may
also serve as a partial explanation for the decrease in
volatility.
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Prior to the liberalisation, the Saudi turnover ratio was much
higher than in many developed and emerging markets, as shown above.
We believe this drop in turnover ratio indicates that herd
behaviour and noise trading in the market decreased after the
liberalisation process.
We calculate a drop in average ADTV from USD1.77bn in the first
period to USD1.07bn after the liberalisation process. However, we
note that these measures were implemented at the peak of the 2008
financial crisis, so the decrease in ADTV may be explained by the
drying-up of international liquidity. However, the countrys
turnover ratio has consistently converged towards levels seen in
developed and emerging markets, which leads us to believe that
foreign investments are also responsible for this drop in
liquidity.
When assessing the impact of the liberalisation on market
efficiency, we found current daily returns to be significantly
correlated with past returns during the two-year period before the
liberalisation process. In the subsequent two-year period, however,
there was a noticeable drop in the significance level of the
coefficients. The table below summarises these results.
After foreign trading was permitted by the exchange, the test
was unable to detect any significant pattern among daily returns,
except for t-2, which still influences current returns.
There has clearly been an improvement in the level of efficiency
in the Saudi market since the liberalisation process took place. We
expect further improvements once direct foreign ownership is
allowed.
TASI market efficiency
___________ Coefficients ____________ Time period Pre
liberalisation Post liberalisation
t-1 0.073** -0.006t-2 -0.047* 0.104**t-3 0.043* 0.000t-4 0.066**
-0.041t-5 -0.021 -0.016t-6 -0.042* -0.051t-7 0.017 0.032** 1%
significance level; * 5% significance level Source: Thomson Reuters
Datastream, HSBC
Weekly returns of Tadawul index pre and post partial
liberalisation in December 2008
Turnover ratios*
Source: Tadawul, Thomson Reuters Datastream Notes: *Turnover
ratio is the total value of shares traded during the period divided
by the
average market capitalisation for the period. Source: Tadawul,
Thomson Reuters Datastream
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10
Pre liberalisation Post liberalisation 0%
50%
100%
150%
200%
250%
300%
1992 1995 1998 2001 2004 2007 2010
Saudi Arabia DM EM GCC
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Earnings and valuations
Price/Earnings ratio Earnings growth and equity performance
Source: Tadawul, Bloomberg Source: Tadawul, Bloomberg
Price/Sales ratio Price/Book ratio
Source: Tadawul, Bloomberg Source: Tadawul, Bloomberg
Earnings yield Dividend Yield
Source: Tadawul, Bloomberg Source: Tadawul, Bloomberg
8.0x
12.0x
16.0x
20.0x
24.0x
28.0x
06 07 08 09 10 11 12 13 1412 month trailing PE 12 month forward
PE
-60%
-40%
-20%
0%
20%
40%
60%
0%
10%
20%
30%
40%
50%
60%
07 08 09 10 11 12 13 1412 month forward Earnings growthy-o-y
returns (RHS)
2.0x
3.0x
4.0x
5.0x
6.0x
08 09 10 11 12 13 1412 month trailing P/S 12 month forward
P/S
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
08 09 10 11 12 13 14
12 month trailing PB 12 month forward PB
4.0%5.0%6.0%7.0%8.0%9.0%
10.0%11.0%12.0%
06 07 08 09 10 11 12 13 1412 month forward Earnings Yield
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
08 09 10 11 12 13 1412 month trailing DY 12 month forward DY
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Slowing, but still strong We remain upbeat on the Kingdoms
near-term economic prospects, and continue to look for strong
growth in domestic demand, underpinned by high oil receipts and two
more years of fiscal and current account surplus. The impact that
unrest in Iraq, Libya and Ukraine has had on global energy prices
represents upside risk to this view.
The governments oil-funded expansionary fiscal stance will
remain the prime driver of growth, with current and capital
spending set to rise from last years record high. The government
will also be a prime driver of a raft of other large industrial and
infrastructure development projects (such as the Riyadh Metro)
which are state sponsored, but not directly state financed.
With inflation low and the dollar-peg in place, we also expect
SAMAs monetary stance to remain loose, with funding from domestic
sources enhanced by improving access to global debt and equity
markets. Saudi Arabias demographic profile 60% of the population
are under the age of 30 will support gains in consumption. With
reserves equivalent to some 90% of GDP and a public debt at less
than 5% of GDP, the Kingdom is also well placed to weather even a
pronounced increase in regional political risk or prolonged fall in
oil earnings.
In this context, though, we see some signs that the economy is
decelerating with markers of consumption and investment growth all
easing over the first half of the year. Though driven in part by
the short-term disruption caused by the expulsion of a large number
of expatriates in late 2013, it also marks the Kingdoms increased
fiscal caution as the budget surplus continues to decline. We see
signs that alongside more modest gains in spending, there is also a
greater commitment to economic liberalisation and structural
reform. In our view, however, the pace of change as yet lacks the
urgency required if the Kingdoms long-term demand for goods,
services and employment is to be met in an environment of more
modest public spending gains.
Economics
Simon Williams EconomistHSBC Bank Middle East Ltd+971 4423
[email protected]
Razan Nasser EconomistHSBC Bank Middle East Ltd+971 4423
[email protected]
Key data and forecasts
2008 2009 2010 2011 2012 2013e 2014f 2015f
GDP (% y-o-y) 8.2 2.0 7.5 8.6 5.8 4.1 4.2 3.9 Current account (%
GDP) 24.4 3.5 13.4 22.8 21.8 17.1 13.4 9.2 Budget Balance (% GDP)
29.8 -5.4 4.4 11.6 13.7 6.4 3.7 2.3 Trade Balance (% GDP) 40.9 24.6
29.3 36.6 34.0 30.1 26.6 23.7 CPI (% end year) 9.0 4.2 5.4 5.3 3.9
3.0 3.5 4.3 Public Debt (% GDP) 12.1 14.0 8.5 5.4 3.6 2.7 2.9 3.1
External debt (% GDP) 18.5 23.2 19.7 16.6 15.8 15.3 14.4 14.1
Policy rate (% end year) 1.50 0.25 0.25 0.25 0.25 0.25 0.25 0.25
USD/SAR (end year) 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 EUR/SAR
(end year) 5.22 5.40 5.02 4.87 4.94 5.13 4.79 4.68 Source: Saudi
Arabia Monetary Agency, Central Department of Statistics and
Information (CDSI), HSBC estimates and forecasts
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Sectors & companies
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Banks
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Sector view Core revenue growth will struggle to recover in
2014e and 2015e A combination of low interest rates, a cap on loan
to deposit ratios of 85% and the strong capitalisation of Saudi
banks means that the sector will struggle to substantially improve
its core revenue growth in 2014e and 2015e, in our view. Alinma
Bank and Riyad Bank are the exceptions due to faster and more
stable loan growth, mainly as a result of their surplus capital
positions. We forecast sector core revenues to increase 9% in 2014e
and 2015e. Q2 2014 earnings results confirmed our full year
expectation. An increase in interest rates will be a key driver of
improvement. We factor in a 20bp increase in 2015e and expect Saudi
banks core revenue growth to recover to 13% in 2016e.
