EUR 50.48 For Business Accounts Only

The wait is over; High conviction Overweight

2019: an inflection year for Samba. Changes to the bank’s BoD in Jan-19 triggered a management reshuffle and shift to a more aggressive lending strategy. This should reflect positively on the bank’s operations, allowing the stock to rerate, with further support from improved transparency, as management finally opened up to the investment community. Trading multiples are attractive, with 2019e P/B of 1.8x, on sustainable RoE of 15% vs. 1.9x and 14.2%, respectively, for Saudi peers.

Higher appetite for lending to complement Samba’s strong capacity. We like Samba’s: i) liquid balance sheet (LTD: 69.3% in Mar-19), ii) strong corporate franchise (corporate MS: 10.6%), and iii) high capitalisation (CAR: 22.4%). As such, we expect Samba to deliver high lending growth, driven by its renewed interest to lend, while maintaining a high DPO (c65% in 2019-20e), implying an average yield of c5.2%, the highest among our Saudi banks coverage.

Tweak our numbers; TP up by 6.5%. While our assumptions had already incorporated a resumption of lending activity in 2019, we raise our loan assumptions for Samba to 7.9% in CAGR for 2019-23e from 7.0% (lower than management’s guidance of 6-8% in 2019, double digits in 2020-21e, representing an upside risk). We also increase our NIM assumptions by c15bps, on average, through 2023e, to incorporate an accelerated increase in LTD, in line with management’s guidance. Conversely, we hike our NPL ratio and CoR assumptions to reflect a higher risk appetite, as the bank expands its: i) retail (management is looking to quadruple mortgage portfolio by end-2021e), ii) SME, and iii) corporate portfolios. The new zakat calculation is also now reflected in our numbers (10% of net profits, negligible impact on our TP).     

Slow pick-up in economic activity, stretched targets among risks. Risks include: i) a setback to Saudi’s economic recovery, limiting the bank’s ability to deliver on its lending growth plans, ii) stretched growth targets, jeopardising asset quality, iii) a lower interest rate environment, which may hit margins, given short maturity loan book, if not fully compensated by higher volumes, iv) increased competition within the corporate space, with a recently closed merger (SABB-AlAwwal) and another one underway (NCB-Riyad), possibly negatively impacting its growth potential and/or margins, and v) intensified competition within the retail space.