• Global values BSF stock at SR54.6 and recommends ‘Buy’ on the stock
Banque Saudi Fransi –Result Update - Banque Saudi Fransi’s (BSF) results (FY08) showed profitability increase of 3.5% (from SR2.7bn in 2007 to SR2.8bn in 2008) as compared to YoY decline of 9.8% in 2007. The bank’s special commission income showed an increase of 7.4% (from SR4.9bn in 2007 to SR5.2bn in 2008), resulting in an improved core banking performance posting net special income increase of 23.2% in FY08. The bank’s balance sheet footing posted a 3-year CAGR (2005-08) of 23.1%, while recording an increase (YoY) of 26.1% (from SR99.8bn in 2007 to SR125.8bn in 2008).
Our fair value for BSF is estimated to be SR54.6 per share. According to our fair value the banking scrip is 11.3% higher than the current market price of SR49.0 (as on Mar 18, 2009). Therefore, we maintain our earlier recommendation of “Buy” on the stock with a medium term perspective.
Financial Performance -FY08
BSF recorded a profitability increase of 3.5% (from SR2.7bn in 2007 to SR2.8bn in 2008) as compared to YoY decline of 9.8% in 2007. The bank’s annual performance was better than the listed Saudi banking sector that registered a marginal growth of 0.5% in FY08. The bank’s special commission income showed an increase of 7.4% (from SR4.9bn in 2007 to SR5.2bn in 2008), while the lower interest rates environment is believed to be the main reason for decline in special commission expense by 6.3% (YoY). Overall, the bank showed an improved core banking performance recording net special income increase of 23.2% in FY08. Although BSF’s commission earning rate of 6.4% in FY07 declined to 5.5% in FY08, the bank was able to maintain its spreads at 2.9% as the commission expense rates also dropped from 3.5% in FY07 to 2.6% in FY08.
Source: BSF Financial Reports & Global Research
We expect that going forward (esp. in 2009) as compared to 2008, it will be much more challenging to fight the contraction in the banking spreads across the industry. The year 2008 was different because interest rates mainly declined in 4Q08, thus providing a window for banks to have sustained higher banking spreads for the major part of the year before feeling the pinch in the last quarter. The year 2009 has started amidst low interest rate environment, which is not expected to change very soon due to continuing global recessionary trends.
BSF’s enhanced core banking performance was augmented by the non-interest income increase (YoY) of 11.8% in FY08. Although the bank’s net fees from banking services witnessed an annual decline of 7.0% (directly affected by TASI decline of 56.5% in 2008, at times of global economic recession also termed as Great Recession), dividend income dropped by 51.6% and net losses of SR55.6mn on non-trading investments were recorded, the pressure on the non-interest income was offset by an increase of 28.3% in exchange income and rise in net trading income (due to higher income from net derivatives) by 60.8%. Due to stressful global financial conditions, the bank after realizing net losses on non-trading investments (loss of SR171.6mn recorded for AFS portfolio) has already placed an impairment charge of SR35mn for AFS in 2008.
An increase of 17.7% in total operating income (from SR3.6bn in 2007 to SR4.2bn in 2008) was not largely subdued by the rise in total operating expenses. The total operating expenses recorded an increase of 58.8%, which if adjusted for impairment charge on investments of SR410mn results in YoY increase of 16.2%. A significant impairment charge was basically allocated for losses in investments portfolio linked to the effects of global financial crisis. Even after absorbing these high impairments, BSF’s income from operating activities showed (YoY) an increase of 3.2%. Overall, the bank’s net income recorded (YoY) an increase of 3.5% (from SR2.7bn in 2007 to SR2.8bn in 2008).
Source: BSF Financial Reports & Global Research
The bank’s improved performance did not fully translate into the bank’s return ratios. The increased profitability while higher growth in asset and equity base led to ROAA decline from 3.0% in 2007 to 2.5% in 2008, and ROAE drop from 26.2% in 2007 to 22.2% in 2008.
BSF with an asset base (FY08) of SR125.8bn was able to capture 11.9% market share of the total assets (SR1.0tr) of the listed Saudi banks. The bank’s total assets posted an increase (YoY) of 26.1% (from SR99.8bn in 2007 to SR125.8bn in 2008), slightly higher than the growth recorded in 2007. Gross loan and advances that continued to dominate (64%) the bank’s assets, posted a (YoY) growth of 34.7% (from SR60.6bn in 2007 to SR81.7bn in 2008). The customer deposits (FY08) constituting 74% of BSF’s funding sources, recorded (YoY) growth of 25.4% (from SR74.0bn in 2007 to SR92.7bn in 2008). The customer deposit base remained dominated by Time deposits with a share of 65.3% of the total.
Source: BSF Financial Reports & Global Research
BSF has 78.1% of its lending in commercial loans. A higher increase in NPLs as compared to the rise in provisioning led to significant decline in NPL coverage from 189.6% in 2007 to 111.0% in 2008. However, the bank’s NPL coverage still remains in comfortable range. Overall, BSF remains an adequately capitalized bank with Tier-1 capital (FY08) of SR13.5bn and the Tier-1 ratio of 11.0%.
Financial Performance -4Q08
BSF (YoY) net income increase of 3.4% largely driven by the improved core banking performance helped the bank overcome the dampened 4Q08 results that recorded a decline of 21.6% (QoQ) and 11.3% (YoY). The increase in special commission income by 17.8% while special commission expense rise of 3.0% led to an encouraging increase in the net special commission income by 35.3% (from SR602mn in 4Q07 to SR815mn in 4Q08). The effects of declining stock markets were evident as the fees from banking services posted a decline of 5.7%, net exchange income decreased (YoY) by 0.4% and net trading income (YoY) dropped by 41.2%. The pressure on non-interest income was exacerbated by recording of higher impairment charges for credit losses (SR78.8mn) and investments (SR208.6mn). This provisioning by the bank was carried out in the light of international economic slump. BSF’s total assets growth (9M08) of 21.2%, on full year basis posted (YoY) growth of 26.1% (from SR99.8bn in FY07 to SR125.8bn in FY08) as compared to an annual growth of 25.4% in FY07.
Saudi banking sector with relatively strong and stable balance sheet footing, accompanied with cautiously optimistic macro-economic outlook, favourable demographics, ability to support infrastructure investments through sovereign muscle, sectoral reforms, and dependent on other market factors, holds significant potential to allure investments. Having said that, containing the interest margins, managing credit and market investments risks remain a few of the challenging areas for the Kingdom’s banks. BSF has well established brand name in the Kingdom and we believe that in near term (esp. 2009) the bank’s focus will be skewed towards sustaining interest spreads rather than balance sheet growth. We expect BSF’s total assets to grow at a 4-year CAGR (2008-12) of 8.0%, posting an annual growth (FY09) of 7.0%. The net loans and advances are expected to record a 4-year CAGR (2008-12) of 9.0%, and the customer deposit base showing a 4-year CAGR (2008-12) of 10.0%. The bank’s net income is estimated to record (FY09) increase of 6.9%.