Saudi banks' y-o-y core revenue* growth: latest trends and our
forecasts
(%) Q2 13 Q3 13 Q4 13 Q1 14 2014e 2015e 2016e
Alinma 12 15 20 15 16 15 15 Alrajhi 1 (2) 2 0 4 5 8 ANB 2 4 15
10 9 8 10 BSF (1) 2 3 12 9 9 20 Riyad 5 7 12 15 9 12 16 Samba (0) 4
7 (3) 8 9 16 Avg. 3 5 10 8 9 9 13 Source: Company data, HSBC
estimates; Note: *core revenue = net interest income + fees; latest
core revenue figures for Q2 14 are not out yet
In the meantime, as core revenue growth remains below 10%, Saudi
banks will have to rely increasingly on other non-interest income,
such as gains on trading and investments, and FX revenue. These are
more volatile sources of earnings, which dilute earnings quality.
As we illustrate in the next table, the average contribution from
these sources to total revenue was 9 to 12% over the last six
quarters.
Aybek Islamov* AnalystHSBC Bank Middle East+ 971 4423
[email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/ qualified pursuant to FINRA regulations
Banks We do not expect core revenue growth to rise above 10%
during
2014e-15e; we factor in a 20bp increase in interest rates in
2015e and expect core revenue growth to recover to 13% in 2016e
Balance sheets are asset-driven in a market with ample deposit
funding; we estimate banks can sustain 10-15% pa increase in
loans but should also raise collective provisions in the medium
term We have Overweight ratings on Samba (TP SAR55) and ANB (TP
SAR 37), Neutral ratings on Alinma (TP SAR21.3), Alrajhi (TP
SAR74.0), BSF (TP SAR37.0) and Riyad (TP SAR20.4)
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Contribution of other non-interest income (FX, trading and
investment gains) to total revenue
(%) Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14
Alinma 1 7 2 3 3 5 Alrajhi 16 10 9 13 15 10 ANB 13 15 13 10 12
16 BSF 9 9 10 9 15 9 Riyad 7 6 12 8 10 11 Samba 9 14 11 12 6 17
Average 9 10 10 9 10 12 Source: company data, HSBC estimates, Q2 14
details are not out yet
Loan growth pipeline remains healthy As was recently discussed
in the initiation report on GCC construction contractors Ride the
next order wave (17th April 2014, Nicholas Paton et al), cUSD100bn
of projects are still to be awarded in 2014 in Saudi Arabia. These
are concentrated in the power, transportation, oil & gas, water
and construction sectors of the economy.
Assuming that a quarter of these projects, ie cUSD25bn, are
funded with bank loans, this translates into an 8-10% increase in
the sector loan book. We estimate that the capitalisation and
liquidity positions of Saudi banks can easily sustain a 10-15%
annual increase in sector loans.
The risk is that contractors may not be getting paid on time,
thereby causing asset quality risks to banks. In 2013, there was
much discussion of the potential introduction of a new law in Saudi
to enable companies to claim compensation for work that has not
been paid for. If such a law were to be introduced, it would not
only reduce the ratio of receivables to sales for construction
contractors (which is running north of 120% in Saudi), but would
also give more confidence to investors in Saudi banks.
Banks need to deal with the structural deficit in collective
provisions With loan growth remaining in the low teens in 2014, we
see increasing pressure on Saudi banks to improve loan loss
reserves. Most banks we cover tend to write off NPLs immediately
against specific loan loss reserves. Hence, quite often, it is not
the NPL ratio which is indicative of real asset quality, but the
write-offs to loans ratio.
Specific reserves to loan ratios averaged 1.1% in 2013 and were
as high as 2.2% in 2010, at a time of rising impairments
2010 2011 2012 2013
Albilad 4.4% 4.4% n/a 1.7% Alinma 0.0% 0.0% 0.2% 0.4% Alrajhi
1.0% 0.9% 1.5% 0.9% ANB 2.8% 2.9% 2.5% 1.7% BSF 1.0% 0.9% 0.7% 1.1%
NCB 3.4% 2.8% 2.7% 1.3% Riyad 1.1% 0.8% 1.2% 0.6% SABB 2.7% 1.2%
1.1% 1.1% Samba 2.6% 1.9% 1.3% 1.1% SHB 2.3% 2.0% 1.6% 1.3% SIB
4.5% 6.0% 0.6% 0.5% Total 2.2% 1.8% 1.5% 1.1% Source: Company data,
HSBC estimates
The problem is that, with a low buffer of portfolio provisions
(also known as collective provisions), such write-offs require
banks to take specific provision charges which, in turn, dampen
earnings growth. The collective provision reserve works as a
counter-cyclical buffer in the event of unexpected impairments,
absorbing negative earnings shocks.
The table above illustrates that most banks have reduced their
specific reserves to loan ratios over the last 3 years. In the
meantime, collective provision to loans ratios were generally
steady, with the exceptions of SIB, Samba, and Riyad where this
ratio declined (see table below). However, 5 out of the 8 banks
currently have a collective provision to loans ratio that is below
1%.
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Collective provisions to loans ratio - below 1% for 5 out of 8
banks in 2013 (grey colour coded)
2010 2011 2012 2013
Albilad 0.5% 1.7% n/a 2.0% Alinma 0.0% 0.5% 0.5% 0.7% Alrajhi
2.0% 1.6% 1.3% 1.3% ANB 0.4% 0.6% 0.5% 0.5% BSF 0.9% 0.7% 0.7% 0.8%
NCB 1.2% 1.4% 1.5% 1.3% Riyad 1.0% 0.9% 0.9% 0.8% SABB 0.7% 1.2%
1.3% 1.0% Samba* 1.8% 1.8% 1.6% 1.3% SHB 0.9% 0.8% 0.8% 0.8% SIB
1.5% 1.6% 1.7% 1.0% Total 1.2% 1.2% 1.1% 1.1% Source: Company data,
HSBC estimates; Note *Samba does not disclose total collective
provisions. We only include the collective provisions which the
company reports in its Tier 2 capital
We therefore think that, even in the absence of further
impairments, banks will need to improve their collective provision
reserves. We model our cost of risk forecasts accordingly, which we
show in the table below.
