Raising Interest Rates would Boost Profits -Al-Rajhi Capital Outlook

Increase in the net interest income due to a 1% change in the interest rate, could result in as much as SR5.2 billion for the banking sector, in the Kingdom of Saudi Arabia (assuming only 50% of the loans are re-priced), according to Al-Rajhi Capital, noting that the total private sector debt interest bearing was SR1,956 billion last August.

As a result of the aforesaid, the rise in interest expenses will be around SR4.2 billion, and the net interest in earnings before tax would be about SR1billion for listed firms.

Around 5% of the economy is affected by consumption, healthcare, industry, and utilities.

The market projected that the interest rates may rise sooner than expected, due to rising inflation caused by global commodity prices and transportation and supply chains’ concerns.

Even if only half of loans are re-priced, a 1% increase may result in an additional profit of SR5.2 billion for Saudi banks over the course of the year. This implies a profit margin of 11% in 2019 and 10% in 2020, respectively, for banks’ sector.

The main risk, according to the “Al Rajhi Capital” report, is that banks are the most exposed to companies, and may see an early improvement in income before taxes and depreciation, but some risks may encounter this relationship.

And the increasing weight of mortgage loans, which are seeing a decline in lending rates, means that the raising of interest rates will depend on a combination of mortgage loan growth, lower mortgage rates, and the recovery in the Saudi interest borrowing overnight rate (SIBOR).

Companies may be able to negotiate smaller spreads, if loans are re-priced, at higher rates. As a result, the effect may differ.

For banks, the change in anticipated Earnings Per Share (EPS) for FY2022 ranges from +0.7% to +1.30%, with a probable rise of 25 basis points, in 2022 and 3-rise of 25 basis points each, in 2023.

In the Fiscal Year 2023, the impact on the EPS estimate would be more pronounced, with the change ranging from +4% to 0+10%.