(Bloomberg) --
Six Saudi lenders had their stock recommendations cut to reduce from hold by HSBC Holdings Plc (LON:HSBA), which said valuations have become too expensive given the negative risks to earnings.
The downgrades for Riyad Bank, Arab National Bank, Banque Saudi Fransi, Al Rajhi Bank, National Commercial Bank and Samba Financial Group mean all seven banks covered by the broker now have the same rating, with Alinma Bank being kept at reduce.
While measures such as regulatory easing and free government deposits are temporarily helping lenders’ credit quality and margins, they are only delaying credit risk events until mid-September, analyst Aybek Islamov wrote in a note.
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The sector’s current valuation “leaves no room for negative earnings surprise at a time when these are highly likely,” Islamov said. He expects combined net income for the seven banks he covers to fall 17% this year and a further 3% in 2021.
If loan payment holidays for small and medium-sized enterprises (SME) aren’t extended and the government cuts back on cheap liquidity injections, Banque Saudi Fransi and Riyad Bank stand out as having most potential earnings risk, according to Islamov. Al Rajhi Bank, on the other hand, would be the least affected due to having the lowest SME exposure.
Islamov cut price targets for all banks in his coverage:
- Banque Saudi Fransi to 25.40 riyals from 26.40 riyals
- NCB to 34.30 riyals from 35.50 riyals
- Riyad Bank to 14.60 riyals from 16.40 riyals
- Al Rajhi Bank to 41.10 riyals from 50 riyals
- Samba to 19.30 riyals from 21 riyals
- Arab National Bank to 15.90 riyals from 21.00 riyals
- Alinma Bank to 10.8 riyals from 11.63 riyals
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