Our cost of risk expectations
(bp) 2012 2013 2014e 2015e 2016e 2017e
Alinma 49 66 61 67 72 76 Alrajhi 142 141 110 93 83 88 ANB 63 70
53 53 58 85 BSF 46 88 57 58 58 58 Riyad 100 50 50 60 78 91 Samba 30
32 37 37 46 54 Average 72 74 61 61 66 75 Source: Company data, HSBC
estimates
Searching for relative value in a sector with pedestrian EPS
growth While the near-term earnings growth that we expect for most
Saudi banks is somewhat sluggish, we still see pockets of value,
which we identify on the basis of PEG. As can be seen from the
table below, although both ANB and Samba are expected to post
below-average earnings growth over the next two years, their
valuations are sufficiently low that they still show up as best
value on a PEG basis. ANB and Samba are our only OW-rated Saudi
banks.
PE and PEG multiples
PE 2015e EPS CAGR 13-15e
PEG
Alinma 21.4 17% 1.3 Alrajhi 13.4 5% 2.7 ANB 9.1 12% 0.8 BSF 12.5
16% 0.9 Riyad 11.8 9% 1.3 Samba 9.7 7% 1.4 Average 12.8 9% 1.4
Source: HSBC estimates
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ARNB AB, Price SAR29.1, Overweight, TP SAR37 Company description
ANB was established in 1979. Arab Bank (Jordan) is the majority
shareholder, with a 40% stake. In 2000 it was the first bank to
offer internet banking services in Saudi Arabia. The bank provides
a full range of retail and corporate banking services. On our
estimates, it had 8% market share of loans and deposits, as at
March 2014. ANB teamed up with Dar Al Arkan, the real estate
developer, to set up the Saudi Home Loan Company, in order to gain
a foothold in the housing finance market.
Investment thesis Good improvement in core revenue despite weak
loan growth. Recent quarters confirm that ANB has been able to grow
its net interest income and fees faster than customer loans. This
is due to it optimising its asset mix. In 2012 and 2013, despite
weak loan growth, the loan to asset ratio continued to improve,
reaching 64% in Q4 13, up from 62% in Q4 11. We expect this trend
to continue and forecast net interest income and fees to grow by 7%
and 11%, respectively, in 2015e. We estimate ANB can grow its
pre-provision income by 8% in 2014e, and by 10% in 2015e.
Cut in pay-out ratio saves more capital. As ANB has now rebuilt
its capital buffer, we expect the bank to re-accelerate its loan
growth from 2015. ANB reduced its pay-out ratio to 17% in 2013 from
36% in 2012. The cut delivered a 130bp improvement in the capital
adequacy ratio, to 16.3% in Q1 14 from 15% in Q1 13. While
ANBs loan growth may lag the sector this year at only 8% we
expect it to recover to 11% and 14% in 2015e and 2016e,
respectively.
Financials We forecast Arab National Bank to report earnings of
SAR2.9bn (before zakat) in 2014e, an increase of 15% over 2013, on
the back of 5% and 7% increases in non-interest income and net
interest income respectively and a 20% decline in bad asset
charges, generating an ROE of 14.8%. Our earnings estimates are 11%
and 12% above Bloomberg consensus for 2014e and 2015e
respectively.
Valuation We derive our target prices for Saudi banks using a
residual income methodology, using an inflation differential model
to calculate the cost of equity. The residual income valuation
approach calculates the fair value of the company as the sum of its
current net asset value and the present value of its future
residual income. The residual income is measured as an excess
return over cost of equity.
To calculate the cost of equity by the inflation differential
method, we assume cost of equity as the sum of the US risk-free
rate (3.0%), the inflation differential between Saudi Arabia and
the US (2.6%) and the equity risk premium (5.5%) multiplied by the
stock beta (1.0 for Saudi banks we cover). Our estimated cost of
equity for ANB is 11.1%. Under our research model, for stocks
without a volatility indicator, the Neutral band is 5 percentage
points above and below the hurdle rate for Saudi stocks of 9.0%.
Our target price of SAR37 implies a potential return of 27%,
Arab National Bank
Aybek Islamov* AnalystHSBC Bank Middle East+ 971 4423
[email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/ qualified pursuant to FINRA regulations
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24
Equities Saudi Arabia July 2014
abc
which is above the Neutral band of 4%-14% for non-volatile Saudi
stocks; therefore, we rate the stock Neutral. The stock is
currently trading at 1.4x 2014e book value, for an ROE of
14.8%.
Potential return equals the percentage difference between the
current share price and the target price, including the forecast
dividend yield when indicated. We do not include dividend yields in
our potential returns for the Saudi banks, since we use residual
income methodology to value our stocks.
Risks Key downside risks include: Downside risks centre on
stronger-than-expected cost of risk as a result of weaker asset
quality, as well as slower loan growth.
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25
Equities Saudi Arabia July 2014
abc
Financials & valuation: Arab National Bank Overweight
Financial statements
Year to 12/2013a 12/2014e 12/2015e 12/2016e
P&L summary (SARm)
Net interest income 3,375 3,613 3,860 4,215Net fees/commissions
1,053 1,194 1,326 1,473Trading profits 65 18 0 0Other income 616
604 663 719Total income 5,110 5,428 5,848 6,407Operating expense
-1,994 -2,070 -2,162 -2,258Bad debt charge -627 -499 -547 -671Other
36 42 48 52HSBC PBT 2,525 2,900 3,188 3,530Exceptionals 0 0 0 0PBT
2,525 2,900 3,188 3,530Taxation 0 0 0 0Minorities + preferences -3
-3 -3 -4Attributable profit 2,522 2,897 3,185 3,526HSBC
attributable profit 2,522 2,897 3,185 3,526
Balance sheet summary (SARm)
Ordinary equity 18,655 20,425 22,369 24,522HSBC ordinary equity
18,655 20,425 22,369 24,522Customer loans 88,456 95,875 105,963
120,284Debt securities holdings 28,248 34,762 35,679 36,660Customer
deposits 106,373 115,946 127,541 144,121Interest earning assets
133,787 139,836 151,966 168,001Total assets 137,935 148,853 162,392
181,126
Capital (%)
RWA (SARm) 123,778 136,476 148,392 164,996Core tier 1 15.1 15.0
15.1 14.9Total tier 1 15.1 15.0 15.1 14.9Total capital 16.0 15.9
15.9 15.6 Ratio, growth & per share analysis
Year to 12/2013a 12/2014e 12/2015e 12/2016e
Year-on-year % change
Total income 7.4 6.2 7.7 9.6Operating expense 5.4 3.8 4.4
4.4Pre-provision profit 8.8 7.8 9.8 12.6EPS 6.4 14.9 9.9 10.7HSBC
EPS 6.4 14.9 9.9 10.7DPS -50.0 36.5 9.9 10.7NAV (including
goodwill) 10.0 9.5 9.5 9.6
Ratios (%)
Cost/income ratio 39.0 38.1 37.0 35.2Bad debt charge 0.7 0.5 0.5
0.6Customer loans/deposits 83.2 82.7 83.1 83.5NPL/loan 1.1 1.1 1.1
1.1NPL/RWA 0.8 0.8 0.8 0.8Provision to risk assets/RWA 1.7 1.4 1.3
1.3Net write-off/RWA 1.0 0.5 0.3 0.3Coverage 204.7 172.0 169.7
166.1ROE (including goodwill) 14.2 14.8 14.9 15.0
Per share data
EPS reported (fully diluted) 2.52 2.90 3.18 3.53HSBC EPS (fully
diluted) 2.52 2.90 3.18 3.53DPS 0.43 0.58 0.64 0.71NAV 18.66 20.42
22.37 24.52NAV (including goodwill) 18.66 20.42 22.37 24.52
Core profitability (% RWAs) and leverage
Year to 12/2013a 12/2014e 12/2015e 12/2016e
Net interest income 2.7 2.8 2.7 2.7Trading profits 0.1 0.0 0.0
0.0Other income 0.5 0.5 0.5 0.5Operating expense -1.6 -1.6 -1.5
-1.4Pre-provision profit 2.5 2.6 2.6 2.6Bad debt charge -0.5 -0.4
-0.4 -0.4HSBC attributable profit 2.1 2.2 2.2 2.3Leverage (x) 6.9
6.7 6.7 6.7Return on average tier 1 13.5 14.1 14.2 14.3 Valuation
data
Year to 12/2013a 12/2014e 12/2015e 12/2016e
PE* 11.5 10.0 9.1 8.3Pre-provision multiple 9.3 8.7 7.9 7.0P/NAV
1.6 1.4 1.3 1.2Equity cash flow yield (%) 8.3 6.9 8.1 8.1Dividend
yield (%) 1.5 2.0 2.2 2.4Note: * = Based on HSBC EPS (fully
diluted) Issuer information
Share price (SAR)29.10 Target price (SAR)37.00 (%)
11.
