Al Rajhi’s share jump isn’t just another TASI rally

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MOSCOW/RIYADH/CAIRO: When the Saudi stock market index sees a rally, usually most shares get an increase in value. However, this isn’t the case for Al Rajhi Bank.

Al Rajhi Bank, whose shares on Sunday recorded their highest level since April 2006 at SR135.20 ($36.05), is in a league of its own among all Gulf Cooperation Council Islamic or Shariah-compliant banks.

“Al Rajhi Bank has been showing significant earning growth (double digit) despite the negative impact of economic lockdown last year, and many analysts still see the double digit growth continuing this year which explains the rise of the stock price ahead of the third quarter earnings announcement,” Mohammed Al-Suwayed, CEO of Razeen Capital told Arab News.

Islamic banks and conventional banks usually have almost the same quality of assets in the GCC; non-performing loans (NPL) ratio in Islamic banks was 3.5 percent in 2020 compared to the slightly higher 3.8 percent for conventional ones according to S&P Global. This also applies to the coverage ratio. Thus, differences between the two types of banks as a whole are sometimes brushed off.

However, the Islamic Al Rajhi Bank has been experiencing a solid and steady performance compared to other banks in the Kingdom and the region as a whole. These strong fundamentals probably helped in its share’s jump to the highest price in more than 15 years.

In terms of the value of total assets, It is the largest Islamic bank in the Gulf region. As of June 30 2021, its total assets were valued at more than $146 billion which is also the fifth largest in the region when we include conventional banks in the comparison.

S&P Global Ratings predicts the bank’s NPL ratio to be 0.69 percent by the end of 2021.

The bank’s selective process in providing loans means this is less than half of the other Saudi banks’ readings and the lowest among Saudi and other GCC countries where data were available: Kuwait, Qatar and the UAE.

The bank’s return on assets ratio is similarly strong, forecast to be 2.32 percent for 2021 — higher than all of its competitors in both the Kingdom and the region.

Not all the numbers are as positive, however. Al Rajhi did not have the best cost metric in 2019 and 2020.

But it is still expected to have the lowest ratio in the Kingdom in 2021, with S&P projecting it to be just 0.71 percent by the end of the year. This is marginally lower than other Saudi banks.

Al Rajhi shares traded with price-to-book value of 5, the highest multiple among Saudi bank stocks, analysts at KAMCO Invest pointed out in a report covering the GCC banking sector in Q2 2021.

For example, Saudi National Bank shares traded with price-to-book multiple of 1.8, Riyad Bank 1.8, Saudi British Bank 1.3, Banque Saudi Fransi 1.4, Alinma Bank 1.7.

Al Rajhi stock traded with a dividend yield of 2.3 percent compared to 2.2% for Saudi National Bank.

Its shares strongly outperformed the rest of Saudi banks in terms of growth since the beginning of 2021 till end of June.

The stock grew by 67 percent compared to 40 percent for Alinma, the second best performing banking stock at the time, according to KAMCO invest.