Expanding Digital Frontiers And Youth Markets To Drive Future Bank Growth

Key Takeaways

• Leveraging digital strategies and youth engagement may enhance retail growth and optimize revenue streams while lowering operational costs.
  
• Expanding SME financing through programs like Kafalah and focusing on cross-selling could diversify revenue and improve earnings efficiency.
  
• Rising cost of funds and slow deposit repricing could pressure Alinma Bank's net margins and profitability despite high loan growth.

Catalysts

Provides banking and investment services in the Kingdom of Saudi Arabia.

• Alinma Bank plans to continue developing its affluent and high-net-worth customer base and to attract the youth segment, which could drive retail growth opportunities and positively impact revenue.
  
• A significant potential lies in the bank's digital strategy, which aims to develop a new e-Trade platform and enhance their digital mortgage journey, potentially optimizing customer experience and lowering operational costs to improve net margins.
  
• The bank is focused on expanding SME financing, which includes leveraging the Kafalah program which provides credit risk guarantees, thus possibly enhancing asset growth and diversifying revenue streams.
  
• Alinma is emphasizing cross-selling across various departments (e.g., retail to corporate, corporate to retail), which may bolster cash flow management and increase overall earnings efficiency.
  
• With expected growth in CASAs – aided by enhanced customer acquisition and payroll strategies – Alinma Bank anticipates an improvement in cost-to-income ratios, thereby potentially enhancing net profit margins.

Alinma Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alinma Bank's revenue will grow by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 55.4% today to 53.2% in 3 years time.
• Analysts expect earnings to reach SAR 7.8 billion (and earnings per share of SAR 3.09) by about November 2027, up from SAR 5.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2027 earnings, up from 13.0x today. This future PE is greater than the current PE for the SA Banks industry at 13.3x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.13%, as per the Simply Wall St company report.

Alinma Bank Future Earnings Per Share Growth

Risks

• The guidance for margins has been downgraded, and future rate cuts may not significantly improve margins due to slow deposit repricing, potentially impacting net profit margins.
  
• The cost of funds continues to rise despite improvements in the CASA ratio, which could exert pressure on net margins and profitability.
  
• High loan growth is supported by increased reliance on time deposits, which could lead to increased cost of funding and affect the bank's net interest margin.
  
• Increased risk-weighted assets relative to total assets indicate higher risk exposure, which could impact capital ratios and earnings if asset performance declines.
  
• Uncertainties in SME and mid-corporate sectors could affect default rates and lead to higher provisioning requirements, impacting net earnings.

Valuation

• The analysts have a consensus price target of SAR 34.0 for Alinma Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SAR 39.0, and the most bearish reporting a price target of just SAR 30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SAR 14.6 billion, earnings will come to SAR 7.8 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 20.1%.
• Given the current share price of SAR 27.55, the analyst's price target of SAR 34.0 is 19.0% 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.