Higher interest rates and cost cutting lifts Saudi banks outlook

Al Rajhi Bank shares raised to 'buy' by Bank of America Merrill Lynch

Al Rajhi Bank stocks have been raised to 'buy' by Bank of America Merrill Lynch. Ahmed Yosri / The National

Bank of America Merrill Lynch said it saw an improved outlook for Saudi Arabian banks due to higher interest rates and cost cutting measures that lenders have been taken to bolster profitability.

"We see an improved outlook for the Saudi banks in to the second half of 2017 and beyond on five core themes including net interest margin expansion accelerating on the back of the three rate hikes observed since 2016 as well as a further four hikes expected over the course of the next 18 months," analysts at the investment bank said.

The interest rate rises followed similar action by the US Federal Reserve, given the Saudi Arabian riyal's peg to the US dollar.

Bank of America Merrill Lynch also cited the banks' stronger asset quality than previously anticipated for its change in outlook, in addition to a potential pick up in asset growth and the possibility that Saudi Arabian stocks may join MSCI and FTSE emerging market indexes in the next couple of years.

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Separately, the bank raised its recommendation to "buy" for Al Rajhi Bank, the biggest publicly traded Saudi Arabian lender,  because it sees earning momentum picking up in the second half of this year and an improved asset quality outlook.

Bank of America Merrill Lynch also noted that shares of Al Rajhi are trading at a 24 per cent discount to historical 12-month forward price-to-book levels and are not reflecting the improved outlook for the lender.