defying the downturn - ready for the recovery...saudi arabia. for 2009, spending is budgeted at sar...

1

equity research

september 26, 2009

initiation of coverage

kingdom of saudi arabiasaudi banks

SECTOR COVERAGEmaha marhaba El dada, Cfa Senior Equity [email protected]

Youssef nizam, CfaHead of Equity [email protected]

initiation of coverage

tHe current concern: corPorate defauLtsthe expected dip in real GDP growth during 2009, coupled with the repercussions of the global financial crisis, lead us to adopt a cautious stance on the short-term asset quality of saudi banks. this is mainly due to the significant increase in bad corporate debts and the lack of transparency as to the banks’ exposure to defaulting groups. the two major cases of default that the saudi banks face today concern the al Gosaibi and al saad Groups. according to Bloomberg estimates, these conglomerates have an outstanding total debt of around usD 15 billion, 30% of which is owed to saudi banks. however, on september 17, 2009, Zawya reported that an agreement has been reached between saad Group and local banks to settle about sar 9.7 billion (usD 2.6 billion) in outstanding loans.Despite this recent positive development, and due to the lack of details surrounding this agreement, we prefer to stay conservative in our forecasts of non-performing loans (NPLs) and the subsequent provisioning, as we see this case as a sample of other companies who might have similar problems though at a smaller scale but a higher frequency. as a result, we expect the NPL ratio for the saudi banks to increase to 2.27% in 2009 and to 1.94% in 2010, but remaining well below the expected average of 2.8% and 3.0% for global banks due to the more favorable macro and microeconomic conditions in the Kingdom.

More resiLient after tHree consecutive sHockshaving adjusted successfully to two previous shocks, saudi banks have emerged as more resilient from the current global crisis. the first of these shocks was the stock market correction in 2006. though the banks had very little direct exposure to local equities, they generated high fee revenues from margin lending, brokerage and asset management services. after the correction, the banks reduced their margin lending and re-focused on core banking activities, resulting in a y-o-y drop of 14.4% in the sector’s net income in Fy 07. the second shock came in 2008, when due to the severe correction in the global financial markets, saudi banks suffered from massive write-downs on their investment portfolios. this was another blow to profitability, as the banking sector’s net income dropped 14.1% during Fy 08. 2009 is expected to be another challenging year, during which saudi banks will go through the process of cleaning up their credit portfolios. rising NPLs, accompanied by large provisions for credit losses, will continue to negatively affect the sector’s profitability, which is expected to drop by 4.9% y-o-y in Fy 09. Going forward into 2010, we expect saudi banks’ earnings to rebound from a relatively low base in 2009 as they benefit from a steep yield curve and better macro-economic conditions, sustained by strong balance sheets and an enhanced risk management framework. We believe the successful management of the current and of the past two crises has enhanced the immunity of the saudi banking sector, putting it in a better position to ride the next curve.

business ModeL sLigHtLY affected bY tHe crisiscompared with their regional and international peers, the saudi banks business model remained relatively intact during the latest crisis. saudi banks still rely on the traditional banking model of generating a spread by taking deposits and granting loans, with special commission income accounting for 72.5% of total operating income. Moreover, saudi banks balance sheets have proven solid owing to their low leverage, as indicated by loans to deposits ratios below 100%, and their strong capital position, validated by the 14.1% average tier 1 ratio as of the end of 2008.

2006 2007 2008 2009

Re-FocusOn Core Business

InvestmentBook Hit

CorporateDefault

Stock MarketCorrection

defYing tHe doWnturn - readY for tHe recoverY

Banque saudi Fransi accumulate

current Price (sar) 41.00

target Price (sar) 51.48

upside 25.6%

arab National Bank accumulate



upside 22.4%

al rajhi Bank accumulate



upside 15.7%

saudi hollandi Bank hold



upside 9.6%

riyad Bank Buy



upside 30.6%

saudi British Bank Buy



upside 31.9%

samba Financial Group Buy



upside 50.7%

regulated by cMa - License no. 06017-37

2

kingdom of saudi arabia

equity research

september 26, 2009

saudi banks

HeLPed bY a robust econoMic backdroP…Being the global leader in oil production, saudi arabia’s real GDP grew by an average of 4.9% per annum between 2003 and 2008 due to high oil prices. however, the fall in oil prices coupled with the sharp cut in oil production at a time of poor global economic conditions, brought the six-year economic boom to a halt. though the global downturn will hit the saudi economy in 2009, we believe saudi arabia is in a relatively good position to face the current economic crisis. Based on iMF figures, we expect real GDP in Ksa to contract at a slower pace than global GDP, shrinking by 0.9% in 2009 versus 1.4% for the world economy. Moreover, as the global economy starts to improve in 2010, Ksa will be recovering at a faster pace, with projected GDP growth of 2.9% versus 2.5% globally.

… and bY a Proactive MonetarY PoLicYin addition to the consecutive cuts in the saudi repo rate and the reduction of the reserve requirement from 13% to 10% and then to 7%, saMa has taken non-conventional measures to ease the liquidity crunch. it injected around sar 10 billion into the local banks in the form of deposits and announced that it is prepared to lend them up to sar 150 billion. Furthermore, in an effort to support deposits and lending, the government announced that it will guarantee the banks’ deposits and the interbank loans.

… aLong WitH a counter-cYcLicaL fiscaL PoLicYBetween 2003 and 2008, booming oil prices resulted in budget surpluses for six consecutive years. this massive fiscal reserve gave the government substantial room to adopt a counter-cyclical fiscal policy at the end of 2008. the budget for fiscal year 2009 is the largest in the economic history of saudi arabia. For 2009, spending is budgeted at sar 475 billion, surpassing expected revenues of sar 410 billion, and resulting in a projected deficit of sar 65 billion. this budget is based on an average oil price of around usD 45 per barrel and an average production of 7.7 million barrels per day.We believe that this expansionary budget aims to instill confidence in the economy and reaffirms the government’s commitment to proceed with its investment program despite the global recession and tight regional and local financing conditions. Furthermore, we think that the downside risk of the oil price is mitigated by saMa’s massive reserves, which can be resorted to if oil prices drop below the budgeted price.

suPPorting factors Positive net income as the first line of defense: Net income of saudi banks is still in the positive territory, providing a cushion to absorb a further deterioration in asset quality before the need to tap into the capital arises. adequate capitalization as the second line of defense: the saudi banking system is adequately capitalized. the average tier 1 capital ratio for the sector reached 14.3% in June 2009, well above the minimum regulatory requirement of 8% set by saMa. this abundance of capital is also illustrated by the sector’s high average total equity to total assets (te/ta) ratio of 12.7%. We believe this high level of capitalization is sufficient for banks to absorb any further deterioration in asset quality, should it occur.

PureLY doMestic PLaY: froM ksa to ksa source of Funds: Most of the saudi banks have solid local franchises and are therefore not very dependent on wholesale funding. customer deposits make up 84% of banks’ funding on average, and 97% of these are local deposits. this provides the saudi banking system with a certain amount of stability, making it less vulnerable to the global crisis. another source of strength in the saudi banks’ funding structure is the high ratio of government and quasi-government deposits to total deposits which reached 37% at the end of 2008. We believe this is an additional stabilizing factor preserving deposits and protecting the banks from major withdrawals. these attributes have resulted in comfortable levels of liquidity, despite the current tight global liquidity conditions. use of Funds: When evaluating the future evolution of loan impairments, it is necessary to consider the geographic mix of sector assets, and more specifically the loan mix. saudi banks have a largely domestic focus, with almost 91% of their total loans originating from the Kingdom. the Gcc and Middle east loans exposure grew from 2% in 2007 to 6% in 2008, when a number of banks expanded their lending regionally. the remaining international loans exposure is around 3%, which is considered to be a healthy level that limits the banks’ vulnerability to any international shock.

saudi banks

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equity research

september 26, 2009

footnotes

saudi banks

furtHer groWtH to coMeDuring the past years, the saudi banking sector has been growing in line with the economy, with total banking assets increasing at a caGr of 18.9% over Fy 04-08. We expect this correlation to continue and forecast a caGr of 12.6% between 2009 and 2013, based on expected nominal GDP growth of 4.6%, 7.4%, and 11.8% in 2009, 2010 and 2011 respectively.We believe that the youthful saudi demographic profile and the expanding bankable population, in conjunction with a low level of credit penetration and a proper implementation of the mortgage law, supported by a growing economy and positive outlook for oil prices, should serve as catalysts for increased loan growth in the years to come.however, in the short term, banks have a weak appetite for loans. We attribute the current drop in the saudi private sector credit to the growing risk aversion of the banks. they are reluctant to lend in this negative economic environment in order to avoid any further deterioration of their loan books. hence, we forecast net loans to grow by a mere 1.1% in 2009 and a caGr of 13.5% during 2009 and 2013, compared to a caGr of 22.8% between 2004 and 2008.

ProfitabiLitY outLook: LoWer earnings near-terM, but MediuM-terM outLook More PositiveDespite the increasingly challenging conditions in the last few months and the anticipated surge in NPLs, exacerbated by the defaults of the likes of al Gosaibi Group, we expect earnings of saudi banks to remain resilient in the medium term, supported by the strength of their balance sheets and the oligopolistic structure of the sector. We forecast saudi banks’ net income to grow at a caGr of 14.0% between 2009 and 2013, well above the 11.3% caGr between 2004 and 2008.in 2009, given sharply higher loan loss provisions charges estimated at sar 10.26 billion, we expect saudi banks’ net income to drop by 4.9% y-o-y. We anticipate the worst stage of the earnings cycle for saudi banks to be in h2 09 and h1 10, as revenues are impaired by stagnant loan growth, and bottom lines are hurt by NPL losses as well as a reduction in fees and commissions income.

vaLuations and stock Picks: corPorate defauLt fears create a buYing oPPortunitY Given the latest price correction, evidenced by the drop in the Banking all share index of 12.4% between May 09, 09 and september 16, 09 we believe the saudi banks are currently trading at attractive valuation levels. among the seven banks we cover, we favor samba for its attractive valuation, as well as its high upside potential.saudi British Bank and riyad Bank are also expected to have significant upside potential, supported by their well-diversified funding, solid balance sheets and sufficient levels of liquidity.

In this report, we examine in detail the performance of all local banks operating in Saudi Arabia, including The National Commercial Bank (NCB), but excluding Al Inma Bank. Based on our analysis, we come up with a rating for the largest seven banks in the Kingdom, excluding NCB.

covered banks

recommendation Current Price Target Price upside Potential Pb PE 2009E PE 2010E

samba Financial Group Buy 46.30 69.75 50.65% 2.12 10.00 8.04

saudi British Bank Buy 46.60 61.47 31.91% 2.67 14.08 11.07

riyad Bank Buy 24.15 31.54 30.60% 1.35 13.49 10.55

Banque saudi Fransi accumulate 41.00 51.48 25.56% 2.00 12.54 10.68

arab National Bank accumulate 44.00 53.87 22.43% 2.17 11.67 9.84

al rajhi Bank accumulate 69.75 80.72 15.73% 3.83 16.17 13.68

saudi hollandi Bank hold 32.50 35.61 9.57% 1.82 16.17 10.59

saudi banks


equity research

4Month 00, 2009

tabLe of contents

saudi banks: tHe groWtH drivers 5

macro-Economic drivers 5

industry-specific drivers 8

Conservative yet Proactive regulator 9

financiaL anaLYsis for fiscaL Year 2008 10

baLance sHeet anaLYsis

assets 10

Net Loans and advances 11

asset quality: Deteriorating Fast 14

investment Portfolio 18

Liabilities 19

customer Deposits 19

Wholesale Funding 20

Capital adequacy 21

incoMe stateMent anaLYsis

operating income 22

Net special commission income 23

Net Fees and commissions income 23

operating Expenses 24

impairment of Financial investments 24

Provisions for credit Losses 25

Profitability outlook 25

ratio anaLYsis

Profitability indicators 26

efficiency 27

Funding and Liquidity 27

asset Liability management 28

H1 09 revieW 30

bank anaLYsis

saMBa Financial Group 33

al rajhi Bank 40

riyad Bank 48

saudi British Bank 54

Banque saudi Fransi 61

arab National Bank 67

saudi hollandi Bank 73

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equity research

september 26, 2009

saudi banks

saudi banks: tHe groWtH driversthe saudi banking sector consists of 22 commercial banks, including 12 local banks (the National commercial Bank, samba Financial Group, al rajhi Bank, riyad Bank, saudi British Bank, Banque saudi Fransi, arab National Bank, saudi hollandi Bank, saudi investment Bank, Bank al Jazira, Bank al Bilad and al inma Bank) and 10 branches of Gulf and foreign banks (including emirates Bank, Gulf international Bank, National Bank of Kuwait, Bank Muscat, BNP Paribas, Deutsche Bank, and others). these branches of non-local banks are focused on corporate and private banking and pose little competition to the local banks, which have developed solid retail and corporate banking franchises.

Macro-econoMic drivers

Economic growth in ksa

saudi arabia is the largest economy in the Gcc and the most powerful player in the global oil market. its oil reserves are estimated to constitute around 22% of global reserves and 55% of Gcc reserves. it currently has a share of 13% of world oil production.

Despite the recent growth in non-oil sectors and continuous efforts to diversify the economy away from oil revenues, the energy sector continues to have a massive impact on the overall economy, as oil revenues are being recycled into the rest of the economy through the government budget and the banking sector.

Chart 1: saudi GDP Growth

Source: IMF, World Economic Outlook, April 2009

From 2003 to 2008, saudi arabia’s real GDP grew by an average of 4.9% per annum due to high oil prices. however, the fall in oil prices, coupled with the sharp cut in oil production at a time of poor global economic conditions, brought the six-year economic boom to a halt. Following real GDP growth of 4.6% in 2008, we expect the real GDP to contract by 0.9% in 2009 and to grow again by 2.9% in 2010 and 4.8% in 2011, based on iMF figures.

inflation started increasing in 2007 when it reached 4.1%. it attained a record high of 11.0% in July 2008, and ended the year at a 9.9% average. these high levels of inflation were caused mainly by increases in food and real estate prices. also, strong domestic demand, a lax fiscal policy and abundant liquidity in the system, evident in the high money supply growth rates, underpinned the acceleration in inflation rates. in addition, due to the peg of the saudi riyal to the us dollar, the saudi arabian Monetary agency (saMa) was forced to follow the Fed’s aggressive easing policies starting september 2007 by cutting the interest rates at a time when a booming economy necessitated the opposite. however, saMa resorted to other means to curb inflation by lifting the reserve requirement by a total of 6% to 13% between November 2007 and May 2008.

0%

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2003 2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

Real GDP Growth (%) Consumer Price In�ation

The energy sector continues to drive the economy

The global economic downturn had a negative impact on the

Saudi economy

Inflation is expected to stabilize at around 5.6% between 2009

and 2013

Real GDP growth is

expected to be negative

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equity research

september 26, 2009

saudi banks

SAMA played an active role in easing liquidity pressures by loosening

its monetary policy

conversely, starting mid-2008, inflation stopped being the government’s primary concern as it declined and liquidity tightened. We believe that inflation will stabilize in the medium-term, supported by the fall in oil and food prices and the reduced costs for key imports, although housing prices will continue to push inflation upward. inflation stood at 4.1% in august 2009 and is expected to average 5.5% in 2009 and 4.5% in 2010, according to the iMF.

Expansionary monetary Policy

the riyal’s fixed exchange rate against the us dollar plays a crucial role in saudi monetary policy. Because of the currency peg, saMa cannot pursue an autonomous monetary policy and is forced to closely follow the Fed’s interest rate changes.

Chart 2: saudi repo and reverse repo rates versus the Fed Funds target rate

Source: Bloomberg

starting september 2007, although it continued to follow the Fed’s rate cuts by lowering the reverse repo rates (the deposit rates at the central Bank) from 5% to a record low of 0.25%, saMa maintained the repo rates (the rates at which it lends the domestic banks) at a high level of 5.5% in an attempt to decelerate the increase in domestic liquidity.

however, in October 2008 the situation changed drastically, and the government was faced with a tight liquidity environment requiring a loose monetary policy. the sudden tightening of liquidity was triggered by the outflow of foreign funds that were parked in sar deposits in anticipation of the – ultimately unrealized - revaluation of the saudi riyal against the us dollar, and was intensified by the worsening global credit crisis and the increased perception of counterparty risk. For this reason, in order to restore lending to the private sector, which slowed sharply in q3 2008, the authorities took several measures, including consecutive cuts in the saudi repo rate by a total of 350 bps from 5.5% to 2%, and in the reserve requirement from 13% to 10% and then to 7%.

Furthermore, saMa has taken non-conventional measures to ease the liquidity crunch by injecting around sar 10 billion in the local banks in the form of deposits, and by announcing that it is prepared to lend them up to sar 150 billion. additionally, in an effort to support deposits and lending, the government announced that it will guarantee bank deposits and interbank loans.

Chart 3: 3- Month saiBOr and LiBOr rates Chart 4: 3- Month saiBOr – LiBOr spread

0.0%

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equity research

september 26, 2009

saudi banks

as shown in the above charts, from mid-June to October 2008, saiBOr and LiBOr rates rose sharply, from around 3% to 4.5%, reflecting the drying up of liquidity. During the same period, the spread between 3-month saiBOr and LiBOr rates was reversed. From a discount it turned to a premium of 185 bps, mirroring a perceived increase of counterparty risk within the Kingdom. however, since November 2008, the situation has improved substantially. the saiBOr and LiBOr rates have declined by a total of 350 bps and the spread has tightened again. Based on these figures, we believe that the liquidity positions in the market have improved but have not been completely restored to the pre-crisis level.

Our View

We think that the government will maintain its loose monetary policy during 2009 and until mid-2010, by keeping key interest rates at their current levels. starting mid-2010, we believe the easing cycle will come to an end and these interest rates will begin to rise again, since liquidity in the banking system will no longer be an issue.

Counter-Cyclical fiscal Policy

Between 2003 and 2008, booming oil prices resulted in budget surpluses for six consecutive years. Due to exceptional oil revenues, 2008 was a record year, during which the surplus amounted to sar 590 billion, well in excess of the projected budget surplus of sar 40 billion. the realized surplus also significantly exceeded the 2007 surplus of sar 177 billion and more than doubled the previous record figure of sar 290 billion reported in 2006. as a result, the budget surplus reached an unprecedented 35.4% of GDP.

Chart 5: saudi Budget Balance % of GDP Chart 6: saMa Net Foreign assets and Deposits with Banks abroad

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SAMA Deposits with Banks Abroad

SAMA Investment in Foreign Securities

Source: SAMA, IMF Source: SAMA

the budget for fiscal year 2009, which the government announced at the end of 2008, is the largest budget in the economic history of saudi arabia. For 2009, spending is budgeted at sar 475 billion, surpassing expected revenues of sar 410 billion, and resulting in a projected deficit of sar 65 billion, the first budgeted deficit since 2003. this budget is based on an average oil price of around usD 45 per barrel and an average production of 7.7 million barrels per day.

We believe that the planned expenditure for 2009 is aggressive, given that it is 16% higher than the budgeted expenditure for 2008, despite lower expected government revenues due to lower oil prices. however, the current budget is in line with previous growth in expenditure. Between 2005 and 2008, government spending grew by more than 15% per annum and it continues to be directed mainly at infrastructure, education, manpower development, healthcare and social affairs.

Record surplus in 2008

Expansionary budget coupled with conservative revenue assumptions

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equity research

september 26, 2009

saudi banks

We believe that this expansionary budget aims to instill confidence in the economy and reaffirms the government’s commitment to proceed with its investment program at a time when the global economy is faced with recession and regional and local financing conditions are tight. Furthermore, we think that the downside risk of the oil price is mitigated by saMa’s massive reserves which can be resorted to if oil prices drop below the budgeted price. saMa investments in foreign securities stood at sar 1,097 billion and deposits with banks abroad stood at sar 223 billion at the end of July 2009.

favorable demographics

Between 2004 and 2008, the saudi population grew at a compounded annual growth rate (caGr) of 2.5% to reach 24.9 million at the end of 2008. this growth rate has been accelerated further by an influx of expatriates coming to work in the oil-rich country. according to the iMF, this fast-paced growth is expected to continue in the future. consequently, the bankable population is projected to expand, increasing the demand for banking services, mainly retail products such as bancassurance, credit cards, and consumer loans, as well as housing loans.