8
Reuters (Equity) 1080.SE Bloomberg (Equity) ARNB ABMarket cap
(USDm) 7,804 Market cap (SARm) 26,605Free float (%) 34 Country
Saudi Arabia Sector COMMERCIAL BANKSAnalyst Aybek Islamov Contact
+9714 423 6921
Price relative
Source: HSBC, price at close of 22 July 2014
15171921232527293133
15171921232527293133
2012 2013 2014 2015Arab National Bank Rel to TADAWUL ALL SHARE
INDEX
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26
Equities Saudi Arabia July 2014
abc
BSFR AB, Price SAR33.5, N, TP SAR37 Company description Banque
Saudi Fransi established in 1977 is among the top 5 banks in Saudi
Arabian banking sector by loan market share. It controls 11% of the
total loan market & 9% of assets in Saudi Arabia as of the end
of March 2014. Credit Agricole CIB, the corporate and investment
banking entity of Credit Agricole Group (ACA FP, Price EUR10.3,
OW), is the largest stakeholder in the bank, with a 31.1% stake,
followed by the Government of Saudi Arabia with a 13.2% stake.
Banque Saudi Fransi is the leading commercial bank in KSA
serving both national and international clientele. It provides
conventional and Islamic commercial banking services including
asset management services, credit cards and corporate banking
solutions. It has a fully owned subsidiary, Saudi Fransi Capital,
which mainly provides investment banking services.
As of December 2013, BSF had a distribution network of 83
branches across Saudi Arabia with an employee base of 2,660.
Investment thesis One-off normalisation in bad asset charge
should lift 2014e ROE to 12.5% from 10.7% last year. We forecast a
28% drop in bad asset charges in 2014e. As a result, we expect a
sharp improvement in ROE, to 12.5% in 2014e from 10.7% in 2013. BSF
has made positive progress in terms of portfolio provisions,
increasing them to 0.8% in 2013 from 0.7% in 2012. However, we
still think the ratio will need to improve further from here. We
forecast cost of risk of 57bp and 58bp in 2014e
and 2015e, respectively, and expect the majority of future loan
loss provisions to be directed into the collective provision
reserve.
Recovery in fee income growth. The pick-up in off balance sheet
business (+17% yoy in 2013) should lead to better fee growth. We
expect BSF to grow its total fees 9% in 2014e and 8% in 2015e.
Financials We forecast BSF to report earnings of SAR3.07bn
(before zakat) in 2014e, increasing 27% y-o-y with ROE of 12.5%.
Our earnings estimates are inline with Bloomberg consensus for
2014e and 6% below consensus for 2015e.
Valuation We derive our target prices for Saudi banks using a
residual income methodology, using an inflation differential model
to calculate the cost of equity. The residual income valuation
approach calculates the fair value of the company as the sum of its
current net asset value and the present value of its future
residual income.
To calculate the cost of equity by the inflation differential
method, we assume cost of equity as the sum of the US risk-free
rate (3.0%), the inflation differential between Saudi Arabia and
the US (2.6%) and the equity risk premium (5.5%) multiplied by the
stock beta (1.0 for Saudi banks we cover). Our estimated cost of
equity for BSF is 11.1%. Under our research model, for stocks
without a volatility indicator, the Neutral band is 5 percentage
points above and below the hurdle rate for Saudi stocks of 9%. Our
target price of SAR37 implies a potential return of 10%, which is
within the Neutral band of 4%-14% for
Banque Saudi Fransi
Aybek Islamov* AnalystHSBC Bank Middle East+ 971 4423
[email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/ qualified pursuant to FINRA regulations
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27
Equities Saudi Arabia July 2014
abc
non-volatile Saudi stocks; therefore, we rate the stock Neutral.
The stock is currently trades at 1.6x 2014e book value, for an ROE
of 12.5%.
Potential return equals the percentage difference between the
current share price and the target price, including the forecast
dividend yield when indicated. We do not include dividend yields in
our potential returns for the Saudi banks, since we use residual
income methodology to value our stocks.
Risks Key downside risks include: Downside risks centre on
further deceleration
in loan growth, largely driven by weak corporate demand.
Key upside risks include: Upside risks centre on lower bad
asset
charges than we estimate. A 10bp reduction in cost of risk
versus our base case would lead to an additional 7ppt of EPS growth
in 2014e.
