BofAML raises EPS estimates on 5 Saudi banks

Bank of America Merrill Lynch (BofAML) has raised its 2017-19 earning per share (EPS) estimates for five of Saudi Arabia’s biggest lenders, noting that it expects an improved outlook for the Kingdom’s banks in the second half of this year.

The EPS estimates were increased by an average of 9 percent for Al Rajhi Bank, National Commercial Bank, Samba Financial Group, and Alinma Bank, BofAML said on Thursday.

“Our new forecasts are now 4 percent above the consensus. Furthermore, on the back of our higher ROE expectations (also supported by higher dividend forecasts) we upgrade our PO's (principal only strips) by an average 11 percent,” the bank said in a report.

BofAML updated its recommendation on Al Rajhi Bank to “buy,” based on the Saudi lender’s accelerated earnings momentum. SABB and Samba maintained their “buy” recommendation.

NCB was also retained on “buy.”

According to BofAML, its projections on the Kingdom’s banking sector were based on five core themes, including an accelerated net interest margin (NIM) expansion due to interest rate hikes observed since December last year. The lender expects another four upward revisions to interest rates over the next 18 months.

“We also see support from lower than expected cost of funding, as observed in Q2 2017,” the report said.

Other factors include the strong cost discipline, which is driving operation costs below expectations; better than expected asset quality; and a potential increase in asset growth in 2018.

In addition, there has been an increased momentum due to the anticipated potential inclusion of Saudi Arabia’s stock exchange in the Morgan Stanley Capital Index’s (MSCI) emerging market index, the report said.

Also, seven of the largest Saudi banks increased dividends by an average of 67 percent YoY in H1 2017, despite aggregate earnings falling 5 percent, BofAML said.

“In our view, this sends a strong signal on management confidence on the outlook for NIM progression as well as asset quality. It also marks an improvement on returns,” the report said.

“Looking forward, we see capital build supporting potential for sustained higher dividend payments from the Saudi banks, with our analysis indicating they will have access capital of 11 percent (of risk weighted assets, including dividends) on average by the end of 2019,” the report said.

Write to Yasmin Helal at yasmin.h@argaamplus.com