Chart 7: saudi Population Distribution

Source: SAMA

it is estimated that around 38% of the population is under the age of 15 and that more than 50% of the population is under the age of 20. this youthful demographic profile also bodes well for a larger bankable population.

industrY-sPecific drivers

Less banking Penetration than its neighbors

With a loans-to-GDP ratio of only 41% as of December 2008, the saudi banking sector is among the least developed in the region, in particular when compared to the uae, which has a loans-to-GDP ratio of around 95%. this low level of credit penetration indicates high long-term growth potential for the banks operating in saudi arabia.

Chart 8: Loans to GDP and Deposits to GDP as of December 2008

Chart 9: Banking Penetration in saudi arabia

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2006 2007 2008

Loans to GDP Deposits to GDP

Source: Central Banks Data Source: SAMA and IMF

38%

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0-14 Years Old

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equity research

september 26, 2009

saudi banks

SAMA perceived as a tough regulator

Proactive measures

Between 2005 and 2008, saudi banking penetration increased moderately as a result of a booming economy and population growth. the loans-to-GDP ratio increased from 37% in 2005 to 41% in 2008, while the deposits-to-GDP ratio increased from 44% to 47%.

Going forward, we believe that the attractive saudi demographic profile and the expanding bankable population, in conjunction with a proper implementation of the mortgage law, should serve as catalysts for increased loan penetration rates, mainly through retail loans.

mortgage Lending

in July 2008, the consultative shourah council passed the long-awaited mortgage law. the draft law, which is composed of four components – a real e state financing system, a system to monitor financing companies, a lease financing system and a real estate mortgage system - still has to be approved by the council of Ministers. the new law will allow more saudis to own their property and banks to diversify their income sources. it is estimated that currently, over 60% of the saudi population is living in rented apartments.

at a time when demand for housing units is growing, especially among young, middle-income residents, this new mortgage law will allow banks to play a major role by enabling developers to build these homes on the one hand, and giving residents the financial capacity to afford them on the other hand.

conservative Yet Proactive reguLator

saMa, the banking supervisory authority in saudi arabia, is perceived as one of the best regulators in the region, due to its conservative approach in managing the saudi banks, and its high regulatory standards on capital adequacy, liquidity levels, asset quality, loan loss provisioning, related-party exposures, and consumer lending. For example, all banks are required to implement the Basel ii standardized approach for credit risk and the minimum capital adequacy ratio is set at 8%, although the average capital adequacy ratio for saudi banks stood at 14.1% at the end of 2008. Moreover, exposure to a single group is restricted to 25% of equity, and lending to related parties is limited to 5% of capital. Besides, in an attempt to reduce the risk inherent in consumer lending, saMa has put strict regulatory caps on retail lending, including a maximum loan size of 15 monthly salaries, a maximum tenor of 5 years, and a maximum burden ratio of 33% of a monthly salary.

in an effort to support the banks during the latest credit market turmoil and the accompanying pullback in liquidity, saMa has taken some active steps by pumping liquidity into the system, reducing reserve requirements, and by cutting benchmark rates multiple times.

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equity research

september 26, 2009

saudi banks

Conservative balance sheet structure

financiaL anaLYsis for fiscaL Year 2008

baLance sHeet anaLYsis

Source: Saudi Banks Financial Statements

saudi banks appear to have a relatively conservative balance sheet structure, with loans accounting for 61% of total banking assets and net investments representing 23%. On the funding side, deposits cover an average of 84% of total funding for the aggregate sector, which is high compared to the regional average.

assets

Between 2004 and 2008, saudi banks went through a remarkable growth period, with total assets increasing by a caGr of 19%. this was fueled by increases in net loans and advances and supported by the strong economy. in response to this rapid growth in their asset base, many saudi banks increased their capital, because their capitalization ratios were put under pressure.

Chart 10: saudi Banks total assets Growth

Source: Saudi Banks Financial Statements and Audi Capital - KSA Estimates

however, in the current challenging economic environment, we believe 2009 will be a tough year for the saudi banks to maintain their growth, especially since most banks have revisited their lending strategies in the last two quarters and have adopted a more cautious approach to lending.in this context, we forecast total assets to grow by 5.6% year-on-year, and at a caGr of 12.6% between 2009 and 2013.

Saudi BanksBalance Sheet Structure

Net Loans and Advances (61.2%)

Liability Mix

Cash & Balances with SAMA (7.4%)

Other Assets (4.5%)

Net Investments (22.8%)

Interbank Assets (4.1%)

Interbank Liabilities (9.6%))

Debt Securities Issued (1.4%)

Customer Deposits (83.5%)

Term Loans (0.6%)

Other Liabilities (4.9%)

Tier 1Capital (14.1%)

CapitalAsset Mix

17% 16%

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caGr=12.6%

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equity research

september 26, 2009

saudi banks

High concentration

Corporate loans currently represent 72.4% of the total loan book

net Loans and advances

the top seven banks in the country account for 88% of the loans portfolio, indicating fairly high concentration.

Chart 11: saudi Banks Loan Market share (2008)


By Business Segment

Chart 12: Loan Mix by Business segment


With retail loans representing 21.8% of the total loan book, saudi banks have one of the lowest exposures to the retail segment in the region. We attribute this low retail exposure to saMa’s increased restrictions on the retail lending area following the stock market crash in 2006, when a high proportion of the retail investors were leveraged.

We believe this low retail exposure will continue in 2009, but this trend will be reversed starting 2010 as mortgage financing should expand, in particular after the draft mortgage law is approved by the saudi government. in addition, the attractive demographic profile and the expanding number of expatriates in saudi arabia will serve as catalysts for strong retail loan growth in the Kingdom.

On the other hand, corporate loans represent a large portion of saudi banks’ loan portfolios. this is attributable to the previous expansion of the economy. Our view is that growth in corporate lending will slow in the near term, as several projects have been cancelled or put on hold.

72.4%

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Others

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equity research

september 26, 2009

saudi banks

Lowest real estate exposure in the region

Limited Real Estate Exposure

the recent decline in the global real estate market and the major losses incurred as a consequence of us subprime lending increased the level of concern over the outlook for the real estate and construction industries. however, as far as saudi arabia is concerned, unlike in the uae and other countries in the region, there was no bubble in the property market, and even the prime segment of mortgage loans remains untapped, limiting if not cancelling the possibility of subprime lending.

Chart 13: regional real estate Loan concentration

Chart 14: saudi Banks Loan exposure to different Business sectors

0%

15%

30%

45%

60%

75%

KSA

Om

an

UA

E

Bahr

ain

Qat

ar

Kuw

ait

USA

UK

25%

21%

13%

12%

9%

6%

5% 4% 3% 2% Commerce

Consumer Loans Other

Manufacturing

Building & Construction

Government

Transportation

Services

Financial InstitutionsAgriculture

Source: Central Banks Data Source: Saudi Banks Financial Statements

saudi arabia emerges as having the least exposure to the real estate and construction sectors in the region. Of the total loan portfolio, real estate lending came in at 8.6% of total loans at the end of 2008, compared to 11.8% in the uae (this figure excludes any exposure through personal loans or other facilities), 18.2% in qatar, 31.9% in Kuwait, 53.3% in the us and almost 70% in the united Kingdom.

the exposure to the mortgage sector is limited to 2% due to the fact that the mortgage market in saudi arabia is relatively new and still underdeveloped, pending the new mortgage law to be approved by the council of Ministers.

Chart 15: real estate contribution to total Loans Portfolio across saudi Banks


among the saudi banks, saBB has the lowest real estate lending exposure at 4% of the total loan book as of December 2008, while saudi investment Bank has the highest exposure at 20%.

however, we are not particularly worried about the exposure to the construction and real estate sectors in the Kingdom, due to the relatively low level of delays and cancellations of existing projects. however, there are many cancellations of projects that are still in the pipeline, mainly in the oil and petrochemicals sectors. this will limit future loan expansion in this segment.

4% 4% 5% 6%

8% 8%

11% 13% 14% 15%

20%

0%

6%

12%

18%

24%

SABB

Bila

d

AN

B

Rajh

i

Riya

d

NCB

BSF

Sam

ba

Jazi

ra

SHB

SIB

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saudi banks

Loans are expected to grow at a CAGR of 13.5% during 2009-2013

Loan growth to slow in 2009

Short–term Loan Maturity Profile

around 61% of saudi loans have a maturity of less than one year, and around 28% have a maturity of 1 to 5 years.

Chart 16: Loan Mix by Maturity


Going forward, given the scale of industrial projects in saudi arabia, and the expected introduction of the mortgage law, we believe that the maturity profile of the loans portfolio will be extended.

Sector Loan Growth Trend

Despite the recent efforts by the government to increase liquidity in the system, loan growth continued to fall in the last two quarters. We attribute this drop not only to the tight liquidity in the market which represents the supply side, but also to the banks themselves, who are reluctant to lend in this negative economic environment in order to avoid any further deterioration of their loan book.

Chart 17: saudi Banks Growth in Net Loans and advances


as much tighter credit standards are the main constraint for balance sheet expansion, we expect loan growth to slow significantly, from 31% in 2008 to 1.1% in 2009, and to increase modestly thereafter, to 13.7% in 2010 and 14.2% in 2011.

however, growth in the saudi banking loan book has by no means come to an end, due to the continued government support to the banking sector and sustained government spending on infrastructure projects.

26%

30%

12%

20%

31%

1%

14% 14% 13% 13%

0%

7%

14%

21%

28%

35%

0

300,000

600,000

900,000

1,200,000

1,500,000

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

Saudi Banks Total Loans Y-o-Y Total Loans Growth

32.7%

28.1%

27.6%

8.9% 2.6%

0-3 Months

3-12 Months

1-5 Years

Over 5 Years

No Fixed Maturity

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equity research

september 26, 2009

saudi banks

asset Quality: deteriorating fast

as measured by the NPL ratio (Non-Performing Loans to Gross Loans), and the NPL coverage ratio (Provisions to NPL), the quality of saudi banking sector assets has improved markedly over the last few years. the average NPL ratio decreased from 2.35% in 2004 to 1.36% in 2008, while the NPL coverage ratio remained almost constant at around 160%.

however, with the global macroeconomic conditions worsening in the past couple of months, credit risk is clearly rising and spreading throughout the corporate sector which is now experiencing great difficulty in obtaining short-term funding. the dire consequences are apparent in the recent loan defaults by large saudi conglomerates such as al Gosaibi Group and al saad Group. it is estimated that the al Gosaibi holding company owes sar 34.6 billion to more than 100 banks, while dozens of banks are holding usD 6.3 billion worth of syndicated loans of al saad Group. saMa has frozen some bank accounts related to these groups following its meetings with saudi banks during which their exposure to troubled family-owned businesses was discussed.

On september 17, 2009, Zawya reported that an agreement has been reached between saad Group and local banks to settle about sar 9.7 billion (usD 2.6 billion) in outstanding loans. Despite this recent positive development, and due to the lack of details surrounding this agreement, we prefer to stay conservative in our forecasts of NPLs and the subsequent provisioning, as we see this case as a sample of other companies who might have similar problems though at a smaller scale but a higher frequency.

as a result, we expect the NPL ratio for the saudi banks to increase to 2.27% in 2009 and to 1.94% in 2010, but remaining well below the expected average of 2.8% and 3.0% for global banks due to the more favorable macro and microeconomic conditions in the Kingdom.

Chart 18: saudi Banks asset quality indicators


as depicted in the below chart, we expect most of the saudi banks’ NPL ratios to increase sharply in 2009, a consequence of the preceding rapid growth in their loan portfolios, whose quality has deteriorated sharply due to the current cyclical downturn.

Chart 19: NPL ratios across saudi Banks in 2009 and 2010


0%

1%

2%

3%

4%

5%

SHB

NCB

Sam

ba

Rajh

i

Al J

azira

Al B

ilad

Riya

d

BSF

SIB

SABB

AN

B

2008 2009 E 2010 E

2.35%

1.76% 1.69%

1.81%

1.36%

2.27%

1.95%

1.72%

0%

40%

80%

120%

160%

200%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E

Saudi Banks NPL Coverage Saudi Banks NPL to Gross Loans

NPL ratio expected to peak at 2.27% in 2009

Asset Quality Indicators

expected to deteriorate in the coming 2 years

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september 26, 2009

saudi banks

Loan Loss provisions are expected to more than triple to SAR 10 billion

in 2009

We expect saudi hollandi Bank, the National commercial Bank and samba to be the most exposed, with NPL ratios rising to 4.35%, 4% and 3.10% in 2009 respectively, while saudi British Bank and arab National Bank will have the lowest NPL ratios at 1%.

We believe the NPLs are well covered at most banks, with coverage ratios estimated at above 100%. in fact, the high level of coverage in the past years, averaging 163% between 2004 and 2008, will leave the saudi banks better equipped to face the current slowdown in the domestic economy.

Chart 20: NPL coverage across saudi Banks in 2009 and 2010


Provisioning Levels

Chart 22: Loan Loss Provisions across saudi Banks in 2009 and 2010


as shown in chart 22, our forecasts indicate that most of the banks will substantially raise their loan-loss provisions during 2009 and 2010. consequently, provisioning will be a key driver for the downturn in profitability, particularly in 2009.

0

500

1,000

1,500

2,000

2,500

NCB

Rajh

i

SABB

Sam

ba

Riya

d

BSF

SHB

AN

B

SIB

Jazi

ra

Bila

d

SAR

mill

ion

2008 2009 E 2010 E

0%

100%

200%

300%

400%

AN

B

SIB

SABB

Jazi

ra

Sam

ba

Rajh

i

Riya

d

NCB

BSF

SHB

Bila

d

2008 2009 E 2010 E

Chart 21: saudi Banks Loan Loss Provisions

During economic slowdowns, the key cost for banks, other than the usual slowdown in revenue growth, relates to provisioning. Based on our forecasts, we estimate loan-loss provisions of saudi banks to more than triple reaching sar 10,256 million at the end of 2009. this compares to sar 3,282 million in 2008 and sar 2,709 million in 2007.

0

3,000

6,000

9,000

12,000 20

06

2007

2008

2009

E

2010

E

2011

E

SAR

mill

ion

Source: Saudi Banks Financial Statements and

Audi Capital - KSA Estimates

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september 26, 2009

saudi banks

What to Worry about: Retail or Corporate Lending Risk?

Chart 23: saudi Banks retail Loans Chart 24: saudi Banks corporate Loans

46% 40%

4%

65%

5%

0%

15%

30%

45%

60%

75%

0

40,000

80,000

120,000

160,000

200,000

2004 2005 2006 2007 2008

SAR

mill

ion

Consumer Loans

Consumer Loans Growth

26%

27%

11%

37% 39%

0%

10%

20%

30%

40%

50%

0

120,000

240,000

360,000

480,000

600,000

2004 2005 2006 2007 2008

SAR

mill

ion

Commercial Loans and Overdrafts

Commercial Loans Growth

Source: Saudi Banks Financial Statements Source: Saudi Banks Financial Statements

Between 2004 and 2006, retail lending within the saudi Banking sector expanded quickly, largely driven by speculation on the local stock market and benefiting from supportive economic conditions. however, saMa’s tightened regulations for personal loans in 2006 had a severe effect on retail lending growth. Nevertheless, we see this as entirely positive, as those growth rates could not be sustained and the application of tighter lending criteria was inevitable. as such, the 2006 crisis put an end to the aggressive margin lending for stock purchases.

We believe retail lending in saudi arabia is more immune that other countries in the region because of the tight regulations by saMa mentioned above, increased demand from a large and young population consisting mainly of locals, loans being backed by salary assignments or personal guarantees and the absence of major job losses, unlike other countries in the region.

Chart 25: trend in the Loan Book composition


Given the low share of retail lending, which constitutes roughly 21% of the total loan book, coupled with the relatively conservative lending practices followed by the banks and the positive macro-economic outlook, we consider the retail exposure to be somewhat resilient even in the current environment.

therefore, we believe that the asset quality will be hit hardest in the corporate sector, which constitutes over 70% of total lending.

74% 72% 73% 68% 72%

23% 24% 23% 26% 21%

0%

25%

50%

75%

100%

2004 2005 2006 2007 2008

Corporate Retail Others

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september 26, 2009

saudi banks

Geographic Mix Key to Preserving Asset Quality

When evaluating the future evolution of loan impairments, it is necessary to consider the geographic mix of sector assets, and more specifically the loan mix. saudi banks have a largely domestic focus, with almost 85% of their total assets and 91% of their total loans originating from the Kingdom.

Chart 26: Geographic Mix of saudi Banks’ total assets

Chart 27: Geographic Mix of saudi Banks’ total Loans

85.2%

5.0%

3.6%

3.1% 2.5% 0.5%

KSA

GCC & ME

Other Countries

Europe

North America

South East Asia

90.9%

5.9% 1.7%

0.8% 0.7%

0.1% KSA

GCC & ME

Other Countries

Europe

South East Asia

North America


the Gcc and Middle east loans exposure grew from 2% in 2007 to 6% in 2008 when a number of banks expanded their lending regionally. the remaining international loans exposure is around 3%, which is considered to be a healthy level and limits the banks’ vulnerability to any international shock.

Chart 28: Geographic Mix of total Loans across saudi Banks (2008)


a closer look at the loan book of individual banks reveals that al rajhi has the lowest local exposure at 74%, with 23% of its loan book originating from the Gcc and the Middle east. the exposure to the Gcc region raises some concerns over the quality of these assets. Because of this, and due to the lack of details as to the exact destination of these loans, we have increased the provisions for credit losses for al rajhi Bank to sar 2.02 billion in 2009, up from sar 1.27 billion in 2008. NcB has the second lowest local exposure at 88%, and 11% exposure to turkey.

0%

25%

50%

75%

100%

NCB

Rajh

i

Sam

ba

Riya

d

SABB

BSF

AN

B

SHB

SIB

Jazi

ra

Bila

d

KSA GCC & ME Europe North America South East Asia Other Countries

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september 26, 2009

saudi banks

investment Portfolio

investment securities are the second largest asset class representing 23% of saudi banks’ total assets. the level of securities ownership varies across banks, with NcB having the highest exposure at 31%, followed by samba at 30%.

Chart 29: share of Net investments in total assets across saudi Banks (2008)


By Counterparty and Location

the saudi banks’ investment portfolios are relatively conservative, consisting mainly of government and quasi-government bonds. these represented 77% of the total investment book at the end of 2008. in addition, 72% of the portfolio is invested domestically.

Chart 30: Portfolio Breakdown by counterparty (2008)

Chart 31: Portfolio Breakdown by Location (2008)

77.4%

11.9%

9.1% 1.5%

Government and Quasi-Government

Corporate

Banks and Other Financial Institutions

Other 72%

28%

Domestic

International


in q4 08, with the downturn in the markets across the globe, most of the saudi banks shrank their investment portfolios and booked massive provisions against their investment books thus addressing the risk of any major write downs or impairments.

0%

7%

14%

21%

28%

35%

NCB

Sam

ba

SHB

Riya

d

SIB

AN

B

SABB

BSF

Jazi

ra

Bila

d

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september 26, 2009

saudi banks

Low funding costs: demand deposits represent 40% of customer deposits

Strong depository franchises

By Type

although “available for sale” investments constitute 35% of the banks’ total investment securities, we are not worried about further large impairments to drag the equity of the banks, as the current conditions in the financial markets are providing a supportive backdrop, with the fixed income as well as the equity markets recording major progress on a year–to-date basis.

Chart 32: Portfolio Breakdown by type (2008)

50.3% 35.2%

9.6%

4.5% 0.4%

Held at Amortised Cost

Available for Sale

Held to Maturity

Held at FVIS

Trading


Looking forward, we expect saudi banks to be even more conservative in their investment decisions, which will be directed towards safer government notes and selected highly rated corporate bonds.

