AL RAJHI BANK STOCK REPORT

Abdulaziz AlmuammarHesham AlshehahMazen Alnaser

30 May 2008

Presented by:

Outline

Banking Industry Analysis Recent Developments 2007 performance Analysis Valuation Conclusion

Banking Industry Analysis

The second largest industry in the Middle East with $ 290bn of total assets in 2007.

The penetration in Saudi Arabia is the least between GCC with %43 of total loans to GDP and %50 of total deposits to GDP.

There is one branch for every 20000 people. Reserve requirements (13 percent) has come

against a backdrop of slowing interest rate cuts. The reverse repo rate was lowered for the first

time since mid-March on May 3, to 2 percents from 2.25 percent.

Banking Industry Analysis

Greater competition from the new investment companies and commercial banks (e.g. Al Enma Bank) will have its effect on the profit margins.

Recent Developments

In Feb 24, the board agreed to increase the capital from SR 13.5bn to SR 15bn and to transfer SR 88.3mn of retained earning to the general reserve.

Al Rajhi by initiating its operations with 19 branches and one center in Malaysia in 2007 has now 40000 clients and aims to expand its branch network to 50 branches by 2010.

Initial acceptance to open a branch in Kuwait was given by the Kuwait central bank. By opening this branch, Alrajhi is continues growing strategy in international Banking business by opening new branches after Malaysia.

Recent Developments (cont.) The bank has participated in five

significant finance projects in 2007, among them is the important Red Sea Gateway Terminal as the most crucial lending project in Saudi Arabia.

A lot of products and services were introduced in 2007: Al Rajhi Petrochemical & Cement Mutual

fund “30 minutes” campaign which allow

clients to get loans in 30 minutes Estesna services for home building. Partnership program for home buying in

25 years

2007 performance Analysis

Balance Sheet Income Statement Total Income from Investment

Balance SheetSR 1000 2004 2005 2006 2007Assets Cash & balances with SAMA 8,795,911 8,682,822 9,243,902 13,141,199 %total 11.30% 9.14% 8.79% 10.52% %increase -1.29% 6.46% 42.16%

Investments 64,771,712 80,134,684 89,563,188 104,875,445

%total 83.20% 84.32% 85.13% 83.98% %increase 23.72% 11.77% 17.10% Net fixed assets 950,313 1,364,205 1,976,551 2,591,101 %total 1.22% 1.44% 1.88% 2.07% %increase 43.55% 44.89% 31.09%

Total assets 77,854,774 95,037,981 105,208,744 124,886,482

SR 1000 2004 2005 2006 2007Liabilities and Equity Customer deposits 60,913,513 70,112,192 73,397,980 89,725,167 %total 87.87% 85.95% 86.32% 88.59% %increase 15.10% 4.69% 22.24% Total liabilities 69,318,807 81,568,687 85,029,268 101,280,370

Total equity 8,535,967 13,469,294 20,179,476 23,606,112 %total 10.96% 14.17% 19.18% 18.90% %increase 57.79% 49.82% 16.98%

Total liabilities and equity 77,854,774 95,037,981 105,208,744 124,886,482

Income Statement

SR 1000 2004 2005 2006 2007

Net Investments income 4,140,761 5,686,267 6,826,086 7,721,812 Exchange income 242,543 360,915 390,299 470,872 Services fee income 669,793 1,523,547 1,400,463 980,625 Other operating income 138,494 411,929 893,050 147,787 Total operating income

5,191,591 7,982,658 9,509,898 9,321,096

Depreciation and amortization

154,888 155,948 183,778 288,159

Provision for investments 860,059 535,973 252,644 443,240 Other expenses 1,240,729 1,657,410 1,771,585 2,140,040 Total operating expenses

2,255,676 2,349,331 2,208,007 2,871,439

Net income 2,935,915 5,633,327 7,301,891 6,449,657

Total Income from Investment

SR x1000 2003 2004 2005 2006 2007YoY

Growth

Mutajara 1082007 946901 1051034 1728571 2797651 61.85%

Installment 1848848257249

0 4191666 5318180 5467749 2.81%

Instisnaa 506546 393064 297933 240606 194092 -19.33%

Murabaha 92208 211598 388057 359379 108089 -69.92%

Other 8060 16708 22177 11530 15535 34.74%Total Income from Investment 3537669

4140761 5950867 7658266 8583116 12.08%

Source: Al Rajhi Financial Reports

Valuation

We used two techniques:1. Dividend Discount Model2. Relative Valuation (P/E)

Valuation

Weekly Rates of Return for TASI and Al Rajhi Bank

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan-

03

Apr-0

3

Jul-0

3

Oct-0

3

Jan-

04

Apr-0

4

Jul-0

4

Oct-0

4

Jan-

05

Apr-0

5

Jul-0

5

Oct-0

5

Jan-

06

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Return (TASI)

Return (Rajhi)

Historical rates of return:

DDM

Required Return (using CAPM) RPm is 5.5% RFR is 4% Beta?

DDM Beta is 1.565

Required return = 10.36%

Scatterplot of Rates of Return with Characterstic Line for Al Rajhi BankWeekly returns from Jan-2003 to May-2008

y = 1.1565x + 0.0008

R2 = 0.6523

-40%

-30%

-20%

-10%

0%

10%

20%

30%

-25% -20% -15% -10% -5% 0% 5% 10% 15%

Rm

Rrajhi

DDM From our analysis, we have estimated the growth

for the three next years to be: 50% in 2008 33% in 2009 25% in 2010

Year Periods Growth Rate Dividend PV Intrinsic Value

2008 1 50% 3 2.72 -

2009 2 33% 4 3.28 -

2010 3 25% 5 3.72 -

9.72

2010+ 6.50% 5.33 102.64 137.95

DDM Value 112.36

DDM

Sensitivity Analysis

Growth

5.5% 6.0% 6.5% 7.0% 7.5%

8.36% 155.07 186.61 235.11 319.28 501.32

9.36% 114.40 130.51 152.27 183.24 230.86

10.36% 90.74 100.16 112.36 128.18 149.55

11.36% 74.72 81.14 88.88 97.39 110.37

Requir

ed re

turn

12.36% 63.57 68.11 73.42 79.73 87.33

Relative Valuation

Earning Per Share

Bank 2008e 2009e 2010e

CAGR EPS

(2008e-2010e)

Estimated Price (2010)

PE Ratio (2010e)

Al Rajhi Bank 5.38 6.65 7.79 20.33 112.5 14.44

We estimated the fair value for AlRajhi Bank as SR 112.5, which represents 14.44x of PE ratio of 2010e

Relative Valuation

Relative Valuation: PE 2010e vs. EPS CAGR (2008-10e)

Riyad Bank AlJ azira

Saudi Investment Saudi Hollandi

Fransi SABB

Arab National

Samba AlRajhi

BANK ALBILAD

y = 0.3631x + 6.7293R2 = 0.9169

0.00

5.00

10.00

15.00

20.00

25.00

30.00

0.00 10.00 20.00 30.00 40.00 50.00 60.00

EPS CAGR 2008-10e

PE

20

10

e

Relative PERAJHI = 0.3631 (20.33) + 6.7293 = 14.11x Fair PriceRAJHI = 14.11 (7.79) = SR 110

Conclusion

We estimated the value for Al Rajhi share to be:

SR 111.25

based on DDM (50%) and Relative valuation (50%)

According to our fair value AlRajhi and based on the current market price of SR 87.5 (as on May 29th, 2008), the share is currently trading at 27.1% discount to our fair value estimate indicating a STRONG BUY.

Thank you