Saudi Banking Competition And Rising Costs Will Squeeze Margins

Key Takeaways

• Intensifying competition and digital disruption are compressing margins and threatening Alinma's traditional customer base and revenue streams.
  
• High operating expenses and regulatory pressures risk eroding profitability and hindering sustainable long-term growth.
  
• Robust loan growth, digital innovation, strong risk management, solid capital buffers, and expanding non-interest income position the bank for sustainable, diversified profitability.

Catalysts

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

• Fierce competition in the Saudi banking sector, alongside accelerating adoption of digital-native and non-traditional banking providers, is expected to intensify margin pressure for Alinma Bank, leading to ongoing compression of net interest margins and stagnating or declining revenue over time.
  
• The persistent shift in young demographics toward digital-first, platform-based financial solutions is likely to gradually erode Alinma's traditional retail and SME customer base, resulting in slower growth of deposits and an eventual decline in the bank's core lending book.
  
• Heavy reliance on the domestic Saudi market exposes Alinma to rising concentration risk, and any protracted economic slowdown or volatility in the Kingdom could rapidly translate to elevated non-performing loans and sharply reduced earnings, as seen in the recent increase in the NPL ratio and coverage levels.
  
• Alinma's continued elevated operating expense growth-driven by labor, depreciation, technology, and branch expansion-combined with only limited success in shifting meaningfully toward non-interest or fee-based revenue streams, threatens to erode the bank's net margins and restrict long-term bottom-line growth.
  
• Escalating regulatory requirements regarding capital adequacy (including the new countercyclical buffer), intensified compliance and technology standards, and the ongoing rise in ESG-related costs will likely keep Alinma's cost base high while constraining its ability to generate improved return on equity or maintain healthy capital ratios as loan growth persists.

Alinma Bank Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Alinma Bank compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Alinma Bank's revenue will grow by 10.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 55.0% today to 48.3% in 3 years time.
• The bearish analysts expect earnings to reach SAR 6.8 billion (and earnings per share of SAR 2.7) by about August 2028, up from SAR 5.7 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 17.3x on those 2028 earnings, up from 11.2x today. This future PE is greater than the current PE for the SA Banks industry at 9.7x.
• Analysts expect the number of shares outstanding to grow 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 20.5%, as per the Simply Wall St company report.

Alinma Bank Future Earnings Per Share Growth

Risks

• Persistent double-digit loan growth and strong demand in Saudi Arabia, particularly in retail, SME, and project finance segments, indicate substantial credit expansion potential, which could drive operating income and net earnings higher over the long term.
  
• Continued investments in digital transformation-including a digital factory, advanced analytics, Gen AI, and automation labs-are likely to improve customer acquisition, cost efficiency, and fee-based income, resulting in improved operating leverage and profitability.
  
• Solid asset quality, reflected by a low non-performing loan (NPL) ratio of 1.25 percent and enhanced coverage ratios above 170 percent, signals effective risk management and supports stable earnings and lower credit-related costs.
  
• Strong capital and liquidity positions, with a Common Equity Tier 1 ratio of 13.2 percent, total capital adequacy above regulatory minimums, and liquidity coverage ratios over 123 percent, provide resilience for future growth and support sustained returns on equity.
  
• Positive trends in non-interest income, driven by growth in banking fees, asset management, card business, and successful cross-selling initiatives, help diversify revenue streams and protect net margins from future pressures on interest income.

Valuation

• The assumed bearish price target for Alinma Bank is SAR26.7, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Alinma Bank'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 SAR41.0, and the most bearish reporting a price target of just SAR26.7.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SAR14.0 billion, earnings will come to SAR6.8 billion, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 20.5%.
  
• Given the current share price of SAR25.78, the bearish analyst price target of SAR26.7 is 3.4% higher. 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.