LiabiLities

Customer deposits

customer deposits make up a major portion of the funding of saudi banks, covering an average of 84% as of the end of 2008. Non-interest bearing demand deposits make up 40% of total deposits. access to this sizeable low-cost deposit base gives saudi banks higher margins and returns on equity than other banks in the Gcc.

however, we believe that in the years ahead, the ratio of time deposits to total deposits will increase as clients are seeking higher returns on their deposits.

Chart 33: saudi Banks’ customer Deposits composition

Chart 34: saudi Banks’ Deposits Market share (2008)

47% 50% 53% 51% 56%

48% 45% 43% 45% 40%

5% 5% 4% 4% 4%

0%

25%

50%

75%

100%

2004 2005 2006 2007 2008

Time & Savings Demand Deposits Other

19%

15%

13%

11%

10%

10%

10%

5% 4%

2% 1% NCB

SAMBA

Rajhi

Riyad

SABB

BSF

ANB

SHB

SIB

Al Jazira

Al Bilad


Most of the saudi banks have strong depository franchises and are therefore not very dependent on wholesale funding. accordingly, the deposit base of the whole sector is relatively stable. More specifically, we believe that the retail -oriented banks will outperform their domestic peers over the coming five years as the retail deposits are seen as less volatile than the corporate ones. in this context, we expect al rajhi with its 425 branches and NcB with its 275 branches to enjoy superior deposits growth of 14.9% and 15.1% respectively between 2009 and 2013, outperforming the projected sector average of 14.0% deposits growth.

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september 26, 2009

saudi banks

Customer deposits are expected to grow at a CAGR of 14.0% during

2009-2013

another source of strength in the saudi banking funding structure is the ratio of government and government-related entities’ deposits to the total deposits, which reached 21% at the end of 2008. We believe this is an additional stabilizing factor preserving bank deposits and protecting them from any major withdrawals.

Chart 35: saudi Banks Growth in customer Deposits


Our View

after increasing by 18.5% between 2004 and 2008, we forecast customer deposits to grow by 8.3% year-on-year to reach sar 997.67 billion in 2009, and to continue growing at a caGr of 14.0% between 2009 and 2013 to reach sar 1,682.71 billion by the end of 2013.

Wholesale funding

saudi arabian banks are generally conservative, having low wholesale funding needs (defined as the total of interbank liabilities, term loans and debt securities issued) as a percentage of total funding. as seen below, during 2008, less than 12% of saudi banks’ funding was market-based, with most of the remaining part coming from customer deposits. in general, most of the banks are not overly leveraged and have room for further loan growth without needing to resort to the more costly wholesale funding to close any funding gap.

another reason for advocating this low reliance on wholesale funding is the current interest rate environment. although interest rates have fallen recently, due to the recent credit tightening, wholesale funding could come at a higher cost than customer deposits even though wholesale funding would facilitate duration matching of assets and liabilities.

Chart 36: Wholesale Funding to total Liabilities Chart 37: Wholesale Funding to total Liabilities across Banks

13% 11%

10%

13% 12%

0%

4%

8%

12%

16%

2004 2005 2006 2007 2008

0%

6%

12%

18%

24%

SHB

SABB

Riya

d

BSF

AN

B

SIB

Sam

ba

NCB

Rajh

i

Jazi

ra

Bila

d


caGr=14%

16% 14%

16%

21%

23%

8%

13% 15% 14%

13%

0%

6%

12%

18%

24%

30%

0

400,000

800,000

1,200,000

1,600,000

2,000,000

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

Saudi Banks Total Deposits Y-o-Y Total Deposits Growth

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september 26, 2009

saudi banks

Adequate capitalization

caPitaL adeQuacY

the saudi banking system is adequately capitalized. the average tier 1 capital ratio for the sector reached 14.1% in December 2008 well above the minimum regulatory requirement of 8% set by saMa. this abundance of capital is also illustrated by the sector’s high average total equity to total assets (te/ta) ratio of 13.5%.

Chart 38: capital ratios evolution Chart 39: capital ratios across Banks (2008)

16% 16%

25% 23%

20%

14%

9% 10%

16% 16% 14% 13%

0%

7%

14%

21%

28%

2003 2004 2005 2006 2007 2008

Average Tier I Capital Ratio

Average TE/TA

0%

6%

12%

18%

24%

SABB

SHB

BSF

AN

B

Sam

ba

SIB

Riya

d

Rajh

i

NCB

Jazi

ra

Bila

d

Tier 1 Capital TE/TA


as illustrated in chart 39, all eleven banks operating in saudi arabia that are covered in this report are adequately capitalized based on saMa’s minimum capital adequacy ratio (car) of 8%. as of the end of 2008, saBB reported the lowest tier 1 ratio of 8.3%, while al Bilad Bank had the highest level of 23.3%. however, in q1 2009, saBB reported a tier 1 ratio of 10.3% owing to a 25% capital increase.

We believe this high level of capitalization is sufficient for banks to absorb any further deterioration in asset quality. Furthermore, net income for the saudi banking sector will provide a buffer, reducing the need to tap into the tier 1 capital.

Minimum tier 1 ratio = 8%

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september 26, 2009

saudi banks

incoMe stateMent anaLYsis


oPerating incoMe

Over the 2004 to 2008 period, saudi banks’ total operating income grew at a caGr of 16.3%, from sar 28.8 billion to sar 52.8 billion. this increase was due mainly to strong loan growth, reflected in the 17% caGr in net special commission income.

Chart 40: saudi Banks total Operating income Growth


in view of the global economic slowdown, we project total operating income growth to slow to 8.4% over our forecasting horizon, driven mainly by an 8.6% caGr in net special commission income and a 9.5% caGr in fees and commissions income.in 2009, we expect total operating income to grow by 3.2%, followed by 9.2% in 2010.

19%

40%

27%

-4%

7% 3% 9% 11%

7% 7%

-15%

0%

15%

30%

45%

0

20,000

40,000

60,000

80,000

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

Total Operating Income Y-o-Y Growth

Net Income

Saudi Banks Income Statement Structure

Operating Expense Mix

Net Fees from Banking Services (20.8%)

Net Income from Investments (0.8%)

Net Special Commission Income (72.5%)

Net Exchange Income (4.4%)

Salaries and Employee -Related Bene�ts (37.4%)

Rent, Depreciation, General & Administrative (29.4%)

Net Impairment of Investments (16.5%)

Net Provision for Credit Losses (12.2%)

Operating Income Mix

ROAE (17.7%)

Other Operating Expenses (4.5%)

ROAA (2.3%)

Other Operating Income (1.5%)

caGr=8.4%

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september 26, 2009

saudi banks

Greater reliance on core banking activities

net special Commission income

Net special commission income is the largest contributor to operating income for the saudi banks, generating around three-quarter of the system revenues. the growing importance of net special commission income is confirmed by its increasing contribution to 72% of total operating income in 2008, compared to 59% in 2006. this resulted mainly from the banks’ increased focus on core banking business and lower brokerage income due to reduced stock market activities.

Chart 41: saudi Banks Operating income Breakdown


Over the next three years, we expect the contribution of net special commission income as a proportion of total operating income to average 75%. this points to a more stable income in the next few years, and we consider it to be one of the major strengths of saudi banks going forward.

net fees and Commissions income

Net fees from banking services are the second largest contributor to total operating income, representing 21% of the banking system revenues in 2008.

Chart 42: saudi Banks Fees from Banking services


Following the spectacular increase in stock market activity in 2005 and 2006, net fees from banking services took a big hit of 40% in 2007, due mainly to the lower trading volumes relative to 2006. in 2007, the average daily trading value was sar 10.31 billion per day, compared to sar 19.85 billion per day in 2006, a sharp drop of 48%. in 2008, trading value was pushed down further, to sar 7.82 billion per day. consequently, net fees from share trading represented only 29% of net fees from banking services in 2008, a sharp drop from 74% in 2006 and 44% in 2007.

For 2009, we expect fees from share trading to continue contributing 30% to fees from banking services, with other fees growing at a faster rate and being the main growth drivers for fees from banking services. hence, we forecast net fees from banking services to grow at a caGr of 9.5% between 2009 and 2013, less than the caGr of 17.1% between 2004 and 2008.

88%

114%

32%

-40%

11%

-5%

9%

15%

8% 6%

-90%

-45%

0%

45%

90%

135%

0

3,000

6,000

9,000

12,000

15,000

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

Saudi Banks Fees from Banking Services Y-o-Y Total Fees from Banking Services Growth

caGr=9.5%

59% 69% 72% 75% 74% 74%

30% 20% 21% 20% 20%

21%

0

20,000

40,000

60,000

80,000

2006 2007 2008 2009 E 2010 E 2011 E

SAR

mill

ion

Net Special Commission Income Net Fees from Banking Services

Net Exchange Income Net Income from Investments

Other

24


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september 26, 2009

saudi banks

In 2008, securities losses were the main drag on earnings

oPerating eXPenses

With the banks’ expanding network of branches, atMs, and POs machines, and new hiring in an increasingly inflationary cost environment, expenses have been rising rapidly. they are driven mainly by salaries and employee-related benefits, which represented 37.3% of total operating expenses as of the end of 2008, and which increased at a caGr of 16.9% between 2004 and 2008. as a result, total operating expenses grew at a caGr of 19.9% between 2004 and 2008, from sar 12,283 million to sar 25,381 million.

Chart 43: saudi Banks Growth in total Operating expenses


in the future, with inflation expected to stabilize, and the banks having decided to control costs by holding back on new hiring and limiting their network expansion, we forecast total operating expenses to grow moderately at a caGr of 2.44% during 2009 to 2013 to reach sar 32,855 million at the end of 2013. it is worth noting that total operating expenses will increase by 17.6% y-o-y in 2009 due to the sharp rise in provisions for credit losses.

impairment of financial investments

in 2008, most of the losses reported by the saudi banks were caused by impairment of investments rather than by credit costs. in effect, net impairment for financial investments reached sar 4,494 million, compared to sar 3,282 million booked as provisions for credit losses. however, starting 2009, with most of the securities-related losses already being written off, and the capital markets starting to rebound, we believe that credit risk will be the main drag on banks earnings

Chart 44: saudi Banks impairment of Financial assets (2008)

2,485

968

410 191 174 87 65 62 52 - -

0

750

1,500

2,250

3,000

NCB

SIB

BSF

Sam

ba

Riya

d

SABB

Bila

d

Jazi

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Rajh

i

AN

B

SAR

mill

ion


7% 10%

18% 21%

31%

18%

-4%

3% 4%

8%

-10%

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0

7,000

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21,000

28,000

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2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

Total Operating Expenses Y-o-Y Growth

caGr=2.4%

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september 26, 2009

saudi banks

Provisions are the largest single risk factor to earnings in 2009

Sector net profit is expected to grow at a CAGR of 14% over 2009-2013

Provisions for Credit Losses

With increased concerns about small and medium enterprises (sMes) as well as large conglomerates, corporate credit risk is clearly rising, and spreading.

as a result, the saudi Banks’ average loan-loss provisioning expense is expected to increase 3.12 times in 2009 to reach sar 10,256 million for the whole sector. also, the ratio of the provisioning expense to total operating expenses is expected to grow to 34% in 2009, up from 13% in 2008.

Chart 45: saudi Banks Provisioning for credit Losses

0%

10%

20%

30%

40%

0

3,000

6,000

9,000

12,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

Total Provision for Credit Losses

Provisions to Total Operating Expenses



ProfitabiLitY outLook

saudi banks are currently operating in a very challenging environment. although impairments of financial investments may be coming to an end in 2009, loan-loss provisioning expenses are clearly rising and will represent the largest single risk factor to sector earnings in 2009 and 2010. consequently, earnings visibility should remain low until the macro-economic picture improves.

Chart 46: saudi Banks Growth in Net income


saudi banks’ net income is projected to drop by 5% in 2009 as loan growth is expected to slow significantly and loan loss provisions will consume an important part of recurring revenues. however, starting 2010, net income growth is expected to accelerate, to a rate of 27% for 2010 and at a rate of 17% in 2011, supported by the banks’ healthy balance sheets. We are bullish on the long-term outlook for the sector and forecast earnings to grow at a caGr of 14.0% between 2009 and 2013, compared to a caGr of 11.3% between 2004 and 2008.

32%

60%

30%

-14% -14% -5%

27%

17% 8%

6%

-20%

0%

20%

40%

60%

80%

0

10,000

20,000

30,000

40,000

50,000

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

Saudi Banks Net Income Y-o-Y Net Income Growth

caGr=14%

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equity research

september 26, 2009

saudi banks

0%

2%

4%

6%

8%

Bilad Rajhi NCB SIB ANB Samba SABB Jazira Riyad SHB BSF

2008 2009 E 2010 E

ratio anaLYsis

ProfitabiLitY indicators

roaE and roaa

in 2008, saudi banks were among the most profitable banks in the region, with a return on average equity (rOae) of 18.0% compared to 16.2% in the uae, 5.6% in Kuwait and 22.5% in qatar, and a return on average assets (rOaa) of 2.3%, compared to 2.1% in the uae, 0.8% in Kuwait and 3.4% in qatar.

Chart 47: saudi Banks rOae and rOaa


in 2009, we forecast rOaa and rOae to drop slightly, to 1.9% and 14.7% respectively, owing to higher loan provisioning charges coupled with slower balance sheet growth, despite a slower increase in operating expenses and a massive reduction in impairment of financial assets.

net interest margin

Chart 48: saudi Banks Net interest Margin


saudi banks are expected to report an average* net interest margin (NiM) of 4.3% in 2009, which is considered relatively high in comparison to their regional peers. We think this is mainly due to higher pricing of risk, along with lower cost of funds. however, the decline in interest rates in the Kingdom will likely put downward pressure on margins in the near-term, especially for islamic banks such as al rajhi Bank that rely on interest-free sources of funding, since the drop in interest rates has a greater impact on the return from loans than on the interest paid on deposits.

Sector ROAE is expected to average 16% during 2009-2013

Low interest rates to impact NIM over time

* We used a simple average for the calculation of the sector average net interest margin as we didn’t want the size effect to hinder our analysis. We calculated the net interest margin as the difference between interest received from loans over net loans and interest paid on deposits over total deposits.

footnotes

27%

33% 34%

24%

18% 15%

16% 17% 17% 16%

0%

8%

16%

24%

32%

40%

0%

1%

2%

3%

4%

5%

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

Saudi Banks ROAA Saudi Banks ROAE

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september 26, 2009

saudi banks

Operating efficiency expected to decline slightly and average 35%

between 2009 and 2013

efficiencY

in 2008, saudi banks reported an average cost to income ratio of 34%. this ratio has been increasing for the last three years due to the banks’ higher expenses from expanding their network locally and abroad, rising inflation putting upward pressure on salaries, increased investments in it platforms and lower fee income from brokerage activities.

Chart 49: saudi Banks cost to income ratio Table 1: efficiency indicators (2008)

32%

27% 26%

31%

34% 33% 35%

34% 35%

36%

10%

20%

30%

40%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E



Staff Cost to Operating

Income

Revenue per Branch

(SAR million)Number of

Branches

NCB 19.3% 38.2 275

Samba 19.5% 107.9 65

Rajhi 15.6% 24.9 425

Riyad 20.1% 26.1 201

SABB 18.3% 72.2 68

BSF 14.2% 58.6 75

ANB 22.0% 31.6 131

SHB 21.4% 16.1 43

SIB 14.5% 58.7 33

Jazira 36.6% 49.6 24

Bilad 42.2% 14.3 61

Average 22.2% 45.3 127

since operating income is expected to continue growing at a slower pace than operating cost, we expect the cost to income ratio to hover between 34% and 36% over our forecast period.

funding and LiQuiditY

Loans to deposits

Despite the year-on-year 31% loan growth having outpaced the 23% deposit growth in 2008, the loans to deposits ratio continues to be relatively healthy at 83%. even though this ratio has increased from 73% in 2004, saudi arabian banks continue to be more conservative than their regional peers. Kuwait has an average loans to deposits ratio of 90%, while the uae’s average is 100% and qatar’s is 115%.

Chart 50: saudi Banks average Loans to Deposits ratio

Chart 51: 2008 Loans to Deposits ratio across Banks

73%

83%

80% 79%

84%

78%

78%

78% 77%

77%

65%

70%

75%

80%

85%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E 0%

25%

50%

75%

100%

125%

Rajh

i

Riya

d

SHB

BSF

SABB

AN

B

Bila

d

Sam

ba

SIB

Jazi

ra

NCB




as illustrated in chart 51, most of the saudi banks present low leverage, with loans to deposits ratio below 100%. the exception is al rajhi Bank which has a ratio of 123%.

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september 26, 2009

footnotes

saudi banks

Saudi banks’ liquidity position remains strong…

* Liquid assets = Cash and balances with SAMA + Due from banks + Investments including trading securities, government securities and other investments + Other liquid assets.^ The weighted average duration was calculated by excluding the “No fixed maturity” portion.

Liquid balance sheets

Despite their rapidly growing loan portfolios and the globally tight liquidity environment, saudi banks’ liquidity indicators remain satisfactory. the ratio of liquid assets* to total assets (ta) ranges between 30% and 46% for all the banks, except for al rajhi Bank whose ratio is 9%.

Chart 52: saudi Banks Liquid assets to ta (2008) Chart 53: Liquid assets to ta across Banks

43%

37%

37% 39%

34%

20%

30%

40%

50%

2004 2005 2006 2007 2008

0%

15%

30%

45%

60%

NCB

Bila

d

SIB

Jazi

ra

Sam

ba

Riya

d

SABB

AN

B

SHB

BSF

Rajh

i

2007 2008


On average, liquid assets as a percentage of total assets fell to around 34.2% at the end of December 2008 from 39.1% at the end of 2007 for all saudi banks. however, we believe that the liquidity profile will improve in the near future, supported by the government injection of funds into the system to bolster deposits, and the banks’ cutdown on lending.

asset LiabiLitY ManageMent

in terms of funding, saudi banks are predominantly reliant on customer deposits, representing 84% of total funding for 2008. this increased dependence on customer deposits as the main source of funding is creating a maturity mismatch between the banks’ assets and liabilities. specifically, the weighted average duration^ of saudi banks assets is 19 months, compared to 8 months on the liabilities side.

Chart 54: saudi Banks assets and Liabilities Maturity Mix

Chart 55: saudi Banks Deposits Mix by Maturity

35% 27% 27%

11%

70%

18%

4% 8%

0%

20%

40%

60%

80%

0-3 Months 3-12 Months 1-5 Years Over 5 Years

Total Assets Total Liabilities

62%

15%

14%

7% 2%

0-3 Months

No Fixed Maturity

3-12 Months

Over 5 Years

1-5 Years


a closer look at the banks’ deposits reveals a fairly concentrated deposit base. 62% of the deposits have a maturity between 1 to 3 months and 15% have a maturity between 3 to 12 months, which means that more than three quarters of the system deposits can be redeemed within one year.

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september 26, 2009

saudi banks

… but their funding requires maturity extension and diversification

Nonetheless, the customers’ rollover of these short-term deposits, as well as the satisfactory capital position of the banks, diminishes the gravity of the problem. We also note that a significant 21% of these deposits originate from government and government-related entities, which are considered to be a stable source of funding given the strong financial situation of the government.

all saudi banks without exception have large asset liability mismatches as short-term customer deposits continue to fund increasing levels of longer-term corporate and consumer loans.

Chart 56: saudi Banks assets by tenor (2008)


Chart 57: saudi Banks Liabilities by tenor (2008)


as a result, in an effort to diversify and lengthen the maturity profile of their funding bases, and to partly address the maturity mismatches in their balance sheets, many banks have resorted to longer-term financing by tapping into the international markets for syndicated loans and euro Medium term Note (eMtN) programs.

Conclusion from the Latest Crisis

the disruption of funding in foreign markets had little impact on the liquidity position of saudi banks, as most of these banks are relying on a gradually accumulated deposit base. the stability of this deposit base was confirmed by the limited money outflow, very unlike what happened in the uae, where the departure of speculative money aggravated the liquidity shortage problems.

