Increasing Funding Costs And Fintech Disruptions Will Erode Returns

Key Takeaways

• Heightened competition, rising funding costs, and digital disruption threaten profitability and limit BSF's ability to diversify and grow revenue streams.
  
• Increasing regulatory pressure, ESG expectations, and exposure to sector shocks raise risks to asset quality and long-term earnings stability.
  
• Digital innovation, wealth management expansion, and strong asset quality position the bank for sustainable growth, improved margins, and resilience amid supportive economic policy.

Catalysts

Provides banking and financial services for individuals and businesses in the Kingdom of Saudi Arabia and internationally.

• The persistent shift towards higher-cost, interest-bearing deposits and a declining share of noninterest-bearing deposits is increasing funding costs, which will continue to undermine net interest margins and squeeze profitability as competition for deposits intensifies in a crowded market.
  
• Intensifying digital disruption from fintech and big tech entrants will threaten BSF's traditional banking revenue and erode fee and commission income, while legacy technology investments and the slow rollout of digital transformation initiatives may not keep pace, stalling BSF's ability to diversify revenue streams in the long term.
  
• BSF's heavy exposure to corporate and government-related lending increases vulnerability to sector-specific shocks, especially as regulatory changes or economic slowdowns could trigger sudden spikes in non-performing loans and sharply increase credit loss provisions, negatively impacting both net income and asset quality.
  
• As ESG standards and sustainable finance expectations increase globally, Saudi Arabia's oil dependency will make it harder for BSF to attract international funding at attractive rates, likely resulting in higher funding costs and limiting the bank's ability to expand its lending book and grow revenue as global capital flows shift away from carbon-intensive regions.
  
• Intensifying competition from domestic peers and neobanks will continue compressing lending and fee margins, while regulatory tightening on capital and compliance will drive up costs, together leading to structurally weaker earnings growth and lower returns on equity over the long horizon.

Banque Saudi Fransi Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Banque Saudi Fransi compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Banque Saudi Fransi's revenue will grow by 8.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 49.5% today to 45.8% in 3 years time.
• The bearish analysts expect earnings to reach SAR 5.2 billion (and earnings per share of SAR 1.96) by about June 2028, up from SAR 4.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 9.4x today. This future PE is greater than the current PE for the SA Banks industry at 9.5x.
• Analysts expect the number of shares outstanding to decline by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.33%, as per the Simply Wall St company report.

Banque Saudi Fransi Future Earnings Per Share Growth

Risks

• The bank is experiencing robust loan growth driven by both commercial and consumer lending, coupled with strong asset quality, which is supported by a low non-performing loan ratio and high NPL coverage, indicating potential for sustainable revenue and earnings growth in the medium to long-term.
  
• BSF's ongoing digital transformation, branch modernization, and investment in new technology platforms-including the launch of a revamped mobile app and integrated corporate portal-position the bank to capture market share, improve cost efficiency, and diversify its fee income streams, which may support top line and net margin expansion.
  
• The bank's strategic focus on expanding its wealth management, private banking, and new asset management offerings (such as through partnerships with BlackRock) is likely to increase high-fee, noninterest income, contributing to revenue growth and higher net margins.
  
• Saudi economic policy tailwinds, including Vision 2030, continued large-scale project financing, and growing demand for mortgages and personal loans, could drive broad-based credit demand and investment, supporting BSF's loan book growth and operating income.
  
• Prudent capital management reflected in a strong capital adequacy and Tier 1 ratio, together with proactive risk and interest rate management, provides resilience against shocks and supports the bank's ability to invest and grow, underpinning long-term earnings and return on equity.

Valuation

• The assumed bearish price target for Banque Saudi Fransi is SAR16.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Banque Saudi Fransi's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SAR24.6, and the most bearish reporting a price target of just SAR16.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SAR11.3 billion, earnings will come to SAR5.2 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 20.3%.
  
• Given the current share price of SAR16.52, the bearish analyst price target of SAR16.0 is 3.2% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.