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28
Equities Saudi Arabia July 2014
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Financials & valuation: Banque Saudi Fransi Neutral
Financial statements
Year to 12/2013a 12/2014e 12/2015e 12/2016e
P&L summary (SARm)
Net interest income 3,363 3,697 4,041 4,981Net fees/commissions
1,150 1,251 1,350 1,465Trading profits 106 150 40 0Other income 434
428 447 417Total income 5,053 5,526 5,878 6,863Operating expense
-1,684 -1,776 -1,853 -1,976Bad debt charge -957 -688 -768 -865Other
-5 3 4 4HSBC PBT 2,406 3,066 3,261 4,026Exceptionals 0 0 0 0PBT
2,406 3,066 3,261 4,026Taxation 0 0 0 0Minorities + preferences 0
-2 -2 -2Attributable profit 2,406 3,064 3,259 4,023HSBC
attributable profit 2,406 3,064 3,259 4,023
Balance sheet summary (SARm)
Ordinary equity 23,217 25,798 28,543 31,932HSBC ordinary equity
23,217 25,798 28,543 31,932Customer loans 111,307 123,491 137,109
152,722Debt securities holdings 34,299 38,264 42,823 48,066Customer
deposits 131,601 144,761 162,133 180,595Interest earning assets
157,803 172,655 190,209 210,788Total assets 170,057 185,799 205,918
227,771
Capital (%)
RWA (SARm) 165,884 183,839 204,086 227,212Core tier 1 13.9 14.0
14.0 14.1Total tier 1 13.9 14.0 14.0 14.1Total capital 15.6 15.6
15.4 15.3 Ratio, growth & per share analysis
Year to 12/2013a 12/2014e 12/2015e 12/2016e
Year-on-year % change
Total income 0.9 9.4 6.4 16.8Operating expense 8.5 5.4 4.3
6.6Pre-provision profit -2.6 11.3 7.3 21.4EPS -20.2 27.4 6.4
23.5HSBC EPS -20.2 27.4 6.4 23.5DPS -66.7 27.4 6.4 23.5NAV
(including goodwill) 6.1 11.1 10.6 11.9
Ratios (%)
Cost/income ratio 33.3 32.1 31.5 28.8Bad debt charge 0.9 0.6 0.6
0.6Customer loans/deposits 84.6 85.3 84.6 84.6NPL/loan 1.3 1.2 1.0
1.1NPL/RWA 0.9 0.8 0.7 0.8Provision to risk assets/RWA 1.3 1.4 1.4
1.4Net write-off/RWA -0.2 -0.2 -0.2 -0.3Coverage 146.2 168.0 194.4
176.6ROE (including goodwill) 10.7 12.5 12.0 13.3
Per share data
EPS reported (fully diluted) 2.00 2.54 2.70 3.34HSBC EPS (fully
diluted) 2.00 2.54 2.70 3.34DPS 0.16 0.20 0.21 0.26NAV 19.26 21.40
23.68 26.49NAV (including goodwill) 19.26 21.40 23.68 26.49
Core profitability (% RWAs) and leverage
Year to 12/2013a 12/2014e 12/2015e 12/2016e
Net interest income 2.1 2.1 2.1 2.3Trading profits 0.1 0.1 0.0
0.0Other income 0.3 0.2 0.2 0.2Operating expense -1.1 -1.0 -1.0
-0.9Pre-provision profit 2.1 2.1 2.1 2.3Bad debt charge -0.6 -0.4
-0.4 -0.4HSBC attributable profit 1.5 1.8 1.7 1.9Leverage (x) 7.1
7.1 7.1 7.1Return on average tier 1 10.4 11.9 11.4 12.6 Valuation
data
Year to 12/2013a 12/2014e 12/2015e 12/2016e
PE* 16.8 13.2 12.4 10.0Pre-provision multiple 12.0 10.8 10.0
8.3P/NAV 1.7 1.6 1.4 1.3Equity cash flow yield (%) 3.6 4.5 4.6
6.0Dividend yield (%) 0.5 0.6 0.6 0.8Note: * = Based on HSBC EPS
(fully diluted) Issuer information
Share price (SAR) 33.50 Target price (SAR)37.00 (%)
8.
8
Reuters (Equity) 1050.SE Bloomberg (Equity) BSFR ABMarket cap
(USDm) 10,766 Market cap (SARm) 30,737Free float (%) 40 Country
Saudi Arabia Sector COMMERCIAL BANKSAnalyst Aybek Islamov Contact
+9714 423 6921
Price relative
Source: HSBC, price at close of 22 July 2014
1618202224262830323436
1618202224262830323436
2012 2013 2014 2015Banque Saudi Fransi Rel to TADAWUL ALL SHARE
INDEX
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29
Equities Saudi Arabia July 2014
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RIBL AB, Price SAR18.35, Neutral, TP SAR20.5 Company description
Riyad Bank was established in 1957. It has the third-largest branch
network in Saudi Arabia and is currently mainly owned by Saudi
shareholders.
We estimate it had market share of around 12% in loans and 11%
in deposits as of March 2014. Riyad bank is engaged in a wide array
of retail and corporate banking services. The bank is primarily a
corporate bank with corporate loans forming 74% of the total loan
book end of Q1 2014. In December 2013, SAMA issued the first
license for real estate financing and lease financing to Riyad
Bank.
Investment thesis Good growth in core revenue. Stable increases
in the customer loan portfolio provide a good base for core revenue
to grow. Core revenue improved sequentially in both Q4 13 and Q1 14
and we forecast growth of 9% in 2014e and 12% in 2015e, which is
above the sector averages.
Funding cost optimisation remains a strategic priority. Riyad
Bank has the second highest funding costs in our coverage (after
BSF) at 57bp as at Q1 14 (peer group average = 40bp). While funding
costs do not appear to be an issue within a very liquid banking
sector and low interest rate environment, Riyad Bank does need to
improve its collection of demand deposits. The ratio of demand
deposits reduced to 42% in Q1 14, down from 47% the year
before.
Collective provisions too low in view of the current loan
growth. Similar to BSF, we think Riyad Bank should reconsider the
adequacy of its collective provision reserves, which reduced to
0.8% of gross loans in 2013, from 1% in 2010. In fact, the size of
Riyad Banks collective provision reserve has not changed since
2010, despite a 23% increase in the loan book. We forecast cost of
risk of 50bp and 60bp in 2014e and 2015e, respectively, and, in the
absence of large impairments, expect the bulk of provisions to flow
into the collective provision reserve. Financials We forecast Riyad
bank to report earnings of SAR4.26bn (before zakat) in 2014e, an
increase of 8% over 2013, on the back of 11% and 8% increases in
non-interest income and net interest income respectively,
generating an ROE of 12.8%. Our earnings estimates are 2% and 1%
above Bloomberg consensus for 2014e and 2015e respectively.
Valuation We derive our target prices for Saudi banks using a
residual income methodology, using an inflation differential model
to calculate the cost of equity. The residual income valuation
approach calculates the fair value of the company as the sum of its
current net asset value and the present value of its future
residual income. The residual income is measured as an excess
return over cost of equity.