Our View

We believe that the average maturity of banking sector loans will be extended over time, especially by the anticipated leap in mortgage lending, which is generally characterized by longer maturities. consequently, the need for longer term funding will become more urgent.

30% 28% 19% 34% 44% 33% 37% 32% 31% 20%

36%

23% 26% 29%

26% 18% 22% 27% 25% 16% 36%

30% 26% 21% 35% 22% 23%

21% 19% 25%

31% 24% 20%

0%

25%

50%

75%

100%

NCB

Sam

ba

Rajh

i

Riya

d

SABB

BSF

AN

B

SHB

SIB

Jazi

ra

Bila

d

0-3 Months 3-12 Months 1-5 Years Over 5 Years No Fixed Maturity

45% 41%

87% 78% 80%

40% 52% 54% 54%

20%

94% 11% 24%

8% 15% 10%

12% 15% 14% 22%

41%

1%

0%

25%

50%

75%

100%

NCB

Sam

ba

Rajh

i

Riya

d

SABB

BSF

AN

B

SHB

SIB

Jazi

ra

Bila

d

0-3 Months 3-12 Months 1-5 Years Over 5 Years No Fixed Maturity

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equity research

september 26, 2009

saudi banks

H1 09 revieWstock Price Performance: With market expectations extremely low, the positive (or at least less negative) newsflow in q1 09 triggered the upside surprise witnessed after the release of the saudi Banks’ q1 09 results. however, during q2 09, with rising worries about corporate defaults and the lack of transparency on the banks’ exposure to the al Gosaibi and al saad Groups, investors remained suspicious, which led to the underperformance of the saudi Banking index as compared to tasi between May and september 09.

Weaker Loan growth

Chart 58: saudi Banks Loan Growth Table 2: Loan Growth across Banks

7.7%

9.9%

5.0%

0.7% -0.8%

0.3%

-5%

0%

5%

10%

15%

500,000

575,000

650,000

725,000

800,000

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

SAR

mill

ion

Saudi Banks Aggregate Loans

Q-o-Q Loans Growth

Loans Growth q-o-q y-o-y

Bilad 13.2% -15.9%

riyad 4.4% 27.1%

NcB 3.8% -4.5%

Jazira 3.3% 13.0%

rajhi 0.9% 15.3%

shB 0.8% 16.9%

siB 0.1% 7.2%

BsF 0.1% 7.0%

saBB -0.7% 1.5%

aNB -2.3% 1.8%

samba -2.4% -8.7%

Source: SAMA Source: Saudi Banks Financial Statements

Due to the growing concerns about the consequences of the global economic downturn and the recent defaults by large saudi Groups, saudi Banks have adopted a cautious stance on lending. Net loans and advances for the whole sector dropped by 0.8% in q1 09, followed by an increase of a mere 0.3% in q2 09 to reach sar 741,517 million at the end of June 2009. among the eleven banks, al Bilad Bank and riyad Bank displayed the highest credit growth on a q-o-q basis, with the latter growing its loan book by 27% in q2 09 as compared to the same quarter last year. as can be seen in the above table, net loans and advances for most of the banks either dropped or remained flat on a quarterly basis. We believe this trend is likely to continue in the coming two quarters, until the uncertainty surrounding the corporate defaults issues is reduced and the global economy starts to recover.

growing depositsChart 59: saudi Banks Deposit Growth Table 3: Deposit Growth across Banks

6.1%

2.8%

2.7%

5.2%

4.3% 3.8%

0.0%

2.5%

5.0%

7.5%

700,000

800,000

900,000

1,000,000

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

SAR

mill

ion

Saudi Banks Aggregate Deposits

Q-o-Q Deposits Growth

Deposits Growth q-o-q y-o-y

samba 11.2% 13.5%

shB 7.4% 23.3%

rajhi 2.6% 13.3%

riyad 2.4% 38.0%

NcB 1.4% 33.0%

aNB 0.8% 0.4%

BsF -1.4% 5.8%

Bilad -1.5% 11.6%

siB -4.4% -1.4%

saBB -5.3% 2.7%

Jazira -29.4% 28.1%


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equity research

september 26, 2009

saudi banks

Despite the liquidity squeeze witnessed in the past quarters, the saudi banks’ deposit base did not shrink. On the contrary, in q1 and q2 09 deposits grew by 4.3% and 3.8% respectively to reach sar 916,444 million at the end of June 2009. taking a look at the banks individually, we observe that some major players such as samba delivered a major increase of 11.2% in their deposit base, while others such as saBB showed a drop of 5.3% q-o-q. We conclude from this that funds were migrating within the system, not outside it.

improved Liquidity

Chart 60: saudi Banks Loans to Deposits ratio Chart 61: Loans to Deposits ratio across Banks (q2 09)

84%

90% 92%

88%

84%

81%

70%

75%

80%

85%

90%

95%

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

0%

25%

50%

75%

100%

125%

Rajh

i

BSF

SABB

Riya

d

AN

B

SIB

Bila

d

SHB

Jazi

ra

Sam

ba

NCB


examining the liquidity position of the banks, we notice that the faster growth in deposits as compared to loans resulted in a lower loans-to-deposits ratio of 81% in q2 09, down from 88% in q4 08.

Capitalization metrics Have remained steady

Driven by the 4.3% q-o-q growth in total equity, the capital adequacy of saudi Banks, as measured by the tier 1 ratio, has improved. among these banks, we note that al Bilad, al Jazira and al rajhi Bank have the highest tier 1 ratios, and all of the other banks have a ratio well above the 8% minimum requirement set by saMa.

Chart 62: tier 1 ratio across Banks

0%

5%

10%

15%

20%

25%

2008 Q2 09

Bila

d

Jazi

ra

Rajh

i

NCB

Riya

d

SIB

Sam

ba

AN

B

BSF

SABB

SHB


impairment Charge for financial investments Has Come to an end

With amplified losses from the investment portfolios, most of the saudi Banks booked high provisions for financial investments during the last two quarters of 2008. the total amount reached sar 2,993 million in q4 08. however, with most of the banks’ portfolios cleaned up in the second half of 08, impairment for financial investments dropped sharply, to sar 737 million in q1 09 and sar 84 million in q2 09.

Chart 63: saudi Banks Financial impairments

219 342

939

2,993

737

84

0

800

1,600

2,400

3,200

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

SAR

mill

ion


32


equity research

september 26, 2009

saudi banks

Continued High Provisions for Credit Losses

Chart 64: saudi Banks Provisions for credit Losses Chart 65: Provisions for credit Losses across Banks

0

500

1,000

1,500

2,000

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

SAR

mill

ion

0

300

600

900

1,200

NCB

Rajh

i

SABB

Sam

ba

Riya

d

SHB

BSF

AN

B

SIB

Bila

d

Jazi

ra

SAR

mill

ion

H1 08 H1 09


in q2 09, the saudi Banks’ aggregate provisions for credit losses continued their rising trend, escalating by 17.3% q-o-q and more than tripling compared to the same quarter last year. this high level of provisioning resulted mainly from the banks’ cautiousness as to the increasing probability of a future deterioration in the asset quality of their loan book. We note that during the first half of the year, banks have booked a total of sar 3,502 million as provisions and believe that this cost will increase further during the latter half of the year to reach a total of sar 10,256 million for 2009.

net income

Chart 66: saudi Banks Net income Chart 67: Net income Growth across Banks (h1 09)

8%

-22% -69%

254%

2%

-100%

0%

100%

200%

300%

0

2,500

5,000

7,500

10,000

Q2 08 Q3 08 Q4 08 Q1 09 Q2 09

SAR

mill

ion

Saudi Banks Aggregate Net Income Q-o-Q Net Income Growth

-45%

-30%

-15%

0%

15%

Rajh

i

Sam

ba

AN

B

BSF

SABB

Jazi

ra

Riya

d

SIB

SHB

NCB


Despite the 17.3% rise in provisions for credit losses in q2 09 compared to q1 09, consolidated earnings for saudi Banks increased by 2.4% q-o-q. During the first half of the year, banks’ earnings declined by 10.7%, negatively affected by the 170% surge in provisions for credit losses and the 11.7% drop in fees from banking services, although net special commission income increased by 7.4% owing to the increase in net interest spreads.

33

equity research

september 26, 2009

stock data

Market cap (usD) 10,749,375,000

Number of shares 330,750,000

Free Float 55.43%

av. Monthly Liquidity (sar) 120,019,245

52-week high (sar) 52.00

52-week Low (sar) 26.72

trailing Pe 10.86

PB 1.82

30

60

90

120

150

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

SAR

year 2008 2009e 2010e 2011e 2012e 2013e

Net income (sar million) 6,525 6,304 7,644 8,555 10,056 11,346

ePs (sar) 4.35 4.20 5.10 5.70 6.70 7.56

rOae (%) 25.77 22.05 23.83 23.77 24.86 25.04

Loans to Deposits ratio (%) 123.49 116.00 114.00 112.00 110.00 108.00

NPL ratio (%) 1.22 2.15 1.94 1.84 1.75 1.66

samba stock Performance

kingdom of saudi arabiasaudi banks saMba financiaL grouP

stock data


year 2008 2009e 2010e 2011e 2012e 2013e


ePs (sar) 4.95 4.63 5.76 6.41 6.73 6.94

rOae (%) 23.36 19.61 21.66 21.45 20.31 19.46


NPL ratio (%) 1.82 3.10 2.60 2.21 2.10 1.99

Market cap (sar) 41,670,000,000


Free Float 55.4%

av. Monthly Liquidity (sar) 1,085,212,005



trailing Pe 9.17

PB 2.12

curreNt Price usd 46.30

Fair VaLue usd 69.75

recOMMeNDatiON buY

asset QuaLitY LikeLY to deterioratein the short term, we are cautious on the asset quality of samba due to the significant increase in the corporate bad debts and the lack of transparency as to the bank’s exposure to defaulting groups. consequently, we expect the NPL ratio to increase to 3.1% in 2009, well above the sector average of 2.3%.

ProfitabiLitY sHouLd Provide a cusHionDespite the expected high provisioning at sar 1.148 billion in 2009, resulting in a 6.34% drop in profitability, the bank can sustain additional unforeseen hits by large groups before the need to tap into the bank’s capital arises.

baLance sHeet MiX reMains LiQuidsamba has a liquid balance sheet, reflected in its loans to deposits ratio of 63.65% in h1 09 and its liquid assets representing 39% of its total assets. this healthy liquidity position is expected to continue in the coming years with the loans to deposits ratio forecasted to hover around the 64% range.

derisking tHe baLance sHeet: Less foreign eXPosurethe overall investment book now has around 60% domestic exposure, a substantial increase from the 43% reported in 2007. While there is still a significant amount of “available for sale” securities at 36% of the portfolio, with corporate securities representing almost 15% of these, the mark-to-market write-downs incurred in 2008 have largely addressed the investment book issues.

vaLuation: a buYing signaL Following the 24% drop in the share price over the past 4 months, we believe the share price is discounting significant downside risk to the bank’s earnings. consequently, we initiate coverage on samba Financial Group with a “Buy” recommendation based on a fair value of sar 69.75 per share, providing investors with 50.7% upside potential. samba is currently trading at levels corresponding to an estimated Pe ratio of 10.00 for 2009 and 8.04 for 2010.

vaLuation Looks coMPeLLing

30

60

90

120

150

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

SAR

34

equity research

september 26, 2009

The largest listed bank in the Kingdom

Strong corporate banking franchise

NPL ratio expected to peak at 3.1% in 2009

overvieW of saMba financiaL grouP

background

samba Financial Group (samba) was founded in 1980 as a result of the partial sale of citigroup equity to saudi nationals. citigroup kept on managing the bank until september 2003, when it handed over the management to samba, and subsequently sold its remaining equity stake. in May 2004, the bank became 100% owned by saudi shareholders, with government entities holding around 45% of the shares.

Chart 68: samba shareholder structure

50.7%

22.9%

15.0%

11.4%

Public

Public Investment Fund

Public Pension Agency

GOSI

Source: Zawya

samba is the second largest bank in saudi arabia by total assets and the largest listed bank, with a 14.2% market share of total assets in 2008. the bank operates a relatively small branch network of around 65 branches and 465 atMs and offers a broad array of conventional and islamic banking products and services, including retail banking, corporate banking, and investment banking.

the bank benefits from a well established corporate banking franchise supported by the former ownership by citibank. in retail banking, samba focuses more on the higher income customer groups. On an international level, samba acquired 68% of crescent commercial Bank Limited (ccBL) in Pakistan in March 2007.

keY findings

Headwinds in Asset Quality

Chart 69: NPL to Gross Loans Chart 70: Provision for credit Losses

0.0%

1.5%

3.0%

4.5%

6.0%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

Samba Saudi Banks Average

0

300

600

900

1,200

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion


Source: Samba Financial Statements and Audi Capital - KSA Estimates

With corporate loans growing by a caGr of 22.7% between 2004 and 2008 and currently representing 86% of the total loan book for samba, we believe the bank is more exposed to the current economic downturn than its local peers due to the higher probability of corporate defaults. in this context, we expect the NPL ratio to increase by 128 bp in 2009 to 3.1% followed by a slight decrease to 2.6% in 2010 while the coverage ratio is estimated to decrease to 144% in 2009. also, provisions for credit losses are estimated to more than quadruple and reach sar 1.148 billion at the end of 2009.


35

equity research

september 26, 2009

Capital markets should provide a boost over the coming quarters

Samba has a well managed utilization ratio

in 2008, with total investments representing around 30% of the bank’s total assets, samba suffered from mark-to-market write-downs in its investment book and lower returns on its domestic and international portfolios. however, starting in q1 09, the bank’s earnings began to recover due to lower investment impairments after the large provisions booked in q4 08 against the investment book. Moreover, any market rally will be supportive for those banks that have larger investments.

Chart 71: Net investments to total assets

0%

7%

14%

21%

28%

35%

NCB

Sam

ba

SHB

Riya

d

SIB

AN

B

SABB

BSF

Jazi

ra

Bila

d

Rajh

i


A Liquid Balance Sheet

Chart 72: ratio of Liquid assets to total assets Chart 73: Loans to Deposits ratio

30%

35%

40%

45%

50%

2004 2005 2006 2007 2008

SAMBA Saudi Banks

40%

55%

70%

85%

100%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAMBA Saudi Banks



samba is a corporate bank lacking the mass retail deposit base. it therefore keeps a relatively high ratio of liquid assets on its balance sheet. these compose 39% of total assets versus the peer average of 34%. this higher liquidity is also apparent in the bank’s loans to deposits ratio of 73% as of the end of 2008, which is below the sector average of 84%. together with a healthy capitalization level illustrated by a tier 1 ratio of 13.1%, it gives samba significant room for further balance sheet growth without jeopardizing its financial condition. starting 2009, we expect the loans to deposits ratio to decrease to 63% and to hover around the 64% range in the years to come.

We Forecast a CAGR of 14.8% for Loans and 13% for Deposits

Chart 74: Loan Growth Chart 75: Deposit Growth

-15%

0%

15%

30%

45%

0

45,000

90,000

135,000

180,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

SAMBA Loans SAMBA Loans Growth

0%

8%

15%

23%

30%

0

65,000

130,000

195,000

260,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

SAMBA Deposits SAMBA Deposits Growth




36

equity research

september 26, 2009

We forecast loans to drop by 8.7% y-o-y to reach sar 89,638 million in Fy 09 and to grow at a caGr of 14.8% over our forecast horizon compared to a caGr of 19.5% between 2004 and 2008. On the other hand, deposits are estimated to grow by 6% y-o-y to reach sar 142,282 million in Fy 09 and at a caGr of 13% over our forecast horizon compared to a caGr of 19% between 2004 and 2008.

We Forecast Net Income to Drop by 6.3% in 2009

Chart 76: Net income Growth


Given the sharply higher loan loss provisioning charges estimated for 2009, samba’s net income is expected to drop by 6.3% y-o-y to reach sar 4,171 million in Fy 09 but to increase again by 24% in 2010. Net income is expected to grow at a caGr of 10.6% over our forecast horizon, sustained by 8.6% growth in net special commission income and a slower growth of 2.1% in total operating expenses.

74%

60%

30%

-7% -8% -6%

24%

11% 5% 3%

-20%

0%

20%

40%

60%

80%

0

1,500

3,000

4,500

6,000

7,500

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

SAMBA NI SAMBA NI Growth


caGr=10.6%

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september 26, 2009

DDM yields a fair value of SAR 69.75

vaLuation

dividend discount ModeL

the Dividend Discount Model (DDM) used for the valuation of saMBa was based on a five-year earnings forecast period and has yielded an intrinsic value of sar 69.75 per share.


financiaL stateMents

baLance sHeet


2009 E 2010 E 2011 E 2012 E 2013 E

Net Income (SAR million) 4,171 5,182 5,771 6,055 6,245

Number of Shares Outstanding (million) 900 900 900 900 900

Earnings per Share (SAR) 4.63 5.76 6.41 6.73 6.94

Dividends per Share (SAR) 1.55 2.21 2.78 3.59 3.70

Present Value of Dividends per Share (SAR) 1.40 1.82 2.09 2.45 2.30

Present Value of Terminal Value (SAR) 59.69

Cost of Equity 10.02%

Terminal Growth Rate 5.94%

Samba Financial Group Fair Value (SAR) 69.75

2008 2009 E 2010 E 2011 E 2012 E 2013 E

(SAR million)

Cash and Balances with SAMA 13,800 20,630 22,200 21,638 23,057 25,805

Due from Banks and other Financial Institutions 878 2,561 2,901 3,327 3,731 4,176

Net Loans and Advances 98,147 89,638 103,144 118,276 134,740 155,438

Investment in Associate 6 6 6 6 6 6

Net Investments 54,213 57,193 63,990 72,501 80,371 88,524

Net Property & Equipment 870 909 945 993 1,032 1,063

Net Other Assets 10,977 7,461 8,585 9,845 11,215 12,938

Total Assets 178,891 178,398 201,771 226,584 254,153 287,950

Customer Deposits 134,228 142,282 161,163 184,806 207,292 231,997

Due to Banks and other Financial Institutions 12,090 3,984 6,112 6,125 8,694 15,302

Other Liabilities 10,638 7,954 7,658 7,903 7,979 8,929

Debt securities issued 1,873 1,873 1,873 - - -

Total Liabilities 158,829 156,093 176,806 198,834 223,965 256,229

Share Capital 9,000 9,000 9,000 9,000 9,000 9,000

Statutory Reserve 7,111 8,154 8,406 9,000 9,000 9,000

General Reserve 130 130 130 130 130 130

Fair Value Reserves (950) (2,085) (1,668) (667) 167 250

Foreign Currency Transfer Reserves (75) - (6) (11) (17) -

Retained Earnings 4,332 6,069 7,496 8,493 9,727 11,407

Proposed Gross Dividends 732 1,391 1,987 2,501 3,230 3,331

Employee Stock Option Shares (433) (433) (217) (260) (312) (374)

Total Equity Attributable to Equity Holders of the Bank 19,846 22,225 25,127 28,186 30,925 32,744

Minority Interest 216 202 244 225 256 232

Total Shareholders' Equity 20,062 22,428 25,372 28,411 31,181 32,976

Total Liabilities & Shareholders' Equity 178,891 178,520 202,178 227,245 255,145 289,205


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september 26, 2009

2008 2009 E 2010 E 2011 E 2012 E 2013 E

(SAR million)

