Riyadh – Mubasher: Bank of America Merrill Lynch on Thursday upgraded Saudi Arabia-based Al Rajhi Bank’s outlook to "Buy" from "Neutral" with a price target (PT) of SAR 75.

“We see Al Rajhi's earnings momentum gathering pace in the second half of 2017 given stand out [net interest margin] (NIM) expansion on the back of a unique cost of funding position (90% of funding comes from low cost, retail based demand deposits) and further policy hikes,” the bank said in its report on the stock.

The deterioration in asset quality was “less severe” than the bank’s previous expectations.

“The shares currently trade on 12mth FWD P/B of 1.8x, a 24% discount to historical levels despite its competitively advantaged position, healthy growth, and strong returns (20% mid-cycle RoTE),” the report noted.

Bank of America Merrill Lynch raised its estimates of Al Rajhi Bank’s earnings per share (EPS) to 11% between 2017 and 2019, forecasting higher dividends on the medium-term.

These higher estimates are due to the stronger volume growth, which Al Rajhi is likely to benefit from owing to “the underpenetrated KSA consumer banking market”, as well as higher NIMs and “lower cost of risk as quality deterioration [is] less acute than expected”, Bank of America highlighted.

Commenting on the recent addition for a possible inclusion of Saudi Arabia in MSCI's Watch List in the Emerging Markets (EM) Index, Bank of America Merrill Lynch said: “We see improved probability for a reclassification by June 2019.”

In the event that Saudi Arabia is added to the EM Index, Al Rajhi could attract $1.8 billion of inflows.

“An announcement by FTSE of a potential Saudi inclusion in its EM Index in the September 2017 Review could provide another catalyst for the shares,” Bank of America Merrill Lynch’s report said.

As for the US-based banks’ outlook for Saudi banks, Bank of America forecasts “improved outlook” in the second half of 2017, on the back of cost discipline, stronger than expected asset quality, and NIM expansion.

“SABB, Samba, and Al Rajhi [are] our preferred KSA banks, [whereas] Al Inma [is] our only Underperform rating,” the report concluded.