DUBAI: Saudi Arabia’s largest lender has become a favourite among equity analysts and investors as its business improves and the potentially lucrative inclusion in an emerging-markets benchmark index approaches next month.
Al Rajhi Bank was upgraded to buy by Goldman Sachs Group Inc on August 8. An analyst at Bank of America Merrill Lynch followed suit eight days later, citing improving net interest margin estimates, lower funding costs and reduced risk expenses at the Riyadh-based lender. Deutsche Bank AG and Dubai-based Arqaam Capital have Al Rajhi as one of their “top picks” among Saudi stocks.
Saudi Arabia’s possible inclusion in stock benchmarks tracked by global investors looms as a catalyst for Al Rajhi shares. A decision next month by index compiler FTSE Russell to bestow emerging-market status on the oil-producing kingdom would see Al Rajhi allocated the second-biggest weighting among the country’s stocks, representing 0.27 per cent of the global index and attracting inflows of $409 million, according to calculations by EFG-Hermes Holding Co. Recognition as an emerging market by MSCI Inc. next year would boost those inflows to $1.8 billion, BofA Merrill Lynch estimates.
Al Rajhi has “the lowest cost of funding in Saudi Arabia, is highly capitalised, has easing cost of revenue and the dividend yield is quite attractive,” said Ali Adou, a money manager at the National Investor in Abu Dhabi, who bought the shares earlier this month. “Also, it will be one of the biggest beneficiaries in the coming FTSE upgrade.”
Al Rajhi and Banque Saudi Fransi are among Saudi lenders that have increased dividend payouts as a way of increasing shareholder value at a time of slow economic growth, Adou said. Al Rajhi said July 13 it was doubling its first-half distribution.
A comparison of valuations against the broader Saudi benchmark, as calculated by estimated twelve-months earnings per share, suggests Al Rajhi is trading at the biggest discount to the overall market since 2015. Al Rajhi is up 3.9 per cent this month, compared with a gain of 1.9 per cent for the Tadawul All Share Index and a 3.2 per cent advance for a gauge tracking local lenders.
The stock closed on Sunday and Monday above its 50-, 100- and 200-day moving averages for the first time in almost a month, reflecting recent gains. The stock may gain 12 per cent in the next year, according to analyst recommendations compiled by Bloomberg. Eight favour buying the stock, eight holding it and one advises selling it.