Special Commission Income 8,426 6,836 7,844 9,467 11,985 15,144

Special Commission Expense 3,365 1,981 2,545 3,756 5,771 8,388

Net Special Commission Income 5,061 4,855 5,299 5,712 6,214 6,755

Net Fees from Banking Services 1,624 1,361 1,544 1,824 2,149 2,297

Net Exchange Income 409 421 482 551 701 801

Net Income from Investments Held at FVIS (646) (42) 21 32 48 72

Net Trading Income 23 363 400 340 204 163

Net Gains (Loss) on non-Trading Investments 501 382 324 259 221 187

Other Operating Income 40 45 39 29 19 24

Total Operating Income 7,012 7,385 8,108 8,746 9,555 10,300

Salaries and Employee Related Expenses 1,366 1,330 1,596 1,790 1,984 2,147

Rent and Premises Related Expenses 199 210 222 243 263 279

Depreciation 137 143 149 156 162 167

Other General and Administrative Expenses 409 389 406 435 461 484

Operating Expenses Before Provision for Credit Losses and Impairment Charge

2,111 2,071 2,373 2,624 2,870 3,078

Provision for Credit Losses, Net of Recoveries 267 1,148 558 354 632 942

Impairment Charge on Investments 191 0 0 0 0 38

Total Operating Expenses 2,569 3,219 2,931 2,979 3,503 4,058

Net Income 4,443 4,166 5,177 5,767 6,052 6,242

Loss Attributable to Minority Shareholders 11 6 5 4 4 3

Net Income Attributable to Equity Holders of the Bank 4,454 4,171 5,182 5,771 6,055 6,245

incoMe stateMent



39

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september 26, 2009

ratio anaLYsis

2008 2009 E 2010 E 2011 E 2012 E 2013 E

Net Loans and Advances 21.84% -8.67% 15.07% 14.67% 13.92% 15.36%

Total Assets 15.85% -0.28% 13.10% 12.30% 12.17% 13.30%

Customer Deposits 15.90% 6.00% 13.27% 14.67% 12.17% 11.92%

Total Liabilities 16.41% -1.72% 13.27% 12.46% 12.64% 14.41%

Total Equity 11.61% 11.79% 13.13% 11.98% 9.75% 5.76%

Net Special Commission Income 2.36% -4.07% 9.15% 7.78% 8.80% 8.71%

Net Fees from Banking Services 0.35% -16.18% 13.41% 18.14% 17.87% 6.87%

Total Operating Income -2.56% 5.32% 9.79% 7.87% 9.25% 7.80%

Net Income -7.59% -6.24% 24.28% 11.40% 4.93% 3.15%

Non-Performing Loans to Gross Loans 1.82% 3.10% 2.60% 2.21% 2.10% 1.99%

Net Provisions for Credit Losses to Net Loans 0.27% 1.28% 0.54% 0.30% 0.47% 0.61%

NPL Coverage 167.01% 144.22% 136.00% 136.00% 138.00% 140.00%

ROAA 2.67% 2.33% 2.72% 2.69% 2.52% 2.30% ROAE 23.36% 19.61% 21.66% 21.45% 20.31% 19.46%

Net Loans to Deposits Ratio 73.12% 63.00% 64.00% 64.00% 65.00% 67.00%

Cost/Income 30.11% 28.04% 29.26% 30.01% 30.04% 29.88%

Total Equity/Total Assets 11.21% 12.57% 12.57% 12.54% 12.27% 11.45%

Liquidity

E ciency

Capital Adequacy

Balance Sheet Growth

Income Statement Growth

Asset Quality

Pro tability



40

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september 26, 2009


stock data

Market cap (usD) 10,749,375,000


Free Float 55.43%




trailing Pe 10.86

PB 1.82

30

60

90

120

150

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

SAR

year 2008 2009e 2010e 2011e 2012e 2013e


ePs (sar) 4.35 4.20 5.10 5.70 6.70 7.56

rOae (%) 25.77 22.05 23.83 23.77 24.86 25.04


NPL ratio (%) 1.22 2.15 1.94 1.84 1.75 1.66


curreNt Price sar 69.75

Fair VaLue sar 80.72

recOMMeNDatiON accuMuLate

stock data

Market cap (sar) 104,625,000,000

Number of shares 1,500,000,000

Free Float 49.9%

av. Monthly Liquidity (sar) 5,661,625,328



trailing Pe 15.65

PB 3.83

0

65

130

195

260

Jul-0

5

Jan-

05

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

SAR

a soLid baLance sHeet to keeP groWing

year 2008 2009e 2010e 2011e 2012e 2013e


ePs (sar) 4.35 4.20 5.10 5.70 6.70 7.56

rOae (%) 25.77 22.05 23.83 23.77 24.86 25.04


NPL ratio (%) 1.22 2.15 1.94 1.84 1.75 1.66

rajhi stock Performance

kingdom of saudi arabiasaudi banks aL raJHi bank

Weakening asset QuaLitY and HigHer Provisions eXPectedGiven an estimated NPL ratio of 2.15% in 2009, close to the sector average of 2.27%, we expect some weakening in the bank’s loan portfolio, though we do not foresee a major deterioration given the bank’s retail focus.

strong isLaMic and retaiL banking francHiseal rajhi has the largest branch network in the Kingdom and benefits not only from being the first and largest shariah compliant bank in saudi arabia but also by having a competitive advantage over its peers in serving its massive retail client base and gathering its cheap deposits. this solid franchise is illustrated by the bank’s ability to continuously grow its low-cost customer deposits base.

return ratios: best in tHe countrYthe bank’s return on average equity (rOae) and return on average assets (rOaa) continue to be the best in the Kingdom. in 2008, al rajhi reported the highest rOaa at 4.5% compared to the sector average of 2.3% and an rOae of 25.8%, well above the sector average of 17.7%.

utiLiZation ratios to reMain over 100%al rajhi’s loans to deposits ratio stood at 123.5% at the end of 2008. in light of the current liquidity squeeze and the absence of alternative sources of funding, the bank needs to further grow its customer deposits or reduce its loan growth to be able to maintain a healthy liquidity position. in fact, in h1 09, the bank’s loans to deposits ratio was reported at 116.8%.

robust ProfitabiLitYWe forecast al rajhi Bank’s net income to grow at a caGr of 15.8% during 2009-2013 on account of an expected caGr of 12.4% in net income from investments and a caGr of 13.1% in net fees and commissions income.

vaLuation We initiate coverage on rajhi Bank with an “accumulate” recommendation based on a fair value of sar 80.72 per share, providing investors with 15.7% upside potential. rajhi Bank is currently trading at levels corresponding to an estimated Pe ratio of 16.61 for 2009 and 13.68 for 2010.

41

equity research

september 26, 2009

Strong Islamic banking franchise

Tapping into markets with a growing potential for Islamic Banking

Diversifying its business lines

NPL ratio expected to increase to 2.15% in 2009

overvieW of aL raJHi bank

background

established in 1978 as a joint stock company, al rajhi Bank is the first and largest islamic bank in saudi arabia and differs from other major banks in the Kingdom by operating only under full shariah principles. the bank enjoys a solid franchise exemplified by its ability to continuously grow its low-cost customer deposits base. accordingly, its non-interest bearing deposits represent 85% of total deposits.

Chart 77: al rajhi shareholder structure

45.7%

44.4%

9.9%

Public

Al Rajhi Family

GOSI

Source: Zawya

al rajhi has the widest distribution network in the country and operates through 425 branches, 2,266 atMs, and over 17,209 POs machines installed at merchant locations across the Kingdom.the bank is controlled by the al rajhi family, who owns around 45% of its shares and which appoints six out of eleven board members.

On an international level, the bank has taken a strategic decision to expand its operations outside the Kingdom. in early 2007, the bank was awarded an islamic banking license in Malaysia where it has invested around usD 80 million and is operating 15 branches, with an aim to open 50 more within the next two years. Other overseas opportunities are on the bank’s agenda. in the Gcc, the bank has a license to open a branch in Kuwait.

al rajhi is traditionally known for retail banking, which contributed 42% of the bank’s net loans portfolio in 2008, compared to 58% in 2007. in order to realize the growing opportunities in corporate and investment banking, al rajhi is aggressively expanding in these domains. as a result, corporate lending represented 35% of the total loan book in 2008, up from 27% in 2007.

keY findings

Weakening Asset Quality and Higher Provisions Anticipated


0%

1%

2%

3%

4%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

Rajhi Saudi Banks Average

0

500

1,000

1,500

2,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion


Source: Rajhi Financial Statements and Audi Capital - KSA Estimates

With corporate loans growing by 76% between 2007 and 2008 and currently representing 35% of the total loan book for al rajhi, we believe the bank is increasingly exposed to the current economic downturn due to the higher probability of corporate defaults. in this context, we expect the NPL ratio to increase by 93 bp in 2009 to 2.15% and to decrease slightly to 1.94% in 2010, while the coverage ratio is estimated to decrease to 143% in 2009. Provisions for credit losses are estimated to increase by around 60% and reach sar 2.019 billion at the end of 2009, followed by sar 1.413 billion at the end of 2010.


42

equity research

september 26, 2009

Al Rajhi has the highest number of branches across the Kingdom

Strong margins relative to the sector

Limited retail banking upside potential…

… With room for growth in corporate banking

Less reliance on wholesale funding

Chart 80: total Number of Branches Chart 81: Net interest Margin (2008)

425

275

201

131

75 68 65 61 43 33 24

0

100

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Rajh

i

NCB

Riya

d

AN

B

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SABB

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ba

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ra

7.6%

5.8% 5.6%

4% 4% 4% 3% 3% 3% 3%

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d

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i

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ba

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d

SHB


al rajhi continues to have one of the highest profit margins in the industry, due to a combination of a number of factors, including the low funding costs of its islamic deposits, good control over operating expenses, and its large retail footprint enabling it to have higher returns. During 2008, its net interest margin reached 5.8% compared to a sector average of 4.2%.

Turnaround of Corporate Banking Activities

We foresee limited growth in the retail loan segment, especially since its share of the total loan portfolio has been decreasing steadily, from 58% in 2006 to 55% in 2007 to the current 42%. conversely, we anticipate a substantial growth in corporate lending, supported by the management’s initiatives to strengthen the bank’s corporate banking unit in order to position itself in project finance.

Chart 82: retail Loans to total Loans Chart 83: corporate Loans to total Loans

42%

23%

16% 16% 12% 9% 6%

0%

10%

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30%

40%

50%

Rajh

i

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B

SABB

Riya

d

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ba

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BSF

35%

76% 81% 82% 85% 86% 91%

0%

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75%

100%

Rajh

i

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SABB

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d

Sam

ba

BSF

SHB


We think that al rajhi’s business profile as a retail bank is another factor that explains its wider interest margins, in that it implies low reliance on wholesale funding. its lower funding costs give it an advantage over other banks. We particularly like the retail deposits as they tend to be less price-sensitive, and entail less concentration risk.

Chart 84: Wholesale Funding to total Liabilities

1.6% 4.2%

6.3% 4.4%

7.1%

0%

6%

12%

18%

2004 2005 2006 2007 2008

Rajhi Saudi Banks



43

equity research

september 26, 2009

Al Rajhi has the highest ROAA and the highest ROAE

Al Rajhi Is the Most Profitable Bank in Saudi Arabia…

in 2008, al rajhi reported the highest rOaa at 4.5%, compared to a sector average of 2.3%. in 2009, we estimate al rajhi’s rOaa to decline owing to slower balance sheet growth and to higher loan provisioning charges, but to continue to be the highest at 3.8% compared to a sector average of 1.9%. though saBB reported the highest rOae of 26.5% in 2008, we expect al rajhi to have the highest rOae in 2009 and 2010.

Chart 85: rOaa (2008-2010) Chart 86: rOae (2008-2010)

0%

1%

2%

3%

4%

5%

Rajh

i

Sam

ba

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B

SABB

BSF

Riya

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Bila

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ra

2008 2009 E 2010 E

0%

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12%

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ba

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ra

2008 2009 E 2010 E



Between 2009 and 2013, we forecast an average rOae of 23.9% for al rajhi, largely exceeding the sector average of 16.3%, and an average rOaa of 4.2%, which also compares favorably to the sector average of 2.1%.

Chart 87: rOaa comparison across Banks Chart 88: rOae comparison across Banks

0%

2%

4%

6%

Rajh

i

Sam

ba

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B

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d

Average (04-08) Average (09-12)

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d

NCB

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Bila

d Average (04-08) Average (09-12)



… and the Most Efficient Despite its Large Operating Network

Between 2004 and 2008, al rajhi recorded an average cost to income ratio of 21.1%, which is the lowest among its local peers. though we view this level of efficiency as being unsustainable in the long term, especially with slower balance-sheet growth and increasing inflation, we expect al rajhi to continue to have the lowest cost to income ratio of 22.9% between 2009 and 2013.

Chart 89: average cost to income ratio across Banks

21%

23%

0%

25%

50%

75%

100%

Rajh

i

BSF

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ba

SIB

SABB

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SHB

NCB

Jazi

ra

Bila

d

Average (04-08) Average (09-12)



44

equity research

september 26, 2009

Some liquidity pressures are reflected in the soaring loans to deposits ratio

The Loans to Deposits Ratio Is Stretched

at the end of 2008, al rajhi’s loans to deposits ratio stood at 123.5%, well above the sector average of 83.9%. in the previous years, this was well perceived as it was indicative of the bank’s increased lending ability boosted by favorable economic conditions in saudi arabia. however, in light of the current liquidity shortage and in the absence of alternative sources of funding, the bank needs to further grow its customer deposits or reduce its loan growth to be able to maintain a healthy liquidity position. starting 2009, we expect the loans to deposits ratio to decrease progressively, from the current level of 120% to 108% in 2013.

Chart 90: 2008 Loans to Deposits ratio across Banks

Chart91: al rajhi Loans to Deposits ratio

123%

0%

25%

50%

75%

100%

125%

Rajh

i

SHB

SABB

Bila

d

SIB

NCB

106%

114%

122%

117%

123%

116%

114%

112% 110%

108%

90%

100%

110%

120%

130%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

Source: Saudi Banks Financial Statements Source: Rajhi Financial Statements and Audi Capital - KSA Estimates

We forecast a CAGR of 12.8% for Net Total Investments and 14.9% for Customer Deposits

Chart 92: Net total investments Growth Chart 93: Deposit Growth

0%

10%

20%

30%

40%

0

75,000

150,000

225,000

300,000

2004

2005

2006

2007

2008

2009

E

2010

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E

SAR

mill

ion

Rajhi Loans Rajhi Loans Growth

0%

8%

16%

24%

32%

0

60,000

120,000

180,000

240,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

Rajhi Deposits Rajhi Deposits Growth



We expect net total investments to remain almost flat in 2009 at sar 144,269 million and grow at a caGr of 12.8% over our projection period. On the other hand, we expect al rajhi’s customer deposits to reach sar 124,370 million in 2009, a 6.7% y-o-y increase, and to grow at a caGr of 14.9% over 2009-2013. sustained positioning in the islamic banking industry is expected to support the bank’s market share in terms of both net total investments and customer deposits.


45

equity research

september 26, 2009




al rajhi’s net profit is estimated to drop by 3.4% y-o-y to reach sar 6,304 million in Fy 09 but to increase again by 21.3% in 2010. a caGr of 15.8% is expected for net profit over 2009-2013, on the back of 12.4% growth in net income from investments and 13.1% growth in net fees from banking services.


44%

92%

30%

-12% 1% -3%

21% 12%

18% 13%

-40%

0%

40%

80%

120%

0

3,000

6,000

9,000

12,000

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

Rajhi NI Rajhi NI Growth

caGr=15.8%

46

equity research

september 26, 2009


vaLuation


the Dividend Discount Model (DDM) used for the valuation of al rajhi Bank was based on a five-year earnings forecast period and has yielded an intrinsic value of sar 80.72 per share.



baLance sHeet

2009 E 2010 E 2011 E 2012 E 2013 E


Number of Shares Outstanding (million) 1,500 1,500 1,500 1,500 1,500







Al Rajhi Bank Fair Value (SAR) 80.72

2008 2009 E 2010 E 2011 E 2012 E 2013 E

(SAR million)

Cash and Precious Metals 3,630 4,427 5,043 5,813 6,708 7,703

Balances with SAMA 7,672 8,834 9,271 13,456 17,126 19,667

Due from Banks 2,892 3,109 3,542 4,082 4,711 5,409

Net Total Investments 144,004 144,269 161,499 182,877 207,265 233,686

Net Customer Current Debit Accounts 754 413 613 813 1,013 1,213

Net Property & Equipment 2,868 3,175 3,515 3,961 4,424 4,897

Net Other Assets 3,110 3,887 4,470 5,141 5,912 6,799

Total Assets 164,930 168,115 187,953 216,142 247,159 279,374


Due to Banks 7,902 3,797 2,115 3,374 2,793 584

Syndicated Murabaha Financing from Banks 1,875 - - - - -

Other Customer Accounts 3,687 3,304 3,698 4,188 4,746 5,351



Share Capital 15,000 15,000 15,000 15,000 15,000 15,000


General Reserve - 250 500 750 1,000 1,250

Retained Earnings 121 817 1,713 2,747 5,369 9,091

Proposed Gross Dividends 3,183 3,782 4,586 5,133 6,536 7,375





47

equity research

september 26, 2009



incoMe stateMent

2008 2009 E 2010 E 2011 E 2012 E 2013 E

(SAR million)

Total Income from Investments 9,421 10,101 11,016 12,740 14,932 17,010

Income Paid to Customers and Banks on Time Investments 819 775 911 1,124 1,556 2,165

Income Paid on Syndicated Murabaha Financing from Banks 107 37 - - - -

Net Income from Investments 8,494 9,289 10,105 11,616 13,375 14,845

Mudaraba Fees 76 84 93 97 107 118



Other Operating Income 280 103 112 121 130 139


Salaries and Employee Related Bene ts 1,649 1,783 1,978 2,280 2,560 2,830


Impairment Charge for Investments and Other 1,274 2,019 1,413 1,755 1,886 2,005

Depreciation and Amortization 383 424 470 529 591 655


Board of Directors' Remuneration 3 3 3 3 3 3


Net Income 6,525 6,304 7,644 8,555 10,056 11,346

ratio anaLYsis

2008 2009 E 2010 E 2011 E 2012 E 2013 E

Net Total Investments 37.31% 0.18% 11.94% 13.24% 13.34% 12.75%

Total Assets 32.06% 1.93% 11.80% 15.00% 14.35% 13.03%


Total Liabilities 36.16% 0.05% 11.58% 15.73% 14.65% 13.42%

Total Equity 14.51% 11.55% 12.81% 11.67% 12.96% 11.21%

Net Income from Investments 10.00% 9.35% 8.79% 14.95% 15.14% 10.98%

Net Fees from Banking Services 26.53% 7.17% 12.20% 9.46% 14.83% 15.84%

Total Operating Income 13.44% 7.00% 8.97% 13.64% 14.51% 11.20%

Net Income 1.14% -3.38% 21.25% 11.92% 17.54% 12.84%

Non-Performing Investments to Gross Investments 1.22% 2.15% 1.94% 1.84% 1.75% 1.66%

Impairment Charge to Net Total Investments 0.88% 1.40% 0.87% 0.96% 0.91% 0.86%

NPL Coverage 191.22% 143.03% 135.51% 144.54% 147.55% 150.56%

ROAA 4.50% 3.79% 4.29% 4.23% 4.34% 4.31%

ROAE 25.77% 22.05% 23.83% 23.77% 24.86% 25.04%

Net Total Investments to Customer Deposits 123.49% 116.00% 114.00% 112.00% 110.00% 108.00%

Cost/Income 26.25% 26.44% 26.55% 26.42% 25.57% 25.16%


Liquidity

E ciency

Capital Adequacy



Asset Quality

Pro tability


48

equity research

september 26, 2009

econoMic deterioration couLd Weaken asset QuaLitYFollowing the fast growth in the bank’s corporate loan portfolio in 2008, which accounted for 85.5% of gross loans in 2008, asset quality is expected to deteriorate. the NPL ratio is forecasted to grow to 1.80% in 2009, up from 1.29% in 2008.

a HigHLY caPitaLiZed bankthanks to its sar 13.1 billion capital increase via a rights issue during 2008, riyad Bank enjoys a high capitalization level. its tier 1 ratio of 13.9% is one of the highest in the sector. this comfortable capital position allows the bank to secure coverage against unforeseen future losses as well as to finance its growth.

PotentiaL to increase its retaiL banking Penetrationas retail loans represent only 15.5% of total loans outstanding, riyad Bank has a low exposure to the high-return retail sector. however, with 201 branches, the bank has a strong distribution capacity that could be utilized to increase the bank’s retail banking penetration, thereby improving its margins and funding base going forward.

