Riyadh-Mubasher: The National Commercial Bank (NCB) can capitalize on growth opportunities arising from current favorable market conditions, thanks to its high asset quality, strong capital base, close relationship with the government and good access to funds, MubasherTrade said in a report.

The think tank placed a ‘Buy’ recommendation on the stock, setting the price target at SAR 71.4.

The bank plans to increase its exposure in different business lines, such as retail, SMEs, and wealth management; with the aim of diversifying its revenue sources.

MubasherTrade said NCB's recent asset growth was largely driven by the government/public and corporate lending on its close ties with the government. However, the bank is now looking to expand its retail and Islamic segments as well as to increase lending to SMEs.

NCB boasts a solid client base as well as a well-diversified loan portfolio, largely consisting of government, public- and private-sector enterprises and corporations. This helped asset quality stay intact despite strong loan growth over the last 12 months, in addition to providing NCB with access to reasonably-priced funding, MubasherTrade said.

“We valued NCB based on the average of two different valuation models: (1) Excess return model (SAR 72.3/share) and (2) Warranted Equity Valuation (WEV) model (SAR 70.6/share). This yielded a weighted average PT of SAR 71.4/share (+12% upside),” the think tank said.

It used a cost of equity of 9.93% and a terminal growth rate (TGR) of 5.0%, stating that NCB would be trading at a 2015e PBV of 2.8x, a 35% premium to regional peers, supported by the bank's strong fundamentals as it posts one of the highest ROEs in Saudi Arabia.

NCB's 2014 and 2015e ROEs are 17.7% and 18.5% vs. local peers' average 14.4% and 14.2%, respectively.