Itqan Cap says provisions continue to weigh on Bank Aljazira’s earnings, holds rating at ‘Neutral’

Bank Aljazira’s record high provisions continue to maintain pressure on the bank’s bottomline, which declined 29.3% year-on-year in Q3 2020, Itqan Capital said in a recent report.

The bank’s relatively high exposure to corporates (50% of financing portfolio) and below average asset quality during the current times of uncertainty is continue to weigh on Aljazira’s earnings, it added.

Bank Aljazira’s gross special commission income remains pressured by lower SAIBOR, rise in credit losses, and payments deferrals by small and medium enterprises (SMEs).

According to Iqtan Capital, Bank Aljazira’s operating income is currently benefiting from a significant reduction in cost of funds, but below average asset quality and rising credit losses remain a concern. The bank showed slow recovery on a quarterly basis as profit before Zakat remained flat and the rise in operating income was offset by higher provisions.

The bank continues to face challenges from rising non-performing loans (NPL), which jumped by 20% quarter-on-quarter in Q3 2020, while NPL ratio reached 1.5% in the same quarter versus 1.3% in Q2 2020 and Q3 2019, the report said.

Rising provisions, slowing deposit growth, and record high loan-to-deposit ratio suggests tightening liquidity for Bank Aljazira, which will weigh down bottomline in the coming quarters, it added.

Iqtan Capital maintained “Neutral” recommendation for Bank Aljazira with a target price (TP) of SAR13.30 per share.

The research firm’s “Neutral” recommendation means that the value will remain in a range of +/- 10% over a period of 52 weeks.