EUR 44.68 For Business Accounts Only

RJHI AB | Beyond mortgages; Raise TP, maintain N

Future is less rosy; Valuation is full. RJHI’s operational excellence in both asset growth and profitability, and its favourable trading dynamics, have driven its stellar stock outperformance since FY18. That said, the shift from the mortgage segment towards the corporate story is underway, for which RJHI is less superiorly positioned vs. more established corporate-oriented Saudi banks, in our view. Valuation is full, with FY22e P/E at c17.9x and P/BV at 4.29x, reflecting exaggerated premiums of c80% and c53%, respectively, to its historical average, of c39% and c2.8x, respectively, to Saudi peers.

Growth rates, margins peak. Progress made on home ownership targets, along with Mar-21 interest rate cuts, triggered stricter terms for mortgage contracts. We expect RJHI to continue to vigorously compete within mortgages, capitalising on its low funding cost; however, we expect to see reduced mortgage volume additions, as well as, lower yields, implying lower NIMs (-43bps, -16bps, -9bps y-o-y, respectively, in FY21-23e). We see loan growth peaking in FY21e (+37%), easing to +24% in FY22e, and to single digits thereafter. We adjust our numbers to incorporate: i) higher loan growth, ii) higher non-interest income, iii) improved opex, iv) lower CoE (-50bps), and, on the flipside: i) diluted margins, and ii) higher CoR; net impact on TP is +33%.

Expansion into corporate to come at a cost. Realising the imminent changes to growth drivers, management ramped up its offering to corporates, appointed a new management team, and procured a new CRM system. 1H21 trends have been satisfactory (+22% y-t-d growth from a low base), but we pinpoint the following drawbacks: i) weak corporate market positioning so far, ii) significantly lower yields vs. retail, and iii) higher capital charge (vs. only 50% risk-weighted charge for mortgages); thus, implying accelerated erosion of capital.

Prefer corporate-oriented Saudi banks, given positive macro trends. These include: i) higher government spending (up 19% q-o-q in 2Q21), ii) robust PMI readings (expansionary since Sep-20), iii) healthy employment numbers (gradually approaching pre-pandemic levels), iv) recovery in oil prices, and v) kick-off of government projects and early signs of consequent corporate lending. We expect the corporate segment to outgrow both the retail and mortgage segments in the medium-term. SABB [OW | TP SAR31.8] and SNB [OW | TP SAR60] have higher exposure to the corporate segment, at c76% and c54% (vs. c20% for RJHI) of their respective loan books.