We forecast net incoMe to groW at a cagr of 14.8% during 2009-2013We forecast net special commission income to grow at a caGr of 5.2% over our forecast horizon as the bank increasingly targets the retail segment, and fees and commissions income to grow at a caGr of 8.7%. On the other hand, we expect total operating expenses to drop by 0.7%. accordingly, we estimate the bank to record a net income caGr of 14.8% between 2009 and 2013. also, riyad Bank is expected to book a bottom line of sar 2,692 million in Fy 09, up by 2% compared to Fy 08.

vaLuation We initiate coverage on riyad Bank with a “Buy” recommendation based on a fair value of sar 31.54 per share, providing investors with 30.6% upside potential. riyad Bank is currently trading at levels corresponding to an estimated Pe ratio of 13.49 for 2009 and 10.55 for 2010.

overvieW of riYad bank

15

30

45

60

75

90

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

SAR

stock data

Market cap (usD) 36,225,000,000

Number of shares 1,500,000,000

Free Float 38.7%




trailing Pe 15.09

PB 1.35

year 2008 2009e 2010e 2011e 2012e 2013e


ePs (sar) 1.76 1.79 2.29 2.74 2.96 3.12

rOae (%) 13.57 10.07 11.94 13.56 14.07 14.34


NPL ratio (%) 1.29 1.80 1.71 1.62 1.30 1.10

riyad Bank stock Performance

WeLL Positioned for tHe uPturn



recOMMeNDatiON buY

kingdom of saudi arabiasaudi banks riYad bank

49

equity research

september 26, 2009

Third largest branch network after Al Rajhi and NCB

background

riyad Bank was established in 1957 and provides various banking and investment services, in addition to shariah-compliant products, to its retail and corporate clients. the bank is the fourth largest bank in saudi arabia in terms of assets and benefits from being around 50% owned by saudi public sector-related entities.

riyad Bank operates through 201 branches, the third largest branch network in the Kingdom after al rajhi and NcB, and 2,027 atM machines across saudi arabia, in addition to a branch in the united Kingdom. the bank also operates in the united states and has a representative office in singapore.

Chart 95: riyad Bank shareholder structure

30.4%

21.7% 21.6%

9.9%

9.9% 6.5%

Public

Public Investment Fund

GOSI

Mohammed Al Issa

Al Nahla Group

SAMA

Source: Zawya

keY findings

Economic Deterioration Could Weaken Asset Quality


0.0%

1.0%

2.0%

3.0%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

Riyad Saudi Banks Average

0

250

500

750

1,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion


Source: Riyad Bank Financial Statements and Audi Capital - KSA Estimates

in the short term, given the higher expected corporate defaults, we forecast the NPL ratio to rise by 51 bp to 1.8% in 2009 and to ease to 1.7% in 2010. also, we estimate the provisions for credit losses to reach sar 868 million in 2009, up from sar 349 million in 2008.


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equity research

september 26, 2009

Chart 98: Deposit Growth Chart 99: Loan Growth

0%

10%

20%

30%

40%

0

60,000

120,000

180,000

240,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

Riyad Deposits Riyad Deposits Growth

0%

13%

25%

38%

50%

0

50,000

100,000

150,000

200,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

Riyad Loans Riyad Loans Growth



supported by its large branch network, riyad Bank has a strong retail franchise that will allow it to grow its deposits base. We therefore expect customer deposits to grow at a caGr of 12.4% between 2009 and 2013, below the sector average of 14.0%. in 2009, we forecast customer deposits to grow by 19.7% in 2009, well above the sector average of 8.3%.

We anticipate riyad Bank’s loan book to grow at a caGr of 10.9% over our forecasted horizon, as it has sufficient funds to expand its operations.

accordingly, we expect the bank to maintain its loans to deposits ratio in a healthy range of 82% to 86% between 2009 and 2013.

Chart 100: Loans to Deposits ratio

40%

55%

70%

85%

100%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

Riyad Bank Saudi Banks



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equity research

september 26, 2009

Cost to Income Ratio Expected to Continue to Be Above the Sector Average

riyad Bank’s total operating expenses increased by a caGr (04-08) of 15.8% and by 20% y-o-y, resulting in a high cost to income ratio of 39.8% in 2008 compared to the sector average of 34%. rising costs were observed across the banking sector as banks were increasingly investing in their distribution channels, as well as their human resources and their it infrastructure.Between 2009 and 2013, cost pressures should ease and we expect the bank’s cost to income ratio to decrease to the 37% level but to remain above the sector average range of 34% to 35%.

Chart 101: cost to income ratio

20%

25%

30%

35%

40%

45%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E



One of the Least Profitable Saudi Banks in Terms of ROAA and ROAE

in 2008, riyad Bank reported an rOaa of 1.9%, below the sector average of 2.7%. the bank’s rOae stood at 13.6% versus 17.6% for the sector as a result of the capital increase. however, we estimate riyad Bank’s rOaa and rOae to improve starting 2010 and average 1.8% and 12.8% between 2009 and 2013.

Chart 102: rOaa Chart 103: rOae

0%

2%

4%

6%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E


0%

10%

20%

30%

40% 20

04

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E




We Forecast Net Income to Increase by 2% in 2009



Between 2009 and 2013, riyad Bank’s earnings are expected to grow at a caGr of 14.8%, which compares favorably to a sector average of 14.0%.

26%

41%

3% 4%

-12%

2%

27% 20%

8% 5%

-20%

0%

20%

40%

60%

0

1,500

3,000

4,500

6,000

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

Riyad NI Riyad NI Growth


caGr=14.8%

52

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september 26, 2009


vaLuation


2009 E 2010 E 2011 E 2012 E 2013 E


Number of Shares Outstanding (million) 1,500 1,500 1,500 1,500 1,500







Riyad Bank Fair Value (SAR) 31.54


baLance sHeet

2008 2009 E 2010 E 2011 E 2012 E 2013 E

(SAR million)

Cash and Balances with SAMA 11,078 14,455 15,793 17,127 18,196 19,078

Due from Banks and other Financial Institutions 6,257 7,165 5,743 7,666 8,552 9,438

Net Loans and Advances 96,430 108,586 122,595 136,016 149,909 164,445

Net Investments 40,329 43,139 45,751 48,997 52,316 55,732

Net Property & Equipment 1,630 1,819 1,966 2,078 2,148 2,192

Net Other Assets 3,928 4,609 5,203 5,773 6,362 6,979

Total Assets 159,653 179,772 197,052 217,656 237,483 257,865


Due to Banks and other Financial Institutions 21,213 18,343 14,995 15,723 14,655 14,226


Debt securities issued 1,874 1,875 1,875 - - -


Share Capital 15,000 15,000 15,000 15,000 15,000 15,000


Other Reserves (940) (415) 195 98 92 -

Retained Earnings 275 141 642 621 1,242 1,274

Proposed Gross Dividends 1,131 2,154 2,742 3,286 3,546 3,739





The Dividend Discount Model (DDM) used for the valuation of Riyad Bank was based on a five-year earnings forecast period and has yielded an intrinsic value of SAR 31.54 per share.



53

equity research

september 26, 2009

incoMe stateMent

2008 2009 E 2010 E 2011 E 2012 E 2013 E

Special Commission Income 6,737 6,791 7,825 9,488 11,686 14,366

Special Commission Expense 2,790 2,197 2,960 4,214 6,254 8,735

Net Special Commission Income 3,947 4,593 4,865 5,274 5,432 5,630



Net Trading Income (283) (6) (7) (8) (7) (6)

Net Gains (Loss) on non-Trading Investments 52.5 (73.1) 36.6 49.4 46.9 42.0

Other Operating Income 80.2 88.2 97.0 106.8 117.4 129.2


Salaries and Employee Related Expenses 1,053 1,138 1,255 1,384 1,483 1,675


Depreciation and Amortization 231 257 278 294 304 310


Other Operating Expenses 10 0 0 0 0 0


2,086 2,232 2,414 2,634 2,814 3,081

Provision for Credit Losses, Net of Recoveries 349 868 791 565 310 126

Impairment Charge on Investments 174 209 0 0 0 0


Net Income 2,639 2,692 3,428 4,108 4,433 4,674

(SAR million)

2008 2009 E 2010 E 2011 E 2012 E 2013 E

Net Loans and Advances 43.20% 12.61% 12.90% 10.95% 10.21% 9.70%

Total Assets 31.56% 12.60% 9.61% 10.46% 9.11% 8.58%


Total Liabilities 23.85% 13.46% 10.13% 11.55% 10.01% 9.42%

Total Equity 94.82% 8.12% 6.78% 4.27% 3.69% 3.23%

Net Special Commission Income 20.83% 16.37% 5.91% 8.42% 3.00% 3.65%

Net Fees from Banking Services 17.49% -2.12% 12.83% 15.54% 2.55% 4.44%

Total Operating Income 1.30% 14.34% 10.53% 10.17% 3.42% 4.28%

Net Income -12.37% 2.03% 27.33% 19.84% 7.90% 5.45%

Non-Performing Loans to Gross Loans 1.29% 1.80% 1.71% 1.62% 1.30% 1.10%

Net Provisions for Credit Losses to Net Loans 0.36% 0.80% 0.65% 0.42% 0.21% 0.08%

NPL Coverage 131.93% 125.55% 132.00% 130.00% 135.00% 135.00%

ROAA 1.88% 1.59% 1.82% 1.98% 1.95% 1.89%

ROAE 13.57% 10.07% 11.94% 13.56% 14.07% 14.34%

Net Loans to Deposits Ratio 91.79% 86.39% 85.39% 83.39% 82.39% 81.89%

Cost/Income 39.75% 37.19% 36.39% 36.04% 37.24% 39.09%


Liquidity

Efficiency

Capital Adequacy



Asset Quality

Profitability

ratio anaLYsis




54

equity research

september 26, 2009

kingdom of saudi arabiasaudi bankscurreNt Price sar 46.60


recOMMeNDatiON buY

good asset QuaLitY WHicH is about to deterioratethe bank has some of the best asset quality indicators among saudi banks. its level of NPL was a mere 0.24% of total loans in December 2008, versus an industry average of 1.36%. Due to the economic slowdown, we believe that NPLs will increase, which will cause the NPL ratio to rise to 1.00% in 2009 and the NPL coverage to drop to 190% from 325% in 2008.

baLance sHeet groWtH is set to decLine sHarPLYWith corporate loans representing 82% of the total loan book in 2008, saBB is largely exposed to the current slowdown in business activities. We forecast loan growth to drop to 0.6% in 2009, down from 29.4% in 2008 and to average 13.5% during 2009-2013, much reduced from the 26.2% average of the 2004-2008 period.

strong corPorate francHisesaBB is best known as a corporate bank. it has the benefit of being associated with hsBc, which gives it a competitive advantage over its peers in terms of product development, commercial strategy and risk management. the association with hsBc also provides the bank with an access to hsBc’s valuable systems and its experienced senior staff.

earnings groWtH to sLoWWe forecast saBB net income to grow at a caGr of 12.5% during 2009-2013, supported by 6.5% growth in net special commission income and 7.1% growth in net fees from banking services, enhanced by a much slower growth of 2.2% in total operating expenses. also, we estimate saBB to book a bottom line of sar 2,486 million in Fy 09, down by 14.1% compared to Fy 08.

vaLuation We initiate coverage on saudi British Bank with a “Buy” recommendation based on a fair value of sar 61.47 per share, providing investors with 31.9% upside potential. saBB is currently trading at levels corresponding to an estimated Pe ratio of 14.08 for 2009 and 11.07 for 2010.

stock data

Market cap (sar) 34,950,000,000


Free Float 32.9%




trailing Pe 12.46

PB 2.67

20

50

80

110

140

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

SAR

year 2008 2009e 2010e 2011e 2012e 2013e


ePs (sar) 3.89 3.31 4.21 5.07 5.22 5.32

rOae (%) 25.49 17.53 18.49 20.03 18.84 17.87


NPL ratio (%) 0.24 1.00 0.95 0.86 0.77 0.73

saBB stock Performance

HigH QuaLitY corPorate banking PLaYer

kingdom of saudi arabiasaudi banks saudi britisH bank

55

equity research

september 26, 2009

Strong banking infrastructure supported by shareholder HSBC

NPL ratio expected to increase to 1% in 2009 and to ease to 0.95% in 2010

overvieW of saudi britisH bank

background

the origins of saudi British Bank (saBB) date back to 1978, when the nationalization program required saudi nationals to own majority shares in foreign banks. thus hsBc, which used to be the major shareholder of BBMe, reduced its ownership in the bank to 40%. the second largest shareholder is the Olayan saudi investment company with a 17% stake. We believe the 40% ownership by hsBc is very beneficial, as it provides the bank with significant expertise in areas such as management, risk control, strategic planning and product development, and enables it to offer a global service.

Chart 105: saBB shareholder structure

40.0%

33.5%

17.0%

9.5% HSBC Holdings

Public

Olayan Saudi Investment Co

GOSI

Source: Zawya

saBB offers a wide range of conventional and islamic banking services. the bank’s major business lines include retail and corporate banking, as well as treasury operations.

the bank’s presence is limited to saudi arabia. it small network of only 68 branches reflects a corporate banking focus. saBB has 31 exclusive ladies’ sections, in addition to 452 atMs.

saBB is the fifth largest bank in saudi arabia by total assets, commanding a market share of around 10% in terms of loans, total assets and customer deposits.

keY findings

Though SABB Asset Quality Is One of the Best, It Is Expected to Deteriorate in 2009

Chart 106: NPL ratios across Banks Chart 107: NPL coverage

0%

1%

2%

3%

4%

5%

2008 2009 E 2010 E 2011 E

SAMBA Riyad

SABB BSF

50%

150%

250%

350%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SABB Saudi Banks Average



the bank’s asset quality indicators are strong. the NPLs to gross loans reported at the end of 2008 was only 0.24%, compared to a sector average of 1.36%. according to our estimates, saBB is expected to continue to have the lowest NPL ratio over our forecasting horizon, although it is expected to grow the most in percentage terms between 2008 and 2009, from 0.24% to 1.00% compared to a sector average of 2.27%. this high growth in the NPL ratio will result mainly from the faster than average loan growth during the past five years and the bank’s higher focus on corporate banking, more vulnerable to the current economic downturn. saBB has a fair level of loan-loss provisions with NPL coverage reported at 325% at the end of 2008. For 2009, we forecast the NPL coverage ratio to drop to 190%, but it will remain above the forecasted sector average of 133%.


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september 26, 2009

Corporate lending is driving the loan book

Relying mainly on short-term funding

that saudi British Bank caters mainly to businesses is evident from the emphasis on commercial loans and overdrafts, which represented 81.5% of total loans as of the end of 2008. indeed, this segment has been the main contributor to loan growth over the past years. it is worth noting that this loan book is originated locally, with domestic loans contributing around 98% to the aggregate lending portfolio.

Chart 108: saBB Loan Mix in 2008

81.5%

16.0%

2.5%

Commercial Loans and Overdrafts

Consumer Loans

Credit Cards

Source: SABB Financial Statements

customer deposits account for the majority share of funding and represented 77% of total liabilities in 2008. the bulk of this funding is short-term and generates a significant maturity mismatch between saBB’s assets and liabilities base. Of its customer deposits, 89% carry a maturity of less than three months. also, 90% of the total liabilities have a maturity of less than a year compared to 56% on the assets side.

Chart 109: saBB Deposits Decomposition by tenor

89.1%

10.3% 0.5%

0-3 Months

3-12 Months

1-5 Years

Source: SABB Financial Statements

SABB has the Lowest Tier 1 Capital Ratio in the Sector

With a tier 1 ratio of 8.3% at the end 2008, notably lower than the sector average of 14.1%, saBB capital adequacy weakened compared to 2007. this resulted mainly from the implementation of Basel ii. however, in q1 09 this ratio has improved to 10.3% owing to a 25% capital increase.

Chart 110: tier 1 ratio across saudi Banks

8% 10% 11% 12% 13% 13% 14% 15% 16%

19%

23%

0%

6%

12%

18%

24%

SABB

SHB

BSF

AN

B

Sam

ba

SIB

Riya

d

Rajh

i

NCB

Jazi

ra

Bila

d



57

equity research

september 26, 2009

We Forecast a CAGR of 13.5% for Loans and 13.9% for Deposits


-20%

0%

20%

40%

60%

0

40,000

80,000

120,000

160,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

SABB Loans SABB Loans Growth

0%

10%

20%

30%

40%

0

45,000

90,000

135,000

180,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

SABB Deposits SABB Deposits Growth

Source: SABB Financial Statements and Audi Capital - KSA Estimates


after growing by 46.1% in 2007 and by 29.4% in 2008, we forecast the loan portfolio to drop by 0.6% in 2009. this slowdown will result mainly from the bank’s reluctance to lend in order to avoid any major deterioration in the quality of its loan book.

We forecast loans to grow at a caGr of 13.5% over our forecast horizon compared to a caGr of 26.2% between 2004 and 2008. On the other hand, deposits are estimated to grow by 2.5% y-o-y to reach sar 94,994 million in Fy 09 and at a caGr of 13.9% over our forecast horizon compared to a caGr of 20% between 2004 and 2008.




Given the sar 1,174 million provision for credit losses estimated to be booked in 2009, saBB’s net income is expected to drop by 14.9% y-o-y to reach sar 2,486 million in Fy 09 but to increase again by 27.1% in 2010. Net income is expected to grow at a caGr of 12.6% over our forecast horizon, sustained by 6.5% growth in net special commission income and a slower growth of 2.2% in total operating expenses.

