Al Rajhi Bank

Best-in-class deposit franchise and Shariah-compliant retail dominance are increasingly priced in. We move to Hold on valuation pending Q2 NIM stabilization.

Al Rajhi remains the structurally highest-return franchise in the GCC banking complex on the back of an unmatched Shariah-compliant retail deposit base. Our concern is not the franchise — it is the entry point. The stock now trades at ~3.0x P/TBV against a 22% sustainable ROE, leaving thin margin of safety if NIMs compress as deposit costs catch up to the policy rate trajectory. We model a 25 bps full-year NIM contraction in 2026, partially offset by mortgage origination and Tasdeed digital wallet fee growth. Mortgage market share has plateaued at ~38% of new originations, and any further concentration adds book-quality risk in a softer real estate cycle. Our SAR 92.00 target uses a Gordon Growth model with sustainable ROE of 21.5%, COE 11.0%, and 4% long-term growth — implying a 2.95x P/TBV exit. We would re-rate to Buy on either: (i) a clean Q2 NIM print, or (ii) a 10%+ pullback toward SAR 80.