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Saudi Arabia's banks are expected to do well in 2024 as potential interest rate cuts lead to corporate loan growth while the lenders' robust asset quality moderate any downward risks, investment bank and asset manager SNB Capital said in a recent note.
The banking sector has a 2024 price-to-book (P/B) ratio of 1.7x, inline with last 10 years average of 1.6x, the investment bank said.
With the US Federal Reserve turning towards a softer monetary stance, there is an increased focus to identify banks that benefit from rate declines, the report said.
This would usually favour retail focused banks over corporate banks, given lower sensitivity of retail loans to rate change. However, as the strong loan growth of the last few years reduced funding room, the pricing power of banks to lower cost of funds will be reduced.
"Hence, we expect cost of funds to remain generally upward sticky. Overall, we expect the sector’s NIMs (net interest margins) to marginally decline from 3.3% in 2023f to 3.2% in 2024f," analyst Nauman Khan said.
The brokerage expects loan growth to remain robust in 2024 as a moderation in interest rates will positively impact credit demand.
"We expect the sector to deliver a c14% YoY (year-on-year) loan growth in 2024f vs c11% in 2023f, driven by increased infrastructure spending. Accordingly, we expect corporate segment to drive the loan growth as work on the Mega projects and other Vision 2030 programs pick-up."
For retail banks, SNB Capital expects demand to remain moderate, impacted by higher interest rates and normalization of mortgages.
Overall asset quality remained robust in the Saudi banking sector with NPL ratio standing at 1.5% in Q3 2023, although the coverage ratio declined to 139% vs 149% in Q4 22, the report noted.
"Going forward, we expect the natural aging of loans to marginally increase NPL while the overall CoR (cost of risk) is expected to remain low. Based on our coverage, we expect the sector CoR to stand at c0.6% over the next few years vs an average of 0.8% in 2018-22. We believe moderation of CoR and C-I (cost-to-income) ratio will reduce the impact of NIMs compression on the sector earnings."
SNB Capital said of the bank stocks under its coverage, it prefers Bank Albilad, Riyad Bank (RIBL) and Banque Saudi Fransi (BSFR). It upgraded Bank Albilad to 'Overweight' rating with a revised price target of SAR 49.6 and maintained 'Overweight' rating on BSFR and RIBL.
"Albilad and RIBL's balanced loan portfolio is a key positive, while resilient BSFR NIMs, due to increased hedge position is a key advantage."
SNB Capital downgraded Alinma Bank to 'Neutral' rating while maintaining a 'Neutral' rating on Al Rajhi Bank and Bank AlJazira.
(Writing by Brinda Darasha; editing by Seban Scaria)