To calculate the cost of equity by the inflation differential
method, we assume cost of equity as the sum of the US risk-free
rate (3.0%), the inflation differential between Saudi Arabia and
the US (2.6%) and the equity risk premium (5.5%) multiplied by the
stock beta (1.0 for Saudi banks
Riyad Bank
Aybek Islamov* AnalystHSBC Bank Middle East+ 971 4423
[email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/ qualified pursuant to FINRA regulations
-
30
Equities Saudi Arabia July 2014
abc
we cover). Our estimated cost of equity for Riyad bank is 11.1%.
Under our research model, for stocks without a volatility
indicator, the Neutral band is 5 percentage points above and below
the hurdle rate for Saudi stocks of 9%. Our target price of SAR20.5
implies a potential return of 12%, which is within the Neutral band
of 4%-14% for non-volatile Saudi stocks, therefore we rate the
stock as Neutral. The stock is currently trading at 1.6x 2014e book
value, for an ROE of 12.8%.
Potential return equals the percentage difference between the
current share price and the target price, including the forecast
dividend yield when indicated. We do not include dividend yields in
our potential returns for the Saudi banks, since we use residual
income methodology to value our stocks.
Risks Key upside risks include: Upside risks centre on stronger
loan growth,
exceeding our base case forecast of 13% in 2014e. Also, an
increase in the dividend pay-out ratio would accelerate ROE
recovery at Riyad Bank. The bank currently has a pay-out ratio of
56%.
Key downside risks include:
Downside risks relate to worse-than-expected asset quality and a
stronger decline in NIM than we forecast
.
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31
Equities Saudi Arabia July 2014
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Financials & valuation: Riyad Bank Neutral Financial
statements
Year to 12/2013a 12/2014e 12/2015e 12/2016e
P&L summary (SARm)
Net interest income 4,697 5,058 5,692 6,704Net fees/commissions
1,821 2,019 2,196 2,416Trading profits -4 0 0 0Other income 559 616
592 590Total income 7,074 7,693 8,479 9,710Operating expense -2,578
-2,789 -2,901 -3,078Bad debt charge -627 -710 -966 -1,434Other 79
62 69 76HSBC PBT 3,947 4,257 4,681 5,274Exceptionals 0 0 0 0PBT
3,947 4,257 4,681 5,274Taxation 0 0 0 0Minorities + preferences 0 0
0 0Attributable profit 3,947 4,257 4,681 5,274HSBC attributable
profit 3,947 4,257 4,681 5,274
Balance sheet summary (SARm)
Ordinary equity 32,470 34,170 36,040 38,158HSBC ordinary equity
32,470 34,170 36,040 38,158Customer loans 131,191 146,765 168,437
192,998Debt securities holdings 43,538 45,179 46,887 48,663Customer
deposits 153,200 170,052 195,163 223,621Interest earning assets
191,641 208,640 230,632 259,319Total assets 205,246 222,464 249,511
280,143
Capital (%)
RWA (SARm) 204,525 222,820 250,164 281,103Core tier 1 16.6 16.0
15.0 14.1Total tier 1 16.6 16.0 15.0 14.1Total capital 17.1 16.4
15.4 14.4 Ratio, growth & per share analysis
Year to 12/2013a 12/2014e 12/2015e 12/2016e
Year-on-year % change
Total income 4.2 8.7 10.2 14.5Operating expense 9.7 8.2 4.0
6.1Pre-provision profit 1.3 9.1 13.8 18.9EPS 13.9 7.8 10.0 12.7HSBC
EPS 13.9 7.8 10.0 12.7DPS 11.5 7.6 10.0 12.7NAV (including
goodwill) 5.3 5.2 5.5 5.9
Ratios (%)
Cost/income ratio 36.4 36.3 34.2 31.7Bad debt charge 0.5 0.5 0.6
0.8Customer loans/deposits 85.6 86.3 86.3 86.3NPL/loan 0.9 1.0 1.2
1.2NPL/RWA 0.6 0.7 0.8 0.9Provision to risk assets/RWA 0.9 1.1 1.2
1.4Net write-off/RWA 0.8 0.1 0.1 0.1Coverage 152.8 152.1 142.1
167.5ROE (including goodwill) 12.5 12.8 13.3 14.2
Per share data
EPS reported (fully diluted) 1.32 1.42 1.56 1.76HSBC EPS (fully
diluted) 1.32 1.42 1.56 1.76DPS 0.73 0.78 0.86 0.97NAV 10.82 11.39
12.01 12.72NAV (including goodwill) 10.82 11.39 12.01 12.72
Core profitability (% RWAs) and leverage
Year to 12/2013a 12/2014e 12/2015e 12/2016e
Net interest income 2.4 2.4 2.4 2.5Trading profits 0.0 0.0 0.0
0.0Other income 0.3 0.3 0.3 0.2Operating expense -1.3 -1.3 -1.2
-1.2Pre-provision profit 2.3 2.3 2.4 2.5Bad debt charge -0.3 -0.3
-0.4 -0.5HSBC attributable profit 2.0 2.0 2.0 2.0Leverage (x) 6.1
6.4 6.7 7.2Return on average tier 1 11.7 12.0 12.5 13.3 Valuation
data
Year to 12/2013a 12/2014e 12/2015e 12/2016e
PE* 13.9 12.9 11.8 10.4Pre-provision multiple 12.2 11.2 9.9
8.3P/NAV 1.7 1.6 1.5 1.4Equity cash flow yield (%) 4.7 5.4 5.0
5.6Dividend yield (%) 4.0 4.3 4.7 5.3Note: * = Based on HSBC EPS
(fully diluted) Issuer information
Share price (SAR)18.35 Target price (SAR)20.50 (%)
24.
2
Reuters (Equity) 1010.SE Bloomberg (Equity) RIBL ABMarket cap
(USDm) 14,677 Market cap (SARm) 49,500Free float (%) 31 Country
Saudi Arabia Sector COMMERCIAL BANKSAnalyst Aybek Islamov Contact
+9714 423 6921
Price relative
Source: HSBC, price at close of 22 July 2014
9
11
13
15
17
19
21
9
11
13
15
17
19
21
2012 2013 2014 2015Riyad Bank Rel to TADAWUL ALL SHARE INDEX
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Equities Saudi Arabia July 2014
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SAMBA AB, Price SAR42.0, OW, TP SAR55 Company description Samba
was established in 1980 and was branded the Saudi American bank
until 2003. Samba is primarily a corporate bank. As of March 2014,
Samba had a network of 72 branches. Samba has 10% market share in
loans & 11% in assets in Saudi Arabia as of the end of March
2014.
Samba was established as a joint-stock company with the takeover
of Citibank branches in Jeddah and Riyadh, under a Saudi programme
that forced all foreign banks to share ownership, with local Saudi
nationals acquiring 60% ownership. In 1999, Samba merged with
United Saudi Bank (USB) through a share exchange. Citibank sold its
20% ownership stake in Samba in 2003 to the General Organization of
Social Insurance (GOSI). In 2007 Samba acquired majority ownership
in the then-named Crescent Commercial Bank, now known as Samba Bank
Limited Pakistan. The subsidiary provides commercial banking
services and turned profitable in 2011 for the first time. Samba
increased its ownership in the subsidiary in 2010, from 68% to 81%
currently.
