GIH on Al Rajhi

Al Rajhi Banking & Investment Corp's (RJHI) marginally improved results as compared to the sector performance signals encouraging outcome of the diversification strategy adopted by the bank in managing both its financing and investment portfolios.
The bank’s strict adherence to Shariah-compliant activities along with no exposure to the global mortgage market has largely facilitated it in escaping the severe repercussions, which could have arose if exposed to toxic financial assets.
Thus, better positioning the bank to be preferred by the market segment inclined towards Islamic over conventional finance. In addition, RJHI’s focus on overseas expansion will better enable the bank to more effectively diversify its income sources.
However, as witnessed across the sector, RJHI may not be able to escape the contraction in banking spreads (especially because the demand deposits constituting the majority of its funding base would allow less flexibility to adjust in a falling interest rate environment). Although the bank’s dominance in retail segment provides it with a chance of earning relatively better returns on its investment portfolio, it may not be in a very strong position to re-price its corporate investments. The slowdown in the economy also calls for greater attention to avoid deterioration in retail investments exposure. We believe that the bank’s near term focus will be towards better managing investment spreads rather than balance sheet growth.
Income Statement
RJHI’s profitability results posted an increase of 1.2% (from SR6.4bn in 2007 to SR6.5bn in 2008) as compared to the decline of 11.7% in 2007. The bank’s improved performance (attributable to income growth from both core banking and non-commission activities) was somewhat better than the listed Saudi banking sector that registered a marginal growth of 0.5% in FY08. The Saudi banks’ 2008 performance was mainly dampened by 4Q08 results that witnessed pressure due to setting aside of higher financial allocations by the banks in consideration to the decline in their investment portfolios.
The bank’s investments income (FY08) recorded an increase of 9.8% (from SR8.5bn in 2007 to SR9.4bn in 2008), while the investments expense during the period showed a rise of 7.6%. At times of the softening interest rates environment, RJHI’s successful management of its investments income and expenses led to an overall improved core banking performance posting an increase in net income from investments of 10% (from SR7.7bn in 2007 to SR8.4bn in 2008).
However, the higher impairment charge for investments and others in 2008 had a dampening impact on the net income from investments after PILs (provisions for investment losses), resulting in a decline of 0.8%. RJHI’s top-line performance was augmented by an increase (y-o-y) in non-commission income by 30.1% in FY08. The bank’s continued efforts to cope with the challenging capital market conditions (TASI decline of 56.5% in 2008), showed positive results as the net fees from banking services (supported by fees from share trading services, payment services, remittance business, etc) recorded an increase of 26.6% in FY08. It is noteworthy that an increase of other operating income by 265% (FY08: SR279.6mn) could be one-off, so even after taking that into account the bank’s non-commission income still showed an increase of 12.6% in FY08.
-- Extracted from an equity research report released in May 2009 by Global Investment House
(This story appeared in The Malaysian Reserve on May 18, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)