Published — Friday 25 January 2013
Last update 24 January 2013 11:23 pm
DUBAI: A weak performance by bank shares was one of the big surprises of Saudi Arabia's stock market last year, but the shares may pick up this year as strong economic growth finally provides a general boost to profits.
Last year should have been ideal for bank shares. Saudi Arabia's economy expanded 6.8 percent, the population continued to grew, and bank lending surged; outstanding loans to the private sector jumped 14.9 percent from a year earlier in November, the fastest pace since March 2009.
Expansionary government spending, with a focus on welfare and infrastructure development, helped drive loan growth for banks listed on the stock market to 17.4 percent last year, investment bank EFG-Hermes estimated.
But share price performance was less than spectacular; the banking sector index was flat in 2012, underperforming a 6.0 percent rise by the overall market index.
Analysts said a range of factors pressured profit margins last year, including regulators' decision to encourage banks to make large provisions for loan losses in the third quarter as a precaution, and stiff competition between banks.
"Banks are going toward retail financing but one of the key characteristics of the segment is price competition," said Abdullah Alawi, head of research at Aljazira Capital in Jeddah. "That's one of the reasons top-line margins are being squeezed."
The pressure on margins could be seen in a mixed bag of earnings reported by Saudi banks over the past couple of weeks for the fourth quarter of 2012.
For example Riyad Bank, the country's third-largest listed bank by market capitalization, posted a rise in fourth-quarter net profit of just 4.1 percent from a year earlier, to SR 810 million ($ 216 million). It missed the average forecast of nine analysts surveyed by Reuters, who had predicted SR 822 million.
Net profit at Samba Financial Group, the second-largest listed bank, actually fell 7.8 percent, even though its loan portfolio expanded 18 percent. There are reasons to think this year will be kinder to bank shares, however.
One is that loan loss provisions tapered off last quarter as regulators apparently became satisfied with the banks' precautions. Now that the precautions have been taken, banks may be freer to offer more loans in the relatively risky but lucrative consumer sector.
The positive surprises in banks' fourth-quarter earnings often came from institutions with substantial exposure to retail consumer lending, including Bank Albilad and Saudi British Bank.
"Loan growth in 2013 will be in the low teens - that is already priced into share prices. But if margins improve, it will be a catalyst for the sector," said Mahmoud Akbar, a banking analyst at NCB Capital.
"The consumer lending side did very well in 2012, and building on that is still a possibility." A key constraint on banks could be regulatory limits on such loans, he added; the central bank limits most consumer lending to 33 percent of the borrower's salary.
But even if consumer lending growth slows, the volume which banks added to their overall loan portfolios in the past year should filter through to their bottom lines in coming months, analysts said.
"These loan growth trends are encouraging and suggest that the broader fundamental story for Saudi banks remains intact," sid Murad Ansari at EFG-Hermes.
Also, precisely because of their weak performance last year, bank shares are not pricey. The sector is trading at about 10.4 times analysts' estimates of earnings for this year, while the overall market index is at 11.3 times.
"Banks are not expensive - we're happy with the asset growth in the banking sector as a whole," said Farooq Waheed, senior portfolio manager at Riyad Capital.
"This year, we will see the full impact of that growth. We expect the sector to lead the market in 2013. There were some earnings disappointments but I think there is room for earnings growth."
Some investors may already be acting on such expectations. The banking sector of the stock market is up 4.4 percent so far in January, compared to a 2.9 percent gain for the overall index.