Shifting To More Profitable Segments Like MSME And Mortgages Will Capture Untapped Market Opportunities

Key Takeaways

• Strategic focus on profitable segments and customer-centric improvements is expected to drive revenue growth and increase net margins.
  
• Investments in digitalization and funding mix optimization aim to enhance operational efficiency and improve earnings.
  
• Dependencies on government projects and economic pressures impact Saudi National Bank's margin growth, profitability, and future earnings.

Catalysts

Through its subsidiaries, provides banking and investment management services in the Kingdom of Saudi Arabia and internationally.

• SNB's strategic shift toward more profitable segments like MSME, mid-size corporate, mortgage, and credit card sectors is expected to drive revenue growth by capturing unexploited market opportunities.
  
• The bank's focus on enhancing customer centricity through better account life cycle management, reducing branch wait times, and leveraging AI and data will likely improve customer satisfaction, leading to increased revenue and potentially higher net margins due to increased efficiency.
  
• Investments in digital offerings and automation to boost operational efficiency are expected to reduce the cost-to-income ratio further, potentially leading to improved net margins and earnings.
  
• The anticipated lending growth from the robust corporate pipeline and mortgage momentum, coupled with low double-digit forecasted loan growth for 2024, is expected to boost revenue.
  
• Optimizing the funding mix with a shift towards more cost-efficient funding sources such as CDs for diversification benefits could lead to reduced funding costs, improving net interest margins and overall earnings.

Saudi National Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saudi National Bank's revenue will grow by 10.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 58.3% today to 56.9% in 3 years time.
• Analysts expect earnings to reach SAR 26.7 billion (and earnings per share of SAR 4.46) by about April 2028, up from SAR 20.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.8x on those 2028 earnings, up from 10.0x today. This future PE is greater than the current PE for the SA Banks industry at 10.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.01%, as per the Simply Wall St company report.

Saudi National Bank Future Earnings Per Share Growth

Risks

• The NSCI margin decline, driven by both domestic and international pressures, could indicate difficulties in maintaining profitability and revenue growth in a competitive rate environment.
  
• The organization's performance was affected by international market volatility, impacting the group’s cost-to-income ratio, which poses risks to net margins.
  
• The Turkish operations are currently a headwind due to economic instability, potentially affecting future earnings and making it challenging to meet profitability targets in this region.
  
• The elevated cost of funding and interest-bearing deposits may pressure net interest margins, affecting revenue and profitability if interest rates don't decline as expected.
  
• The dependence on government-related projects and Vision 2030 opportunities introduces political and execution risk, potentially impacting the bank's revenue if these projects face delays or re-prioritization.

Valuation

• The analysts have a consensus price target of SAR46.438 for Saudi National 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 SAR53.5, and the most bearish reporting a price target of just SAR39.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SAR47.0 billion, earnings will come to SAR26.7 billion, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 20.0%.
• Given the current share price of SAR34.35, the analyst price target of SAR46.44 is 26.0% 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.