Investment thesis Strong capacity to improve asset mix in favour
of loans. Sambas loan to asset ratio improved to 57% in Q2 14 from
a low of 43% in 2010. We see further scope for improvement, as the
bank focuses on loan-driven growth. We normalise Sambas loan to
asset ratio at 60%, and see scope for it to rise further. For
comparison, peer banks in Saudi have loan to asset ratios of 65% on
average.
Core revenue growth and strong funding franchise. As a result,
we expect core revenue growth at Samba to recover to 8% in 2014e
and 9% in 2015e from -3% in 2013. Sambas competitive advantage
centres on its strong funding franchise. Demand deposits make up
67% of total deposits at the bank and the absolute funding cost was
just 68bp in Q1 14. This gives Samba strong capacity to grow its
customer loans without large upside risk to funding costs. Sambas
loan to deposit ratio remains low at 72% and we normalise this to
75% going forward.
Generous collective reserve keeps cost of risk low. While the
bank does not fully disclose its collective provision reserves, the
portion of the collective reserve disclosed in Tier 2 (SAR1,566m),
is equivalent to 1.3% of the loan book. This makes Samba the bank
with highest collective provision ratio within our Saudi coverage.
Although, similar to Alrajhi bank, Samba appears to have a
shortfall in terms of specific loan loss reserves, Samba can cover
any shortfall by using its collective provisions. Hence, rich
collective provision should prevent volatility in cost of risk,
which is so common to other Saudi banks.
Financials We forecast Samba to report earnings of SAR4.8bn
(before zakat) in 2014e, an increase of 7% over 2013, on the back
of 7% increases in non-interest income and net interest income
respectively, generating an ROE of 13.7%. Our earnings estimates
are 2% and 1% above Bloomberg consensus in 2014e and 2015e,
respectively.
Samba Financial Group
Aybek Islamov* AnalystHSBC Bank Middle East+ 971 4423
[email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/ qualified pursuant to FINRA regulations
-
33
Equities Saudi Arabia July 2014
abc
Valuation We derive our target prices for Saudi banks using a
residual income methodology, using an inflation differential model
to calculate the cost of equity. The residual income valuation
approach calculates the fair value of the company as the sum of its
current net asset value and the present value of its future
residual income. The residual income is measured as an excess
return over cost of equity.
To calculate the cost of equity by the inflation differential
method, we assume cost of equity as the sum of the US risk-free
rate (3.0%), the inflation differential between Saudi Arabia and
the US (2.6%) and the equity risk premium (5.5%) multiplied by the
stock beta (1.0 for Saudi banks we cover). Our estimated cost of
equity for Samba is 11.1%. Under our research model, for stocks
without a volatility indicator, the Neutral band is 5 percentage
points above and below the hurdle rate for Saudi stocks of 9%. Our
target price of SAR55 implies a potential return of 31%, which is
above the Neutral band of 4%-14% for non-volatile Saudi stocks;
therefore, we rate the stock Overweight. The stock is currently
trading at 1.4x 2014e book value, for an ROE of 13.7%.
Potential return equals the percentage difference between the
current share price and the target price, including the forecast
dividend yield when indicated. We do not include dividend yields in
our potential returns for the Saudi banks, since we use a residual
income methodology to value our stocks.
Risks Key downside risks include: Downside risks to our rating
and target price
include stronger aversion to loan risk as a result of negative
pressure on loan pricing, in particular in the corporate banking
segment.
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Financials & valuation: Samba Financial Group Overweight
Financial statements
Year to 12/2013a 12/2014e 12/2015e 12/2016e
P&L summary (SARm)
Net interest income 4,528 4,727 5,240 6,152Net fees/commissions
1,600 1,813 2,011 2,231Trading profits 293 215 140 0Other income
579 730 659 639Total income 7,001 7,485 8,049 9,022Operating
expense -2,137 -2,221 -2,346 -2,541Bad debt charge -353 -451 -507
-703Other 0 0 0 0HSBC PBT 4,510 4,812 5,197 5,778Exceptionals 0 0 0
0PBT 4,510 4,812 5,197 5,778Taxation 0 0 0 0Minorities +
preferences 0 0 0 0Attributable profit 4,510 4,812 5,197 5,778HSBC
attributable profit 4,510 4,812 5,197 5,778
Balance sheet summary (SARm)
Ordinary equity 33,787 36,623 39,686 43,091HSBC ordinary equity
33,787 36,623 39,686 43,091Customer loans 113,455 125,644 140,616
157,897Debt securities holdings 60,341 57,092 57,328 56,137Customer
deposits 158,337 172,587 189,846 212,627Interest earning assets
190,929 203,557 221,364 244,111Total assets 205,037 221,107 241,429
267,615
Capital (%)
RWA (SARm) 188,295 197,755 215,777 235,954Core tier 1 18.6 18.6
18.5 18.3Total tier 1 18.6 18.6 18.5 18.3Total capital 19.4 19.4
19.2 19.0 Ratio, growth & per share analysis
Year to 12/2013a 12/2014e 12/2015e 12/2016e
Year-on-year % change
Total income 4.6 6.9 7.5 12.1Operating expense 3.6 3.9 5.6
8.3Pre-provision profit 5.0 8.2 8.4 13.6EPS 4.2 6.7 8.0 11.2HSBC
EPS 4.2 6.7 8.0 11.2DPS 0.3 6.7 8.0 11.2NAV (including goodwill)
10.1 8.4 8.4 8.6
Ratios (%)
Cost/income ratio 30.5 29.7 29.1 28.2Bad debt charge 0.3 0.4 0.4
0.5Customer loans/deposits 71.7 72.8 74.1 74.3NPL/loan 1.7 1.7 1.7
1.7NPL/RWA 1.1 1.1 1.1 1.2Provision to risk assets/RWA 1.6 1.6 1.7
1.8Net write-off/RWA 0.2 0.1 0.1 0.1Coverage 145.5 149.1 148.3
152.5ROE (including goodwill) 14.0 13.7 13.6 14.0
Per share data
EPS reported (fully diluted) 3.76 4.01 4.33 4.82HSBC EPS (fully
diluted) 3.76 4.01 4.33 4.82DPS 1.22 1.31 1.41 1.57NAV 28.16 30.52
33.07 35.91NAV (including goodwill) 28.16 30.52 33.07 35.91
Core profitability (% RWAs) and leverage
Year to 12/2013a 12/2014e 12/2015e 12/2016e
Net interest income 2.6 2.4 2.5 2.7Trading profits 0.2 0.1 0.1
0.0Other income 0.3 0.4 0.3 0.3Operating expense -1.2 -1.2 -1.1
-1.1Pre-provision profit 2.7 2.7 2.8 2.9Bad debt charge -0.2 -0.2
-0.2 -0.3HSBC attributable profit 2.5 2.5 2.5 2.6Leverage (x) 5.5
5.5 5.4 5.5Return on average tier 1 12.9 13.1 13.1 13.4 Valuation
data
Year to 12/2013a 12/2014e 12/2015e 12/2016e
PE* 11.2 10.5 9.7 8.7Pre-provision multiple 10.4 9.6 8.8
7.8P/NAV 1.5 1.4 1.3 1.2Equity cash flow yield (%) 5.9 8.2 7.8
8.7Dividend yield (%) 2.9 3.1 3.4 3.7Note: * = Based on HSBC EPS
(fully diluted) Issuer information
Share price (SAR)42.00 Target price (SAR)55.00 (%)
27.
