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Saudi banks 4Q20 results review | Loan growth momentum sustains, amid NIM normalisation, mixed CoR; Improved outlook for FY21

Aggregate earnings drop c21.6% y-o-y in 4Q20. The pressure came purely on the back of higher provisions y-o-y (+47.2%), overshadowing the reported: i) growth in operating income (+3.8% y-o-y) and ii) reduction in opex (-2.7% y-o-y). The pressure on NIMs eased again in 4Q20 (-2bps q-o-q, on average), with average asset yields shrinking only c8bps (vs. c22bps in 3Q20 and c38bps in 2Q20), and cost of funding inching down c6bps q-o-q (vs. c18bps and c30bps, respectively). Net income dropped c18.6% q-o-q in 4Q20 and c26.5% y-o-y in FY20.

Loans up c2.3% q-o-q, deposits c3.3%; NPL ratio rise for most names. RJHI, Alinma, ALBI, and NCB led the market in loan growth in 4Q20, recording +8.8%, +5.9%, +3.5%, and +2.9% q-o-q, respectively, continuing to be driven mostly by higher mortgages. Only SAIB, ANB, and BSF reported loan drops in 4Q20 (-5.9%, -3.7%, and -2.1%, respectively). Saudi’s four Islamic names (RJHI, ALBI, BJAZ, and Alinma) led the market on deposit growth, largely overlapping with the top loan performers. Higher CASA deposits explained c80% of the reported growth, while higher time deposits justified the balance. The banks’ aggregate NPL books added c2.3% q-o-q, roughly in line with 3Q20 additions (+2.6%), but slower than 2Q20 additions (+14.4%), with the average NPL ratio of our coverage roughly unchanged q-o-q, at c2.4% in Dec-20. The average coverage ratio improved to c160% in Dec-20 (+7pp q-o-q). Capitalisation ratios grew for most banks q-o-q in 4Q20, except for BJAZ, Alinma, and ANB, with CAR averaging c20.5% and Tier-1 capital at c18.5% in Dec-20, adding c68bps and c54bps q-o-q, respectively, supported by limited or no dividend distribution for FY20.

Better outlook for FY21. We expect the loan growth momentum to largely sustain through FY21 (+c9.2% y-o-y, on average, for FY21 vs. +c10.4% in FY20), continuing to be boosted mostly by the mortgage segment, amid limited corporate lending opportunities. We look for stable NIMs, from the levels reached in 4Q20 and for CoR to inch downwards, while continuing to be elevated, on an expected deterioration in asset quality metrics. Accordingly, we look for aggregate net income to grow c13.5% y-o-y in FY21 (vs. the reported c6.1% decline in FY20, both adjusted for SABB’s goodwill impairment charge) and dividends to resume.

Adjust forecasts post 4Q20 results; Limited revisions to TPs. Our top picks for 2021 are unchanged: i) SABB: turnaround year, post conclusion of integration costs, clean-up of books, and new management; ii) NCB: high-value exposure to corporate, retail segments, and unjustifiably inflated trading discount to RJHI, gaining scale following soon-to-be concluded merger with Samba, ii) iii) Alinma: new and improved management, Islamic name geared towards growth, while trading at undemanding multiples relative to larger Islamic peers, and iv) BJAZ: on undemanding valuation.