HSBC has ‘buy’ on Banque Saudi Fransi, Samba; construction exposure a risk

HSBC has set “buy” ratings on Banque Saudi Fransi, Samba Financial Group and Arab National Bank (ANB), which it views as providing a more attractive risk/reward profile.

“Collectively, they trade at a 21 percent discount to Saudi and 11 percent discount to EEMEA banks on a one-year forward PE basis,” HSBC said in a note Thursday on Saudi commercial banks.

ANB has a target share price of SAR 42, implying a 43 percent upside from current levels. HSBC said the key downside risk is loan yield compression, which could be competition driven, resulting in lower-than-expected net interest income growth.

“Very strong loan growth in H1-15 could lead to a higher-than-expected cost of risk than we forecast, especially if such growth was in the construction sector,” HSBC said. 

For Banque Saudi Fransi, HSBC has a target price of SAR 41, at a 27 percent upside from current levels.  Downside risks include higher-than-expected net interest margin contraction, driven by higher funding costs.

“Also, negative asset quality surprise in construction sector loan book, c30 percent of gross loans, represents another downside risk,” the note added.

Samba has a target share price of SAR 34, with a 47 percent upside.

“Downside risks include a deterioration in the quality of the construction sector loans, a reduction in FX income in 2016, and higher reliance of the government on SAMA cash reserves to fund the fiscal deficit instead of further issuance of treasury bonds,” HSBC said.

HSBC said that Saudi Binladin Group’s suspension from new government contracts is a worrying factor as SBG is a systemically important credit risk, potentially accounting for about five percent of sector loans.

“SBG case means the government is likely to become selective on construction project awards,” it added.