31%

52%

21%

-14%

12%

-15%

27%

20%

3% 2%

-20%

0%

20%

40%

60%

0

1,250

2,500

3,750

5,000

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

SABB NI SABB NI Growth


caGr=12.6%

58

equity research

september 26, 2009


vaLuation


the Dividend Discount Model (DDM) used for the valuation of saudi British Bank was based on a five-year earnings forecast period and has yielded an intrinsic value of sar 61.47 per share.


baLance sHeet

2009 E 2010 E 2011 E 2012 E 2013 E









Saudi British Bank Fair Value (SAR) 61.47

(SAR million)

Cash and Balances with SAMA

Due from Banks and other Financial Institutions

Net Loans and Advances

Investment in Associate

Net Investments

Net Property & Equipment

Net Other Assets

Total Assets

Customer Deposits

Due to Banks and other Financial Institutions

Other Liabilities

Term Loan

Debt securities issued

Total Liabilities

Share Capital

Statutory Reserve

2008 2009 E 2010 E 2011 E 2012 E 2013 E

11,328 11,638 13,149 15,251 17,380 19,557

6,200 5,700 5,366 6,224 7,093 7,982

80,237 79,795 92,087 104,314 118,169 132,176

148 126 197 152 203 155

29,604 29,975 31,726 34,505 37,407 40,464

561 563 564 577 584 586

3,581 3,118 3,598 4,076 4,618 5,165

131,661 130,916 146,689 165,099 185,454 206,085

92,678 94,994 107,327 124,480 141,860 159,633

16,069 9,746 10,747 11,410 13,763 14,259

5,436 4,711 5,323 6,173 7,035 7,917

188 188 188 188 188 188

5,657 5,657 5,657 3,407 1,705 1,705

120,027 115,296 129,241 145,658 164,551 183,702

6,000 7,500 7,500 7,500 7,500 7,500

4,480 5,101 5,891 6,842 7,500 7,500

Other Reserves

Retained Earnings

Proposed Gross Dividends

(177) (176) (16) 70 92 128

1,331 1,703 2,177 2,557 3,269 4,465

- 1,492 1,895 2,471 2,543 2,791


Total Shareholders' Equity

Total Liabilities & Shareholders' Equity

11,634 15,620 17,448 19,441 20,904 22,384

131,661 130,916 146,689 165,099 185,454 206,085




59

equity research

september 26, 2009

incoMe stateMent

Special Commission Income

Special Commission Expense

Net Special Commission Income

Net Fees from Banking Services

Net Exchange Income

Net Income from Investments Held at FVIS

Net Trading Income

Dividend Income

Net Gains (Loss) on non-Trading Investments

Other Operating Income

Total Operating Income

Salaries and Employee Related Expenses

Rent and Premises Related Expenses

Depreciation and Amortization

Other General and Administrative Expenses

(SAR million)

2008 2009 E 2010 E 2011 E 2012 E 2013 E

5,865 5,094 6,136 7,335 9,147 11,328

2,658 1,633 2,308 3,244 4,855 6,869

3,207 3,461 3,828 4,091 4,292 4,460

1,257 1,246 1,311 1,552 1,560 1,637

138 135 163 177 192 208

(42) 10 25 38 56 85

364 327 360 353 307 273

2 2 2 3 3 4

(17) 66 165 207 258 323

3 3 2 2 1 1

4,912 5,250 5,856 6,421 6,669 6,991

898 908 1,060 1,212 1,378 1,550

79 84 90 101 113 124

107 108 108 110 112 112

557 587 614 657 696 731

Operating Expenses Before Provision for Credit Losses and Impairment ChargeProvision for Credit Losses, Net of Recoveries

Impairment Charge on Investments

Total Operating Expenses

Net Income

Net Share in Earnings of Associates

Net Income Attributable to Equity Holders of the Bank

1,642 1,687 1,872 2,081 2,299 2,517

371 1,174 928 646 570 605

87 0 0 0 0 0

2,100 2,862 2,800 2,726 2,869 3,122

2,812 2,388 3,056 3,695 3,800 3,868

108 97 102 107 113 118

2,920 2,486 3,159 3,802 3,913 3,987



60

equity research

september 26, 2009

ratio anaLYsis


Total Assets

Customer Deposits

Total Liabilities

Total Equity




Net Income

Non-Performing Loans to Gross Loans

Net Provisions for Credit Losses to Net Loans

NPL Coverage

ROAA

ROAE

Net Loans to Deposits Ratio

Cost/Income

Total Equity/Total Assets

Liquidity

E ciency

Capital Adequacy



Asset Quality

Pro tability

2008 2009 E 2010 E 2011 E 2012 E 2013 E

29.41% -0.55% 15.40% 13.28% 13.28% 11.85%

34.06% -0.57% 12.05% 12.55% 12.33% 11.12%

28.99% 2.50% 12.98% 15.98% 13.96% 12.53%

36.72% -3.94% 12.10% 12.70% 12.97% 11.64%

11.60% 34.26% 11.70% 11.43% 7.52% 7.08%

4.85% 7.91% 10.61% 6.87% 4.90% 3.91%

45.86% -0.86% 5.17% 18.39% 0.52% 4.96%

12.29% 6.89% 11.55% 9.64% 3.87% 4.82%

10.31% -15.05% 27.97% 20.88% 2.85% 1.80%

0.24% 1.00% 0.95% 0.86% 0.77% 0.73%

0.46% 1.47% 1.01% 0.62% 0.48% 0.46%

325.04% 190.00% 200.00% 205.00% 205.00% 210.00%

2.45% 1.82% 2.20% 2.37% 2.17% 1.98%

25.49% 17.53% 18.49% 20.03% 18.84% 17.87%

86.58% 84.00% 85.80% 83.80% 83.30% 82.80%

33.42% 32.14% 31.96% 32.40% 34.47% 36.01%

8.84% 11.93% 11.89% 11.78% 11.27% 10.86%



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kingdom of saudi arabiasamba finanCiaL grouPsaudi banks

a resiLient corPorate bank




LoW risk ProfiLeOver the past years, BsF has reported high asset quality indicators. its NPL ratio was 0.94% in 2008, compared to a sector average of 1.36%. in 2009, we expect the NPL ratio to increase to 1.80% but to continue to be well below the forecasted sector average of 2.27%.

strong coPorate francHise and increased eMPHasis on retaiL bankingGiven that consumer loans represent only 5.5% of the bank’s loan portfolio, there is vast room for growth in the retail banking sector. the bank’s strategy is to aggressively grow its retail franchise while continuing to focus on its core competency in corporate banking. the bank is also expanding its islamic banking franchise by opening more islamic branches and offering more shariah compliant products.

a HigH LeveL of oPerating efficiencYWith a cost to income ratio of 25% compared to a sector average of 34%, BsF has a high level of operating efficiency, which we expect will be maintained over our forecasting horizon.

baLance sHeet to continue groWing, tHougH at a sLoWer Pacein view of the current market conditions, BsF is forecasted to deliver loan and deposit growth in line with the sector average. We estimate loans and deposits to grow at a caGr of 13.1% and 14.7% respectively between 2009 and 2013.

earnings to droP bY 15.7% in 2009 and to groW at a cagr of 8.9% during 2009-2013Owing to high provisions in 2009 of sar 824 million, we expect net income to drop by 15.7% y-o-y in 2009 to sar 2,365 million and to grow at a caGr of 8.9% over 2009-2013, underpinned by 4.1% growth in net special commission income and 8.8% growth in net fees from banking services.

vaLuation We initiate coverage on Banque saudi Fransi with an “accumulate” recommendation based on a fair value of sar 51.48 per share, providing investors with 25.6% upside potential. BsF is currently trading at levels corresponding to an estimated Pe ratio of 12.54 for 2009 and 10.68 for 2010.

stock data

Market cap (sar) 29,651,692,000


Free Float 54.7%




trailing Pe 10.86

PB 2.00

20

45

70

95

120

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

SAR

year 2008 2009e 2010e 2011e 2012e 2013e


ePs (sar) 3.88 3.27 3.84 4.26 4.39 4.60

rOae (%) 22.06 15.82 16.64 16.54 15.25 14.49


NPL ratio (%) 0.94 1.80 1.53 1.30 1.17 0.99

BsF stock Performance

kingdom of saudi arabiasaudi banks banQue saudi fransi

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Well established corporate business supported by Calyon

Growing emphasis on Islamic banking

Diversified business lines

overvieW of banQue saudi fransi

background

Banque saudi Fransi (BsF) was founded in 1977, and operates through 75 branches and 274 atM machines in the Kingdom. the bank is 31% owned by credit agricole through its investment banking subsidiary calyon.

BsF is a universal bank with about 10% share of saudi arabia’s total banking assets offering a full range of commercial banking products. it is best known for its corporate banking services, with a competitive edge in the syndication and corporate advisory business. BsF arranges major deals in the oil, petrochemicals, and manufacturing sectors and enjoys a long-standing relationship with its large corporate clients.

Chart 114: BsF shareholder structure

41.3%

31.1%

12.8%

9.8%

5.0% Public

Groupe Credit Agricole

GOSI

Rashed Abdul Rahman Al Rashed & Sons Co

Mohammed Ibrahim Al Issa

Source: Zawya

the bank benefits from calyon’s supply of well-designed banking products and services as well as its support in the treasury, operations and risk management areas.

in an effort to broaden its product range, the bank started focusing on islamic banking in 2005 by transforming its Makkah branch into a completely shariah compliant branch, and by introducing two shariah compliant funds.

the bank has entered into different joint ventures offering potential for growth in the insurance and investment banking areas, including a 50% stake in saudi Fransi insurance company, a joint venture with aGF; caaM saudi Fransi, a joint venture with credit agricole asset Management; and a joint venture with calyon that offers investment banking services.

keY findings


0%

1%

2%

3%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

BSF Saudi Banks Average

0

250

500

750

1,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion


Source: BSF Financial Statements and Audi Capital - KSA Estimates

Over the years, BsF has delivered superior asset quality compared to its local peers. it reported an average NPL ratio of 1.08% between 2004 and 2008, below the sector average of 1.79%. We forecast BsF to maintain a low NPL ratio averaging 1.36% over our forecast horizon, versus a sector average of 1.78%. this can be achieved due to its strict credit policy and the initial targeting of low-risk profile clients. in 2009 and 2010, the NPL ratio is expected to increase to 1.80% and 1.53% respectively.On the provisioning side, BsF is expected to record provisions for credit losses of sar 824 million while the bank’s coverage ratio is expected to hover around the 110% level.


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Higher operating efficiency compared to its local peers, BsF’s operating efficiency is high, mainly due to its low retail exposure which requires an elevated cost structure.Between 2004 and 2008, the bank reported an average cost to income ratio of 25%, compared to a sector average of 30%. Going forward, we believe the bank will continue to deliver higher efficiency. its cost to income ratio, expected to average 29%, will outperform the projected sector average of 34.6% over our forecasting horizon.

Chart 117: cost to income ratio

20%

25%

30%

35%

40%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

BSF Saudi Banks Average




0%

10%

20%

30%

40%

0

40,000

80,000

120,000

160,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

BSF Loans BSF Loans Growth

0%

8%

15%

23%

30%

0

45,000

90,000

135,000

180,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

BSF Deposits BSF Deposits Growth



after growing by 35.1% in 2008, we forecast the loan portfolio to grow by 1.6% in 2009. this slowdown will result mainly from the bank’s reluctance to lend in order to avoid any major deterioration in the quality of its loan book.We estimate loans to grow at a caGr of 13.1% over our forecast horizon compared to a caGr of 23.8% between 2004 and 2008. On the other hand, deposits are estimated to grow by 1% in Fy 09 and at a caGr of 14.7% over our forecast horizon compared to a caGr of 18.1% between 2004 and 2008.

We forecast Net Income to Drop by 15.7% in 2009



Given the sar 824 million provision for credit losses estimated to be booked in 2009, BsF net income is expected to drop by 15.7% y-o-y in Fy 09 but to increase again by 17.3% in 2010. Net income is expected to grow at a caGr of 8.9% over our forecast horizon.

30%

44%

36%

-10%

3%

-16%

17% 11% 3%

5%

-20%

0%

20%

40%

60%

0

1,000

2,000

3,000

4,000

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

BSF NI BSF NI Growth


caGr=8.9%

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vaLuation


the Dividend Discount Model (DDM) used for the valuation of Banque saudi Fransi was based on a five-year earnings forecast period and has yielded an intrinsic value of sar 51.48 per share.


baLance sHeet

2009 E 2010 E 2011 E 2012 E 2013 E









Banque Saudi Fransi Fair Value (SAR) 51.48

(SAR million)





Net Investments


Net Other Assets

Total Assets

Customer Deposits


Other Liabilities

Term Loan

2008 2009 E 2010 E 2011 E 2012 E 2013 E

5,773 6,370 7,277 8,477 9,706 11,033

4,246 8,435 8,564 9,977 11,423 12,985

80,866 82,147 91,694 104,325 118,728 134,154

177 177 177 177 177 177

27,710 25,042 26,956 29,842 32,887 36,275

591 628 668 724 778 827

6,502 5,017 5,600 6,371 7,251 8,193

125,865 127,816 140,936 159,894 180,948 203,644

92,791 93,719 107,055 124,713 142,784 162,312

8,402 8,619 6,040 4,175 4,149 4,122

5,675 4,750 5,426 6,321 7,237 8,227

4,927 4,906 4,906 4,906 4,906 4,906

Total Liabilities

Share Capital

Statutory Reserve

General Reserve

111,796 111,994 123,427 140,114 159,076 179,566

5,625 5,625 5,625 5,625 5,625 5,625

4,754 5,345 5,625 5,625 5,625 5,625

2,590 2,590 2,590 2,590 2,590 2,590

Other Reserves

Retained Earnings


295 463 (20) 25 40 55

6 1,170 2,811 4,790 6,830 8,803

777 610 854 1,103 1,136 1,358

Total Equity Attributable to Equity Holders of the Bank

Minority Interest



14,047 15,803 17,485 19,759 21,847 24,056

22 18 25 21 25 22

14,069 15,822 17,509 19,779 21,873 24,077

125,865 127,816 140,936 159,894 180,948 203,644




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incoMe stateMent





Net Exchange Income

(SAR million)

2008 2009 E 2010 E 2011 E 2012 E 2013 E

5,298 4,551 5,271 6,500 8,296 10,476

2,478 1,514 2,184 3,215 4,835 6,910

2,821 3,037 3,087 3,285 3,461 3,566

834 782 878 1,012 1,045 1,097

241 249 318 365 419 481

Net Trading Income

Dividend Income








Other Operating Expenses


Provision for Credit Losses, Net of Recoveries



Net Income

Net Share in Earnings of Associates


500 272 299 293 255 227

2 - - - - -

(56) - - - - -

50 9 8 6 4 5

4,392 4,348 4,589 4,960 5,184 5,376

624 668 748 855 972 1,093

91 96 103 116 129 142

87 92 98 107 114 122

288 304 317 339 360 378

6 0 0 0 0 0

1,096 1,160 1,266 1,417 1,575 1,735

94 824 549 461 433 311

410 0 0 0 0 0

1,600 1,984 1,815 1,877 2,008 2,046

2,791 2,365 2,774 3,083 3,176 3,330

12 - 0 0 0 0

2,804 2,365 2,774 3,083 3,176 3,330



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ratio anaLYsis


Total Assets

Customer Deposits

Total Liabilities

Total Equity




Net Income



NPL Coverage

ROAA

ROAE


Cost/Income


Liquidity

E ciency

Capital Adequacy



Asset Quality

Pro tability

2008 2009 E 2010 E 2011 E 2012 E 2013 E

35.12% 1.58% 11.62% 13.77% 13.81% 12.99%

26.11% 1.55% 10.26% 13.45% 13.17% 12.54%

25.38% 1.00% 14.23% 16.49% 14.49% 13.68%

26.23% 0.18% 10.21% 13.52% 13.53% 12.88%

25.16% 12.46% 10.67% 12.96% 10.58% 10.08%

23.20% 7.66% 1.65% 6.42% 5.38% 3.02%

-6.99% -6.30% 12.32% 15.21% 3.30% 4.96%

18.87% -0.98% 5.54% 8.08% 4.51% 3.69%

3.22% -15.28% 17.30% 11.14% 3.03% 4.85%

0.94% 1.80% 1.53% 1.30% 1.17% 0.99%

0.12% 1.00% 0.60% 0.44% 0.36% 0.23%

110.99% 107.94% 105.94% 111.11% 113.11% 115.11%

2.47% 1.86% 2.06% 2.05% 1.86% 1.73%

22.06% 15.82% 16.64% 16.54% 15.25% 14.49%

87.15% 87.65% 85.65% 83.65% 83.15% 82.65%

24.95% 26.67% 27.59% 28.56% 30.38% 32.27%

11.18% 12.38% 12.42% 12.37% 12.09% 11.82%



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one of tHe best asset QuaLitY ProfiLes aMong its saudi Peersin 2008, arab National Bank’s NPL ratio of 0.39% was the second lowest among saudi banks, which averaged a ratio of 1.36%. in 2009, we expect the bank’s NPL ratio to more than triple to 1.00%, still well below the forecasted sector average of 2.27%. aNB has adequate provisions, which shows in its NPL coverage of 348.98%. Going forward, we forecast the NPL coverage to average 207% between 2009 and 2013, far exceeding the sector average of 135%.

WeLL Positioned to WeatHer tHe current cHaLLenging environMentthanks to its strong retail banking franchise, we believe that arab National Bank is one of the best placed banks to face the current challenging macroeconomic conditions. it is also helped by its adequate capital, confirmed by its tier 1 ratio of 11.9%, a strong liquidity position, as demonstrated by a loans-to-deposits ratio of 80.5%, and sound asset quality, reflected in its 2008 NPL ratio of 0.39%.

baLance sHeet to continue groWing, tHougH at a sLoWer PaceGiven the current conditions, aNB’s loans and deposits are anticipated to grow in line with the sector average. We estimate a caGr of 13.2% for loans, and 13.4% for deposits during 2009-2013. however, the bank is expected to exhibit a drop of 4.5% in its deposit during 2009.

earnings to droP bY 1.4% in 2009 but to groW at a cagr of 12.8% froM 2009 untiL 2013We expect net income to drop by 1.4% y-o-y in 2009 to sar 2,452 million and to grow at a caGr of 12.8% between 2009 and 2013, mainly due to 9.1% growth in net special commission income, which constituted 81% of total operating income in 2008.

vaLuation We initiate coverage on arab National Bank with an “accumulate” recommendation based on a fair value of sar 53.87 per share, providing investors with 22.4% upside potential. aNB is currently trading at levels corresponding to an estimated Pe ratio of 11.67 for 2009 and 9.84 for 2010.

stock data

Market cap (sar) 28,600,000,000


Free Float 49.1%




trailing Pe 11.43

PB 2.17

20

40

60

80

100

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

SAR

year 2008 2009e 2010e 2011e 2012e 2013e


ePs (sar) 3.82 3.77 4.47 5.08 5.62 6.09

rOae (%) 21.50 18.20 18.61 18.22 17.82 17.27


NPL ratio (%) 0.39 1.00 0.95 0.86 0.77 0.69

aNB stock Performance




nicHe PLaYer in tHe retaiL sector

kingdom of saudi arabiasaudi banks arab nationaL bank

68

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september 26, 2009

Growing emphasis on new business lines

NPL ratio expected to peak at 1.0% in 2009 and to ease to 0.95% in 2010

overvieW of arab nationaL bank

background

arab National Bank (aNB) was established in 1979, when it took over the operations of arab Bank Ltd in Ksa. the bank is a 40%-owned subsidiary of arab Bank Jordan.With total assets of sar 121.31 billion as of December 2008 giving it a 9.6% market share of total banking assets, arab National Bank enjoys a strong presence in saudi arabia.

aNB provides a mix of conventional and islamic banking products and services to its retail and corporate clients. it operates through 131 branches in saudi arabia and one branch in the united Kingdom and is known to be the first bank to have introduced internet banking services in 2000.

Chart 121: aNB shareholder structure

40.0%

33.7%

10.8%

9.9%

5.6%

Arab Bank

Public

GOSI

Al Rashed & Sons Co

Al Jaber Trading Co

Source: Zawya

the bank is recognized for its strong retail banking franchise supported by its broad branch network and its expanding delivery channels, as well as its exclusive relationship with the government pensioners.

Faced with the rising demand for housing units from a young and growing population, and an expanding economy, aNB set up a shariah-compliant mortgage finance JV, the saudi home Loan company, together with Kingdom installment company, international Financing corporation and Dar al arkan real estate Development co. this venture will provide a growth opportunity for the bank in the housing finance market, especially with the adoption of the mortgage law.

keY findings

Having the Second Lowest NPL Ratio... ... And the Highest Coverage

Chart 122: NPL to Gross Loans Chart 123: NPL coverage

0%

1%

2%

3%

4%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

ANB Saudi Banks Average

0%

100%

200%

300%

400%

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

ANB Saudi Banks Average



Despite the significant expansion in its credit portfolio, arab National Bank has maintained a high level of credit quality and a very low level of non-performing loans. the bank’s 2008 NPL ratio of 0.39% was the second lowest among saudi banks, which averaged a ratio of 1.36%. in 2009, we expect the NPL ratio to more than triple to 1.00%, but to continue to be well below the forecasted sector average of 2.27%. aNB has adequate provisions, which shows in its NPL coverage ratio of 349%. We forecast the NPL coverage to average 207% between 2009 and 2013, well above the projected sector average of 135%.


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Solid retail banking franchise

Chart 124: retail Loan Market share (2008) Chart 125: retail Loans to total Loans (2008)

37%

20%

11% 10% 8% 8%

3% 2% 1% 1% 0%

10%

20%

30%

40%

Rajh

i

NCB

AN

B

Riya

d

SABB

Sam

ba

BSF

SHB

SIB

Jazi

ra

42%

23%

16% 16% 12%

9% 6%

0%

10%

20%

30%

40%

50%

Rajh

i

AN

B

SABB

Riya

d

Sam

ba

SHB

BSF



arab National Bank is widely known as a retail bank, and this claim is validated by its 11% market share of the Kingdom’s retail loans. retail loans account for 22.8% of aNB’s loan book. similar to our reasoning on riyadh Bank, we believe arab National Bank will continue to grow its retail banking segment, supported by the bank’s broad branch network and its expanding delivery channels, especially with the adoption of the mortgage law.

