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Al Rajhi Bank Stock Report

Al Rajhi Bank Stock Report. 30 May 2008. Abdulaziz Almuammar Hesham Alshehah Mazen Alnaser. Presented by:. Outline. Banking Industry Analysis Recent Developments 2007 performance Analysis Valuation Conclusion. Banking Industry Analysis.

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Al Rajhi Bank Stock Report

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  1. Al Rajhi Bank Stock Report 30 May 2008 Abdulaziz Almuammar HeshamAlshehah MazenAlnaser Presented by:

  2. Outline • Banking Industry Analysis • Recent Developments • 2007 performance Analysis • Valuation • Conclusion

  3. Banking Industry Analysis • The second largest industry in the Middle East with $ 290bn of total assets in 2007. • The penetration in Saudi Arabia is the least between GCC with %43 of total loans to GDP and %50 of total deposits to GDP. • There is one branch for every 20000 people. • Reserve requirements (13 percent) has come against a backdrop of slowing interest rate cuts. • The reverse repo rate was lowered for the first time since mid-March on May 3, to 2 percents from 2.25 percent.

  4. Banking Industry Analysis • Greater competition from the new investment companies and commercial banks (e.g. Al Enma Bank) will have its effect on the profit margins.

  5. Recent Developments • In Feb 24, the board agreed to increase the capital from SR 13.5bn to SR 15bn and to transfer SR 88.3mn of retained earning to the general reserve. • Al Rajhi by initiating its operations with 19 branches and one center in Malaysia in 2007 has now 40000 clients and aims to expand its branch network to 50 branches by 2010. • Initial acceptance to open a branch in Kuwait was given by the Kuwait central bank. By opening this branch, Alrajhi is continues growing strategy in international Banking business by opening new branches after Malaysia.

  6. Recent Developments (cont.) • The bank has participated in five significant finance projects in 2007, among them is the important Red Sea Gateway Terminal as the most crucial lending project in Saudi Arabia. • A lot of products and services were introduced in 2007: • Al Rajhi Petrochemical & Cement Mutual fund • “30 minutes” campaign which allow clients to get loans in 30 minutes • Estesna services for home building. • Partnership program for home buying in 25 years

  7. 2007 performance Analysis • Balance Sheet • Income Statement • Total Income from Investment

  8. Balance Sheet

  9. Income Statement

  10. Total Income from Investment

  11. Valuation • We used two techniques: • Dividend Discount Model • Relative Valuation (P/E)

  12. Historical rates of return: Valuation

  13. DDM • Required Return (using CAPM) • RPm is 5.5% • RFR is 4% • Beta?

  14. DDM • Beta is 1.565 • Required return = 10.36%

  15. DDM • From our analysis, we have estimated the growth for the three next years to be: • 50% in 2008 • 33% in 2009 • 25% in 2010

  16. DDM • Sensitivity Analysis

  17. We estimated the fair value for AlRajhi Bank as SR 112.5, which represents 14.44x of PE ratio of 2010e Relative Valuation

  18. Relative PERAJHI = 0.3631 (20.33) + 6.7293 = 14.11x Fair PriceRAJHI = 14.11 (7.79) = SR 110 Relative Valuation

  19. Conclusion • We estimated the value for Al Rajhi share to be: SR 111.25 based on DDM (50%) and Relative valuation (50%) • According to our fair value AlRajhi and based on the current market price of SR 87.5 (as on May 29th, 2008), the share is currently trading at 27.1% discount to our fair value estimate indicating a STRONG BUY.

  20. Thank you

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