0
Reuters (Equity) 1090.SE Bloomberg (Equity) SAMBA ABMarket cap
(USDm) 13,437 Market cap (SARm) 49,485Free float (%) 51 Country
Saudi Arabia Sector COMMERCIAL BANKSAnalyst Aybek Islamov Contact
+9714 423 6921
Price relative
Source: HSBC, price at close of 22 July 2014
222732374247525762
222732374247525762
2012 2013 2014 2015Samba Financial Group Rel to TADAWUL ALL
SHARE INDEX
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Equities Saudi Arabia July 2014
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RJHI AB, Price SAR67.75, Neutral, TP SAR74 Company description
Al Rajhi was established in 1957 and was established as a Saudi
share holding company in 1988.
Al Rajhi bank is run by a management organization that includes
the headquarters in Riyadh and six regional departments. The bank
has the largest network of branches (over 500 branches) in the
Kingdom and largest ATM network. The bank also has a presence in
Malaysia, Kuwait and Jordan.
Investment thesis Core revenue growth will struggle to improve.
Slowing loan growth and a declining NIM will constrain core revenue
growth at Alrajhi Bank. We estimate net interest income and fee
income will grow at a 4% CAGR 2013-2015e.
Pressure on operating costs constrains pre-provision income
growth. In addition to slow core revenue growth, we expect Alrajhi
bank to see upward pressure on operating costs. A relatively heavy
reliance on remittance business where the bank has to rely on
outsourced labour means upside risk to operating costs in light of
the recent labour crackdown in Saudi Arabia. We believe that
outsourced labour costs could more than double as the supplying
companies either have to employ more Saudis or pay up for work
permits for expat
employees. Growth in operating costs already accelerated to 12%
yoy in Q1 14, from 7% in 2013. We therefore expect pre-provision
income in 2014e to remain flat on last year.
Specific provisions may need to rise further. The low 2.3%
collateral to loan ratio means the specific provisions may continue
to surprise negatively as and when impairments occur at Alrajhi. We
note that the sum of disclosed collateral against individually
impaired loans of SAR971m and specific loan loss reserves of
SAR1,789m fell short of NPLs of SAR3,008m by SAR248m as at Q4 13.
This shortfall is equivalent to 2% of 2013 pre-provision income. We
factor in a cost of risk of 110bp and 93bp in 2014e and 2015e,
respectively.
Financials We forecast Al Rajhi to report earnings of SAR7.75bn
(before zakat) in 2014e, an increase of 4% over 2013, on the back
of 5% increase in net interest income, generating an ROE of 20.6%.
Our earnings estimates are 1% and 6% below Bloomberg consensus in
2014e and 2015e, respectively.
Valuation We derive our target prices for Saudi banks using a
residual income methodology, using an inflation differential model
to calculate the cost of equity. The residual income valuation
approach calculates the fair value of the company as the sum of
its
Alrajhi Banking & Investment
Aybek Islamov* AnalystHSBC Bank Middle East+ 971 4423
[email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/ qualified pursuant to FINRA regulations
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Equities Saudi Arabia July 2014
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current net asset value and the present value of its future
residual income. The residual income is measured as an excess
return over cost of equity.
To calculate the cost of equity by the inflation differential
method, we assume cost of equity as the sum of the US risk-free
rate (3.0%), the inflation differential between Saudi Arabia and
the US (2.6%) and the equity risk premium (5.5%) multiplied by the
stock beta (1.0 for Saudi banks we cover). Our estimated cost of
equity for Al Rajhi is 11.1%. Under our research model, for stocks
without a volatility indicator, the Neutral band is 5 percentage
points above and below the hurdle rate for Saudi stocks of 9%. Our
target price of SAR74 implies a potential return of 9%, which is
within the Neutral band of 4%-14% for non-volatile Saudi stocks;
therefore, we rate the stock Neutral. The stock is currently
trading at 2.8x 2014e book value, for an ROE of 20.6%.
Potential return equals the percentage difference between the
current share price and the target price, including the forecast
dividend yield when indicated. We do not include dividend yields in
our potential returns for the Saudi banks, since we use residual
income methodology to value our stocks.
Risks Key downside risks include: Downside risk includes further
cuts in the
dividend pay-out ratio. Note that Alrajhi Bank reduced its
pay-out ratio to 50% based on 2013 profit from 62% a year ago.
Key upside risks include: Upside risks centre on stronger
lending
volumes, in particular in the corporate segment. Also, a
stronger-than-expected decline in bad asset charges may lead to
stronger EPS growth than we forecast.
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Financials & valuation: Alrajhi Banking & Investm
Neutral Financial statements
Year to 12/2013a 12/2014e 12/2015e 12/2016e
P&L summary (SARm)
Net interest income 9,606 10,056 10,474 11,341Net
fees/commissions 2,846 2,916 3,095 3,302Trading profits 0 0 0
0Other income 1,663 1,507 1,553 1,622Total income 14,115 14,480
15,122 16,265Operating expense -4,057 -4,474 -4,804 -5,152Bad debt
charge -2,619 -2,253 -2,109 -2,051Other 0 0 0 0HSBC PBT 7,438 7,752
8,209 9,062Exceptionals 0 0 0 0PBT 7,438 7,752 8,209 9,062Taxation
0 0 0 0Minorities + preferences 0 0 0 0Attributable profit 7,438
7,752 8,209 9,062HSBC attributable profit 7,438 7,752 8,209
9,062
Balance sheet summary (SARm)
Ordinary equity 36,155 39,274 42,586 45,942HSBC ordinary equity
36,155 39,274 42,586 45,942Customer loans 186,813 208,452 228,708
250,527Debt securities holdings 16,117 16,843 17,618 18,445Customer
deposits 231,589 257,064 287,912 322,461Interest earning assets
264,634 281,249 308,377 343,460Total assets 279,871 306,430 340,801
379,