Digital Transformation And Regional Expansion Will Drive Long Term Banking Franchise Strength

Catalysts

About National Bank of Bahrain B.S.C

National Bank of Bahrain B.S.C is a leading Bahraini banking group providing retail, corporate, Islamic and wealth management services across Bahrain, Saudi Arabia and the UAE.

What are the underlying business or industry changes driving this perspective?

• Potential merger with BBK is set to create a larger national champion with a stronger balance sheet, allowing deeper deployment into higher yielding corporate, mortgage and transaction banking assets, which should support revenue growth and earnings scalability.
• Ongoing digital transformation and over BHD 100 million of technology investments are driving rapid customer migration to low cost digital channels, which should lift fee income while improving cost efficiency and net margins over time.
• Fast growing franchises in Saudi Arabia and the UAE, supported by full commercial licenses and cross border capabilities, position the bank to capture expanding regional trade and credit demand, underpinning long term loan growth and diversified earnings.
• Scaling of wealth management, structured products and Islamic banking offerings enables deeper share of wallet with affluent and mass affluent clients, supporting higher fee and commission income and a richer revenue mix less dependent on spread income.
• Disciplined credit risk management with resilient asset quality, stable cost of risk and strong liquidity buffers provides capacity to reallocate assets into higher return portfolios as funding pressures normalize, supporting net interest income and sustainable returns on equity.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming National Bank of Bahrain B.S.C's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 44.2% today to 44.1% in 3 years time.
• Analysts expect earnings to reach BHD 105.3 million (and earnings per share of BHD 0.05) by about December 2028, up from BHD 83.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 13.7x today. This future PE is greater than the current PE for the BH Banks industry at 8.4x.
• Analysts expect the number of shares outstanding to decline by 4.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The proposed merger with BBK could be delayed, abandoned or deliver weaker-than-expected synergies if due diligence uncovers issues or integration proves complex, which would limit the anticipated scale benefits and constrain growth in revenue and earnings over the medium term.
• Persistent pressure on deposit pricing and an unfavourable yield curve, even after rate cuts, may prevent net interest margins from stabilising, eroding net interest income and ultimately weighing on net profit growth despite loan expansion.
• Intensifying competition in Bahrain’s banking sector, including from digital and AI enabled rivals, could slow NBB’s above market loan and deposit growth, reduce its ability to win higher value customers and compress pricing power, putting long term revenue and net margin expansion at risk.
• Rapid growth in overseas franchises in Saudi Arabia and the UAE and heavy reallocation from liquid assets to higher yielding investments may increase concentration and execution risk, so any credit or market downturn in those markets could negatively affect asset quality, provisions and earnings.
• Ongoing cost inflation from digital transformation, sustainability initiatives and talent development may outpace productivity gains, especially if fee and transaction income growth slows, which would push the cost to income ratio higher and constrain operating leverage and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of BHD0.6 for National Bank of Bahrain B.S.C based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be BHD238.6 million, earnings will come to BHD105.3 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of BHD0.5, the analyst price target of BHD0.6 is 16.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.