ANB Has the Greatest Focus on Core Banking Activities

compared to its peers, aNB relies more on core banking activities with net special commission income representing 81.1% of total operating income in 2008, compared to a sector average of 72.5%, while net fees from banking services make up the majority of the rest.

Chart 126: Operating income Breakdown across Banks

0% 25% 50% 75%

100%

AN

B

Rajh

i

Riya

d

Sam

ba

SHB

SABB

BSF

Net Special Commission Income Net Fees from Banking Services

Other



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september 26, 2009



-15%

0%

15%

30%

45%

0

40,000

80,000

120,000

160,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

ANB Loans ANB Loans Growth

Source: ANB Financial Statements and Audi Capital - KSA Estimates


We forecast loans to drop by 3.3% y-o-y to reach sar 72,185 million in Fy 09 and to grow at a caGr of 13.2% over our forecast horizon compared to a caGr of 27.2% between 2004 and 2008. On the other hand, deposits are estimated to drop by 4.5% y-o-y to reach sar 88,570 million in Fy 09 and to grow at a caGr of 13.4% over our forecast horizon compared to a caGr of 19.0% between 2004 and 2008.

Earnings to Grow at a CAGR of 12.8% between 2009 and 2013

Chart 129: Growth in Net income


We expect net income to drop by 1.4% y-o-y in 2009 to sar 2,452 million and at to grow at a caGr of 12.8% between 2009 and 2013, mainly due to 9.1% growth in net special commission income compared to the sector average of 8.6%.


-15%

0%

15%

30%

45%

0

45,000

90,000

135,000

180,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

ANB Deposits ANB Deposits Growth

51%

57%

37%

-2%

1% -1%

19%

14% 11% 8%

-20%

0%

20%

40%

60%

0

1,250

2,500

3,750

5,000

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

ANB NI ANB NI Growth

caGr=12.8%

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september 26, 2009


vaLuation


the Dividend Discount Model (DDM) used for the valuation of arab National Bank was based on a five-year earnings forecast period and has yielded an intrinsic value of sar 53.87 per share.


baLance sHeet

2009 E 2010 E 2011 E 2012 E 2013 E









Arab National Bank Fair Value (SAR) 53.87

(SAR million)





Net Investments


Net Other Assets

Total Assets

Customer Deposits


Other Liabilities

2008 2009 E 2010 E 2011 E 2012 E 2013 E

12,051 8,017 9,067 10,454 11,917 13,263

2,747 3,986 4,508 5,198 5,925 6,594

74,662 72,185 81,987 93,382 107,102 118,470

193 230 211 288 211 288

28,228 27,456 29,562 32,498 35,512 38,361

935 1,070 1,194 1,305 1,426 1,558

2,492 2,276 2,586 2,945 3,378 3,736

121,307 115,219 129,114 146,069 165,470 182,270

92,743 88,570 100,171 115,503 131,660 146,535

10,509 7,415 6,562 7,235 7,456 6,407

3,508 3,119 3,527 4,067 4,636 5,160


Total Liabilities

Share Capital

Statutory Reserve

1,875 1,875 1,875 - - -

108,636 100,978 112,135 126,806 143,752 158,102

6,500 6,500 6,500 6,500 6,500 6,500

4,390 5,003 5,730 6,500 6,500 6,500

Other Reserves

Retained Earnings


(86) (293) 172 57 51 41

1,217 2,414 3,689 5,029 7,179 9,314

650 642 907 1,196 1,505 1,831




12,671 14,266 16,997 19,282 21,736 24,186

121,307 115,244 129,132 146,088 165,488 182,288




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incoMe stateMent

ratio anaLYsis





Net Exchange Income


Net Trading Income

Dividend Income








(SAR million)

2008 2009 E 2010 E 2011 E 2012 E 2013 E

5,639 4,654 5,310 6,473 8,164 10,060

2,285 1,238 1,657 2,457 3,708 5,217

3,354 3,416 3,653 4,016 4,455 4,843

839 757 811 990 1,054 1,102

266 269 332 365 398 430

(58) (30) 21 27 35 45

5 15 16 16 14 12

6 6 7 8 7 6

(424) 39 47 61 58 52

148 171 119 90 58 76

4,135 4,643 5,006 5,572 6,078 6,566

908 982 1,077 1,232 1,400 1,575

123 123 140 157 174 192

156 178 199 217 238 260

395 396 414 443 469 493Operating Expenses Before Provision for Credit Losses and Impairment ChargeProvision for Credit Losses, Net of Recoveries

1,582 1,679 1,829 2,049 2,282 2,519

60 512 269 217 141 81


Net Income

Share in Loss of an Associate


1,642 2,191 2,098 2,266 2,423 2,601

2,493 2,452 2,908 3,306 3,656 3,965

(7) - - - - -

2,486 2,452 2,908 3,306 3,656 3,965


Total Assets

Customer Deposits

Total Liabilities

Total Equity




Net Income



NPL Coverage

ROAA

ROAE


Cost/Income


Liquidity

E ciency

Capital Adequacy



Asset Quality

Pro tability

2008 2009 E 2010 E 2011 E 2012 E 2013 E

22.15% -3.32% 13.58% 13.90% 14.69% 10.61%

28.41% -5.02% 12.06% 13.13% 13.28% 10.15%

25.85% -4.50% 13.10% 15.31% 13.99% 11.30%

29.42% -7.05% 11.05% 13.08% 13.36% 9.98%

20.40% 12.58% 19.15% 13.44% 12.73% 11.27%

15.48% 1.86% 6.95% 9.93% 10.94% 8.70%

8.07% -9.73% 7.14% 21.98% 6.46% 4.58%

4.52% 12.28% 7.83% 11.29% 9.09% 8.02%

1.01% -1.39% 18.63% 13.67% 10.58% 8.46%

0.39% 1.00% 0.95% 0.86% 0.77% 0.69%

0.08% 0.71% 0.33% 0.23% 0.13% 0.07%

348.98% 205.50% 200.50% 220.00% 210.00% 200.00%

2.31% 2.07% 2.38% 2.40% 2.35% 2.28%

21.50% 18.20% 18.61% 18.22% 17.82% 17.27%

80.50% 81.50% 81.85% 80.85% 81.35% 80.85%

38.25% 36.17% 36.54% 36.77% 37.54% 38.37%

10.45% 12.38% 13.16% 13.20% 13.14% 13.27%


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september 26, 2009



recOMMeNDatiON HoLd

asset QuaLitY reMains Weakin 2008, saudi hollandi Bank reported an NPL ratio of 2.73%, the highest in the sector, which had an average of 1.36%. in 2009, we expect the NPL ratio to increase to 4.35% and to continue to be well above the forecasted sector average of 2.27%. shB has less provisioning than its peers, reflected in its NPL coverage ratio of 107.8%. Going forward, we forecast the NPL coverage to stay around 110% between 2009 and 2011.

one of tHe sMaLLest banks in saudi arabia WitH Large eXPosure to tHe buiLding and construction sectorsaudi hollandi Bank is a small player in the saudi banking sector, ranking eighth in terms of total assets as of the end of 2008. its balance sheet has been growing at a caGr of 16.4% between 2004 and 2008, below the sector growth rate of 18.9%. its 14.7% exposure to the building and construction sector is relatively high compared to the aggregate sector exposure of 8.6% which raises some concerns over the quality of shB’s loan book.

baLance sHeet to continue groWing tHougH at a sLoWer Pacein light of current conditions, shB’s loan and deposit growth is anticipated to resemble the sector average. We estimate loans and deposits to grow at a caGr of 13.5% and 14.3% respectively over 2009-2013. however, the bank is expected to report a very high deposit growth rate of 16.4% in 2009, versus a forecasted sector average of 8.3%, as evidenced by the developments during the first half of 2009.

earnings to contract bY 45.6% in 2009 but to groW at a cagr of 17.4% betWeen 2009 and 2013We expect net income to decline by 1.6% y-o-y in 2009 to sar 1,204 million and at to grow at a caGr of 17.4% during 2009-2013, mainly due to the 2.9% expected drop in total operating expenses.

vaLuation We initiate coverage on saudi hollandi Bank with a “hold” recommendation based on a fair value of sar 35.61 per share, providing investors with 9.6% upside potential. shB is currently trading at levels corresponding to an estimated Pe ratio of 16.17 for 2009 and 10.59 for 2010.

stock data

20

40

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100

120

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

SAR

year 2008 2009e 2010e 2011e 2012e 2013e

Net income (sar million) 1,224 665 1,017 1,221 1,262 1,265

ePs (sar) 3.70 2.01 3.07 3.69 3.81 3.82

rOae (%) 23.85 10.60 14.01 15.04 14.13 13.09


NPL ratio (%) 2.73 4.35 3.70 2.96 2.66 2.26

shB stock PerformanceMarket cap (sar) 10,749,375,000


Free Float 29.4%




trailing Pe 10.86

PB 1.82

a cHaLLenging future aHead

kingdom of saudi arabiasaudi banks saudi HoLLandi bank

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overvieW of saudi HoLLandi bank

backgroundsaudi hollandi Bank was established in 1926 by algemene Bank Nederland (aBN) in the Kingdom of saudi arabia. in 1976, it was converted into a joint venture in line with the saudisation policy and was renamed saudi hollandi Bank (shB).

similar to other banks in the Kingdom, shB offers a wide range of banking services and products in addition to shariah compliant islamic products.

saudi hollandi Bank’s network is relatively small with 43 branches and 169 atM machines spread over the Kingdom. the bank is well known for its strong corporate franchise, as evidenced by the 80% share of corporate loans in its total loan portfolio.

Chart 130: shB shareholder structure

39.9%

29.7%

20.8%

9.6%

ABN Amro Bank

Public

Olayan Saudi Investment Co

GOSI

Source: Zawya

With total assets of sar 61.4 billion as of December 2008, shB commands a market share of 4.9% of the saudi banking assets and attracts 4.9% of the industry’s loans and deposits.

keY findings

Inevitable Deterioration in Asset Quality

Chart 131: NPL to Gross Loans across Bank Chart 132 NPL coverage across Banks

0%

1%

2%

3%

4%

5%

SHB

SAM

BA

Rajh

i

Riya

d

BSF

AN

B

SABB

2008 2009 E 2010 E

0%

100%

200%

300%

400%

SHB

BSF

Riya

d

Rajh

i

Sam

ba

SABB

AN

B 2008 2009 E 2010 E



One disadvantage of saudi hollandi Bank is its weak asset quality. in 2008, shB reported an NPL ratio of 2.73%, markedly higher than the average of 1.36% for the saudi banking sector as a whole. shB has less provisioning than its peers, with an NPL coverage ratio of 107.8% at the end of 2008 compared to the sector average of 152.3%. Due to the weakening macroeconomic conditions, we believe that the NPL ratio will increase to 4.35% in 2009 and to 3.70% in 2010, while the coverage ratio will stay close to the 110% level in the coming three years. hence the bank is facing the challenge of growing its lending portfolio, while enhancing the overall asset quality.

A corporate bank

NPL ratio expected to surge to 4.35% in 2009


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september 26, 2009

since building and construction account for 14.7% of the total loan book of saudi hollandi Bank, we remain worried about write-off risk, as these loans are particularly exposed to a deteriorating economic environment.

Chart 133: Building & construction exposure to total Loans

0%

4%

8%

12%

16%

SHB

Sam

ba

BSF

Riya

d

Rajh

i

AN

B

SABB


High Dependence on Wholesale Funding

as seen in chart 134, close to 19% of saudi hollandi Bank funding is market-based. although this allows for smaller asset-liability duration gap, in our opinion it causes an over-reliance on the capital markets and other banks for funding.

Chart 134: shB Wholesale Funding to total Liabilities (2008)

0%

6%

12%

18%

24%

2004 2005 2006 2007 2008

SHB Saudi Banks


A Relatively Clean Investment Book

Chart 135: shB asset Mix Chart 136: shB investments Decomposition by counterparty

61.9%

29.9%

4.5% 3.1% 0.6%


Net Investments


Other

Interbank Assets 91.0%

4.9% 3.9% 0.2%

Government and Quasi Government

Banks and Other Financial Institutions

Corporate

Other

Source: SHB Financial Statements Source: SHB Financial Statements

Economic downturn could further damage SHB’s asset quality


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september 26, 2009

Limited international investment exposure

even though shB has a large proprietary investment portfolio relative to its peers at 30% of its total assets, shB’s investment book is comparatively clean, with saudi government and quasi-government papers representing 91% of the total book, and the international exposure being limited to 7% of the total portfolio.

Chart 137: shB investments Decomposition by Location

93%

7%

Domestic

International

Source: SHB Financial Statements

A Low Capitalization Level

shB reported a tier 1 capital ratio of 9.95% in 2008, which, although above the regulatory minimum requirement of 8%, continues to be below the aggregate sector average of 14.1%. the bank’s te/ta ratio of 9.3% is also below the saudi Banks’ sector average of 13.5%.

Chart 138: tier 1 ratio (2008)

8% 10% 11% 12%

13% 13% 14% 15% 16%

19%

23%

0%

6%

12%

18%

24%

SABB

SHB

BSF

AN

B

Sam

ba

SIB

Riya

d

Rajh

i

NCB

Jazi

ra

Bila

d




0%

15%

30%

45%

60%

0

20,000

40,000

60,000

80,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

SHB Loans SHB Loans Growth

0%

8%

15%

23%

30%

0

25,000

50,000

75,000

100,000

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

SAR

mill

ion

SHB Deposits SHB Deposits Growth

Source: SHB Financial Statements and Audi Capital - KSA Estimates


We forecast loans to rise by 7.0% y-o-y to reach sar 40,660 million in Fy 09 and to grow at a caGr of 13.5% over our forecast horizon compared to a caGr of 23.0% between 2004 and 2008. On the other hand, deposits are estimated to grow by 16.4% y-o-y to reach sar 50,052 million in Fy 09 and at a caGr of 14.3% over our forecast horizon compared to a caGr of 15.9% between 2004 and 2008.


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september 26, 2009

We Expect SHB’s Net Income to Drop by 45.6% to SAR 665 million in 2009



Given the surge in provisions for credit losses estimated at sar 752 million in 2009, we expect saudi hollandi Bank to book a net income of sar 665 million in Fy 09, significantly lower than 2008 net income of sar 1,224 million. Net income is expected to grow at a caGr of 17.4% over our forecast horizon compared to a caGr of 13.3% between 2004 and 2008. this expected caGr for the 2009-2013 period compares well with the estimated sector average of 14%.

24%

42%

-9% -54%

179%

-46%

53% 20% 3% 0%

-75%

0%

75%

150%

225%

0

400

800

1,200

1,600

2004 2005 2006 2007 2008 2009 E 2010 E 2011 E 2012 E 2013 E

SAR

mill

ion

SHB NI SHB NI Growth


caGr=17.4%

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vaLuation


the Dividend Discount Model (DDM) used for the valuation of saudi hollandi Bank was based on a five-year earnings forecast period and has yielded an intrinsic value of sar 35.61 per share.


baLance sHeet


2009 E 2010 E 2011 E 2012 E 2013 E

Net Income (SAR million) 665 1,017 1,221 1,262 1,265








Saudi Hollandi Bank Fair Value (SAR) 35.61

(SAR million)




2008 2009 E 2010 E 2011 E 2012 E 2013 E

2,791 8,115 8,598 9,588 10,423 11,124

365 4,254 4,852 5,598 6,386 7,249

38,017 40,660 46,661 52,844 59,905 67,571

Net Investments


Net Other Assets

Total Assets

Customer Deposits


Other Liabilities

18,368 19,689 20,974 22,708 24,586 26,694

466 488 511 546 577 605

1,429 1,311 1,504 1,703 1,931 2,178

61,436 74,517 83,100 92,988 103,808 115,420

43,012 50,052 57,087 65,861 75,129 85,278

9,286 14,875 15,291 15,196 15,613 15,985

1,948 1,982 2,261 2,608 2,975 3,377


Total Liabilities

Share Capital

Statutory Reserve

General Reserve

1,475 775 775 775 775 775

55,721 67,684 75,414 84,441 94,493 105,415

2,646 3,308 3,308 3,308 3,308 3,308

1,915 2,081 2,169 2,386 2,485 2,703

130 130 150 170 170 170

Other Reserves

Retained Earnings


Sta Share Plan Reserve

Total Equity Attributable to Equity Holders of the Bank

(45) (20) 21 16 10 -

825 1,125 1,678 2,173 2,769 3,183

233 200 356 488 568 632

11 11 5 6 8 9

5,715 6,834 7,686 8,547 9,316 10,005



5,715 6,834 7,686 8,547 9,316 10,005

61,436 74,517 83,100 92,988 103,808 115,420




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Total Assets

Customer Deposits

Total Liabilities

Total Equity




Net Income



NPL Coverage

ROAA

ROAE


Cost/Income


Liquidity

E ciency

Capital Adequacy



Asset Quality

Pro tability

2008 2009 E 2010 E 2011 E 2012 E 2013 E

37.97% 6.95% 14.76% 13.25% 13.36% 12.80%

21.87% 21.29% 11.52% 11.90% 11.64% 11.19%

24.30% 16.37% 14.06% 15.37% 14.07% 13.51%

21.49% 21.47% 11.42% 11.97% 11.90% 11.56%

25.70% 19.57% 12.48% 11.20% 8.99% 7.40%

20.38% 10.73% 12.87% -0.78% 2.19% -0.79%

16.96% 6.16% 5.19% 10.09% 10.11% 7.13%

18.86% 10.37% 9.93% 2.50% 3.39% 1.07%

179.03% -45.64% 52.85% 20.03% 3.37% 0.26%

2.73% 4.35% 3.70% 2.96% 2.66% 2.26%

0.07% 1.85% 1.32% 0.74% 0.51% 0.32%

107.80% 106.40% 110.00% 115.00% 112.00% 115.00%

2.19% 0.98% 1.29% 1.39% 1.28% 1.15%

23.85% 10.60% 14.01% 15.04% 14.13% 13.09%

88.39% 81.24% 81.74% 80.24% 79.74% 79.24%

38.36% 36.96% 36.21% 38.52% 42.35% 46.06%

9.30% 9.17% 9.25% 9.19% 8.97% 8.67%

Liquidity

E ciency

Capital Adequacy



Asset Quality

Pro tability

incoMe stateMent

ratio anaLYsis





Net Exchange Income


Net Trading Income

(SAR million)

2008 2009 E 2010 E 2011 E 2012 E 2013 E

2,977 2,652 3,279 3,921 4,940 6,177

1,532 1,052 1,473 2,129 3,109 4,361

1,445 1,600 1,806 1,792 1,831 1,817

456 484 510 561 618 662

88 98 110 122 136 151

5 2 (1) (2) (3) (4)

115 144 137 152 132 117

(SAR million)








0.6 0.3 0.4 0.5 0.5 0.4

0.5 0.6 0.5 0.4 0.2 0.3

2,111 2,330 2,562 2,626 2,715 2,744

453 485 531 584 691 777

74 78 84 94 105 115

63 66 69 74 78 82

220 232 243 260 276 289Operating Expenses Before Provision for Credit Losses and Impairment ChargeProvision for Credit Losses, Net of Recoveries



Net Income

810 861 927 1,012 1,150 1,264

25 752 617 394 303 215

52 52 0 0 0 0

887 1,665 1,545 1,405 1,453 1,479

1,224 665 1,017 1,221 1,262 1,265

Net Income Attributable to Equity Holders of the Bank 1,224 665 1,017 1,221 1,262 1,265



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fair vaLue definition

recoMMendation guide

address

discLaiMer

it is an unbiased estimate of the 12-month potential market price of the stock

buY: upside potential in share price is more than 30%

accuMuLate: upside potential in share price is between 10 and 30%

HoLd: upside or downside potential in share price less than 10%

reduce: Downside potential in share price is between 10 and 30%

seLL: Downside potential in share price is more than 30%

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Phone: +966 1 2199300 • Fax: +966 1 4627942 • Email: [email protected]

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Downside -30% -10% +10% +30% upside

seLL reduce HoLd accuMuLate buY

kingdom of saudi arabiasaudi banks

defying the downturn - ready for the recovery...saudi arabia. for 2009, spending is budgeted at sar...

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