Banking Industry Analysis The second largest industry in the Middle East with $ 290bn of total assets in 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 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.
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.
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 clients and aims to expand its branch network to 50 branches by 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.
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
2007 performance Analysis Balance Sheet Income Statement Total Income from Investment
Balance Sheet SR Assets Cash & balances with SAMA8,795,9118,682,8229,243,90213,141,199 %total11.30%9.14%8.79%10.52% %increase-1.29%6.46%42.16% Investments64,771,71280,134,68489,563,188104,875,445 %total83.20%84.32%85.13%83.98% %increase23.72%11.77%17.10% Net fixed assets950,3131,364,2051,976,5512,591,101 %total1.22%1.44%1.88%2.07% %increase43.55%44.89%31.09% Total assets77,854,77495,037,981105,208,744124,886,482 SR Liabilities and Equity Customer deposits60,913,51370,112,19273,397,98089,725,167 %total87.87%85.95%86.32%88.59% %increase15.10%4.69%22.24% Total liabilities69,318,80781,568,68785,029,268101,280,370 Total equity8,535,96713,469,29420,179,47623,606,112 %total10.96%14.17%19.18%18.90% %increase57.79%49.82%16.98% Total liabilities and equity77,854,77495,037,981105,208,744124,886,482
Income Statement SR Net Investments income4,140,7615,686,2676,826,0867,721,812 Exchange income242,543360,915390,299470,872 Services fee income669,7931,523,5471,400,463980,625 Other operating income138,494411,929893,050147,787 Total operating income5,191,5917,982,6589,509,8989,321,096 Depreciation and amortization 154,888155,948183,778288,159 Provision for investments860,059535,973252,644443,240 Other expenses1,240,7291,657,4101,771,5852,140,040 Total operating expenses2,255,6762,349,3312,208,0072,871,439 Net income2,935,9155,633,3277,301,8916,449,657
Total Income from Investment SR x YoY Growth Mutajara % Installment % Instisnaa % Murabaha % Other % Total Income from Investment % Source: Al Rajhi Financial Reports
Valuation We used two techniques: 1. Dividend Discount Model 2. Relative Valuation (P/E)
Valuation Historical rates of return:
DDM Required Return (using CAPM) RP m is 5.5% RFR is 4% Beta?
DDM Beta is Required return = 10.36%
DDM From our analysis, we have estimated the growth for the three next years to be: 50% in % in % in 2010
DDM Sensitivity Analysis
Relative Valuation We estimated the fair value for AlRajhi Bank as SR 112.5, which represents 14.44x of PE ratio of 2010e
Relative Valuation Relative PE RAJHI = (20.33) = 14.11x Fair Price RAJHI = (7.79) = SR 110
Conclusion We estimated the value for Al Rajhi share to be: SR 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.