In a note published on 25 December, NCBC Research said, "We believe the opportunities we expected for 2014E, namely better NIMs, improving asset quality and high total returns from consumer financing will turn into challenges. Given the higher book values for 2014E, which offset the lower forecasts, our price targets have increased. We remain cautious on the sector as labour market pressures and restrictions on consumer financing may impact profitability. Overall we reduce our net income estimate by 0.9 per cent and expect a 7.1 per cent growth for 2014E. We prefer SHB, SABB and Riyad due to good profit growth at attractive valuations. Upgrade SHB and SABB to Overweight, maintain all other ratings "We upgrade our ratings on SHB and SABB to Overweight from Neutral. We believe the current 2014E P/E valuations at 9.3x and 10.7x respectively, discount the growth potential of both banks. In addition to Riyad, we place them among our top picks. Riyad and SHB have recently secured long term funding, while SABB plans to issue sukuks by year end, which will enable the good loan growth. We expect this to partially offset the risk on NIMs from higher CoF which we believe is a positive as it provides stability to earnings. We remove Al Rajhi from our top picks due to retail lending restrictions "Following the latest restrictions on "step up loans" and fees charged to retail customers, we reduce our 2014E net profit estimate for Al Rajhi by 7.5 per cent to SAR 7.3 billion . Although we remain Overweight on the stock, we believe growth will be restricted with downside risks on loan growth potential relatively high. We expect high provisions for 2014E due to tight labour market "Given the pressures faced by contractors from the labour shortages, we expect provisions to increase 15.5 per cent YoY in 2014E to SAR 6.3 billion . We expect contractors to face pressures as delays in project completions impact their cash flows and ability to service debt. This high provision estimate reflects uncertainty of the "normalisation" period for the labour market. Overall net interest margins continue to be under pressure "We continue to expect limited improvement in NIMs. For 2014E, we expect flat NIM's and forecast only 4bps increase for 2015E. Based on management guidance, we believe that a combination of strong competition between banks as well as low global interest rates will keep interest yields under pressure."
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