Al Rajhi Bank (1120.SR) - Deep Philosophical Analysis

The Most Unusual Moat in Global Finance

Al Rajhi Bank presents the value investor with a genuinely rare specimen: a business whose competitive advantage is rooted not in technology, scale, or regulatory capture, but in faith itself. When a billion Muslims worldwide view earning interest as spiritually impermissible, and when the world's largest oil economy is governed by that same faith, the result is a banking franchise whose moat cannot be attacked by any conventional competitor.

Consider the absurdity from a conventional banking perspective: Al Rajhi's depositors willingly accept zero return on their deposits. They do this not because Al Rajhi offers superior service or convenience (though it does), but because they believe their eternal souls depend upon avoiding interest. This is customer loyalty that cannot be bought, incentivized, or competed away.

The Cost of Funds Miracle

Every bank in the world engages in the same fundamental arbitrage: borrow cheap, lend dear, and capture the spread. The constraint on this model has always been the cost of deposits—banks must compete for funding by offering attractive rates, and this competition compresses margins.

Al Rajhi operates outside this constraint entirely. Its depositors view their deposits as religious duty rather than investment. The bank's cost of funds approaches zero while it lends at market rates to borrowers who have no similarly religious objection to paying financing costs.

This asymmetry creates a 17.2% ROE with 0.76% non-performing loans—numbers that conventional banks can only achieve through dangerous leverage or aggressive underwriting. Al Rajhi achieves them through structural advantage.

The Permanence Question

Is this moat permanent? The answer requires understanding whether Saudi Arabia will remain an Islamic society. This seems as close to certain as any social prediction can be. The House of Saud derives its legitimacy from guardianship of Islam's holiest sites. Vision 2030's modernization explicitly maintains Islamic values while diversifying the economy. There is no scenario in which Saudi Arabia becomes a secular society within any investment timeframe.

Therefore, Al Rajhi's moat is permanent within any reasonable definition of the term.

The Vision 2030 Opportunity

Saudi Arabia is undergoing the most ambitious economic transformation in modern history. Vision 2030 aims to diversify away from oil dependence by building entertainment, tourism, and financial sectors. This requires massive investment—and investment requires banking.

Al Rajhi sits at the intersection of this transformation. As the largest bank with the broadest distribution, it captures the new mortgages, business loans, and consumer credit that diversification creates. The bank is not merely surviving the transformation; it is financing it.

The mortgage market alone represents a generational opportunity. Saudi home ownership rates lag regional peers, and government programs actively encourage ownership. Every new mortgage flows through banks, and Al Rajhi's 512 branches ensure it captures disproportionate share.

The Valuation Dilemma

Here we arrive at the central tension: Al Rajhi is an A-quality business trading at a premium valuation. At P/B 3.6x, the market fully appreciates everything described above. There is no margin of safety, no opportunity to buy quality cheap.

The philosophical question becomes: Should we pay fair value for extraordinary quality, or should we demand a discount even for the world's most unusual moat?

The Buffett evolution applies here. Young Buffett demanded bargains. Old Buffett accepts fair prices for wonderful businesses. But even old Buffett prefers wonderful businesses at less-than-wonderful prices.

At SAR 70 (P/B ~2.6x), we would be paying for a good bank but getting the Islamic moat for free. At SAR 80 (P/B ~3.0x), we would be paying for a quality bank with some margin of safety. At SAR 97 (P/B 3.6x), we are paying for perfection with no room for error.

The discipline is clear: wait.

The Oil Correlation

Al Rajhi cannot escape its geography. Saudi Arabia, despite diversification efforts, remains an oil economy. When oil crashes, the Saudi economy contracts, loan growth slows, and NPLs rise. Al Rajhi's stock trades as a levered play on oil prices.

This creates the entry opportunity. When oil falls to $50 (as it has multiple times in the past decade), Al Rajhi's stock falls disproportionately. The moat remains intact, but Mr. Market prices in crisis. This is when generational wealth is built—buying permanent moats during temporary pessimism.

The patient investor's strategy: set alerts at SAR 70-80, wait for the next oil correction, and accumulate what cannot be replicated.

The Competition Question

Other Islamic banks exist. Saudi National Bank, Alinma, and regional competitors all offer Sharia-compliant products. Does this threaten Al Rajhi's moat?

The answer is nuanced. In commodity businesses, competition erodes returns until capital earns cost of capital. But Islamic banking is not a commodity—it is a network business with significant switching costs (mortgages, salary accounts, business relationships) and brand loyalty.

Al Rajhi's 512 branches, 4,420 ATMs, and multi-generational customer relationships create localized monopolies. A customer in Riyadh choosing their primary bank will naturally gravitate toward the largest, most convenient, most trusted name. That name is Al Rajhi.

The Circle of Competence Question

Is Middle Eastern banking within an investor's circle of competence? The honest answer: it requires more work than investing in familiar markets.

The financial statements follow different conventions. The regulatory environment is opaque to Western observers. The political risks are real but difficult to quantify. The currency (SAR) is pegged to USD, removing exchange risk but adding political risk to the peg.

Yet the core business model—borrow cheap, lend dear—is universally understandable. The moat—religious loyalty—is visible and measurable. The quality metrics—17.2% ROE, 0.76% NPL—speak clearly across any cultural divide.

This is within the circle of competence of any investor willing to do the work.

The Patient Investor's Path

The correct approach to Al Rajhi is clear:

1. Recognize quality: This is an A business with a unique, durable moat
2. Accept current reality: At SAR 97, fair-to-premium value is priced in
3. Wait with discipline: SAR 70-80 represents a proper margin of safety
4. Monitor the catalyst: Oil price weakness creates entry opportunities
5. Size appropriately: 2-3% position reflects quality but geographic concentration

The oil cycle will turn. It always does. When it does, Al Rajhi will still possess its unique moat, and patient investors will have their entry.

The Philosophical Conclusion

Al Rajhi Bank represents something rare in investing: a business whose moat is genuinely irreplicable. No amount of capital, technology, or competitive aggression can create a deposit base motivated by religious conviction. This is not a disruption risk—this is a disruption immunity.

The question is not whether Al Rajhi is a good business. It clearly is. The question is whether SAR 97 represents good value. It clearly does not.

The discipline of value investing requires saying no to good businesses at bad prices, and waiting for good businesses at good prices. Al Rajhi is the former today. It will become the latter when oil weakens and fear replaces complacency.

Wait for SAR 70-80. The opportunity will come.

"The big money is not in the buying and selling... but in the waiting."

For Al Rajhi Bank, the waiting is for oil's next downturn. When it comes, a unique moat will be available at a reasonable price. That is when the patient investor acts.