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Saudi banks 3Q20 results review | Healthy loan growth; NIM bottoms out; CoR normalises; No rating changes

Aggregate earnings drop c5.0% y-o-y. Support came from: i) c50% y-o-y drop in funding costs, limiting the drop in NII to 1.1% y-o-y, absorbing c11.4% fall in interest income, ii) robust growth in bank balance sheets (aggregate assets: +14.1% y-o-y), reflecting positively on non-interest income (+13.3% y-o-y), resulting in +2.1% y-o-y rise in aggregate operating income, and iii) positive jaws ratio, with opex adding 1.9% y-o-y only, resulting in c8bps y-o-y improvement in average CTI. Notably, CoR normalised, averaging c87bps in 3Q20 vs. c91bps in 3Q19 and c123bps in 2Q20. Excluding the hefty SAR7.42bn in goodwill impairment booked by SABB in 2Q20, net income added c28.0% q-o-q in 3Q20 and dropped c6.9% y-o-y in 9M20.

Loans up 2.9% q-o-q, deposits 2.6%; NPL ratios inch down for most names, on limited NPL accumulation. NCB, RJHI, ALBI, and Samba led the market on loan growth in 3Q20, recording +6.4%, +5.2%, +4.5%, and +4.6% q-o-q, respectively, mostly driven by higher mortgage lending. Only SABB, BSF, and SAIB reported loan drops for the quarter (-0.6%, -1.2%, and -1.4%, respectively). The above listed four outperformers on loan growth were among the top five performers on deposits, along with Alinma. Higher CASA deposits explained c70% of the reported growth, while higher time deposits explained the balance. The banks’ aggregate NPL books added c2.6% q-o-q, slower than the 2Q20 additions (+14.4%), with the average NPL ratio of our coverage roughly unchanged q-o-q, at c2.4% in Sep-20. Coverage ratios were also roughly unchanged q-o-q, averaging 153% in Sep-20. Capitalisation ratios improved for all banks q-o-q, except for BSF, in 3Q20, with CAR averaging 19.8% and Tier-1 capital 18.0%, in Sep-20, adding c42bps and c27bps, q-o-q, respectively. 

4Q20e: Stable NIMs, no spike to CoR. NIMs bottomed out in 3Qa, with 4Qe NIMs expected to be stable to positive q-o-q. CoR normalised for four names in 1Q and seven additional names in 2Q, after hefty provisions in 4Q19-1Q/2Q20. We expect this trend to continue through 4Qe, particularly following Saudi Central Bank’s decision to further extend the MSME deferral programme through Mar-21, which would likely further mute the potential actual deterioration of banks’ asset quality metrics. On loans, we expect 4Qe loans to grow c3.0%, roughly in line with Q3a levels (c2.9%). Regarding dividends, while banks gave no specific guidance on 2020e dividends to date, our base case assumes no cash dividends for the year.

Adjust forecasts post 3Q20 results; Minor impact on TPs, no change to ratings. NCB is our top pick in Saudi Arabia (high-value exposure to corporate, retail segments, unjustifiably inflated trading discount to RJHI, and potential merger with Samba further solidifying market position). We also like: i) SABB: mispriced name, as market ignores its expanded capacity, merger synergies, ii) Alinma: New improved management, Islamic name geared towards growth, while trading at undemanding multiples relative to larger Islamic peers, and iii) BJAZ: on valuation.