This analysis is by Bloomberg Intelligence Senior Analyst Edmond Christou, with assistance from Analyst Lea El-Hage. It appeared first on the Bloomberg Terminal.
Saudi banks are better placed to navigate a gradual downward shift in Federal Reserve rate policy vs. 2019-20, after they booked less margin expansion than hoped last year due to structural changes in balance sheets to a more interest-sensitive liability mix and greater fixed-rate asset exposure. The sector is also taking steps to aid the kingdom’s five-year, $521 billion project pipeline via long-term funding diversity. Banks are optimistic about project credit drawdowns, underpinning 12-15% compound annual growth in commercial loans, based on 50%-plus credit utilization, or conservative 5-10% growth at 20-40% use.
Saudi banks’ returns metrics are crucial to valuation rating
Albilad and Alinma are trading at higher price to book (P/B) than Riyad Bank with a similar return. These banks focus on scaling up operations, growing fast and tackling inefficiencies, but Albilad still has work ahead to cut high cost to income. Their tactics become harder amid tighter liquidity. Al Rajhi’s has the highest returns vs. peers, but its P/B is at a 28% premium (with the six-month average at 33%). Rajhi’s ROE may reset lower amid capital retention and higher cost of capital. SNB and SAB offer higher returns for a close valuation to Saudi Fransi.
Saudi Fransi and ANB are undergoing strategic transformation. The market may find Riyad Bank’s higher returns unsustainable vs. Albilad and Alinma as Riyad trades below their multiples. Al Jazira needs solid strategic KPI to beat returns and justify its rating.
Saudi banks rated lower on new norms; pivot may ease Fed’s scar
Saudi banks trade at 1.6x forward price-to-book, a premium over regional peers, supported by a stronger asset-growth trajectory given the kingdom’s $521 billion project pipeline. Yet P/B has rated lower since peaking at 2.3x in May 2022, reflecting the emergence of new norms — modest liquidity despite soaring oil prices, greater fixed-rate exposure and rising cost of capital. Saudi banks’ spread became less sensitive to rate changes as margin grew 19 bps in 2022 (27 bps UAE).
Oil-price strength isn’t filtering into domestic liquidity, which has the merit of reducing the oil volatility hit to the sector, pushing banks to manage funding structure and risk profile properly. This implies more debt issuance and deposit-mix changes, leading to a higher cost of capital. The latter velocity may decrease as the Fed pivots on rates.
Bloomberg
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