JEDDAH: Despite the global financial crisis, Saudi banks offer the best sustained profitability prospects and growth outlook among GCC (Gulf Cooperation Council) banks as they are not distressed, and they are among the best regulated in the region, according to a Banc of America Securities-Merrill Lynch report released this week.
Saudi Arabia is better positioned than most GCC countries to weather the global recession as it was more prudent during the boom and has a large internal market with growth potential.
Saudi banks are also well positioned to increase profitability once a recovery is in full swing. This is due to: (1) the lack of serious banking system stress; (2) the banks’ strong funding and capital positions; (3) their exposure to a large commodity-driven economy backed by a government with deep pockets, and (4) an expansion in liability spreads as central banks hike rates from historical lows providing Saudi banks with significant room to expand margins.
Banc of America Securities-Merrill Lynch is initiating on the Saudi banks with Buys on Samba Financial Group and Arab National Bank (ANB), and a Neutral recommendation on Al-Rajhi Bank.
The study recommended ANB with a Buy and a 12-month price objective of SR56.3, indicating a total return of 28 percent. ANB is among the largest of the mid-sized banks in Saudi Arabia with a 9-11 percent market share in total assets, loans, and deposits.
ANB shares fell 2.28 percent to SR42.70 yesterday.
Samba also received a Buy recommendation and a 12-month price objective of SR61.5 indicating 25 percent total return potential. Samba is Saudi Arabia’s third-largest bank by assets and deposits. Its shares also fell yesterday by 1.43 percent to close at SR48.10.
Al-Rajhi Bank received a Neutral recommendation and a 12-month price objective of SR79.2. It is clearly a “best of breed” with a dominant franchise base and is the largest Saudi bank by loans and the world’s largest Islamic bank. Its shares closed yesterday at SR68.50, down 0.36 percent.
The Saudi Arabian Monetary Agency (SAMA) is also in a strong position to support the banking system and has presided over important risk reduction measures such as curtailing retail lending.
SAMA has been robust in its approach to monitoring areas of excessive lending and in 2006 imposed sharp limits on retail lending. Retail loans were capped at 30 percent of the loan book along with tighter regulation on limits and duration.
On the other hand retail lending has been deleveraging for three years post the 2005 equity bubble, a phase the banks came out of largely unscathed.
While the banking system is facing pressure, its loans-to-deposits ratio is 84 percent and it has 13.2 percent equity to assets with relatively healthy penetration levels and asset quality conditions. However, the Saudi banking sector will go through a cyclical downturn but not a banking crisis, so positioning it for a healthy recovery, the report said.
The Saudi banks’ access to stable and cheap funding gives them an important edge over regional and emerging market peers. The spare funding and benefits from rising rates positions them to achieve a swift return to growth once opportunities return on the asset side. Saudi banks enjoy a higher share of capital and deposit funding than their EEMEA (Eastern Europe, the Middle East & Africa) peers, at 86 percent vs. 68 percent.
The short-term funding squeeze witnessed in late 2008 by Saudi banks has quickly abated, with LTDs falling back to 84 percent by March while for EEMEA banks this ratio remains well over the 100 percent mark. Government and central bank action was quick and decisive with reserve requirements cut to 7 percent from 13 percent in October 2008, a $3 billion long-term deposit injection (1.3 percent of system deposits), and a promise to guarantee deposits by the Supreme Economic Council.
Saudi banks are very well capitalized with 13.2 percent equity to assets for the whole system as of March 2009. However, the report said banks will struggle to maintain fee income growth at the first quarter level as seasonal factors come into play but the outlook for a healthy recovery in 2010 looks promising.
The Saudi market has seen a significant fall in trading values during the global downturn. However, velocity remains high and with 92 percent of trading linked to retail accounts the banks will continue to enjoy a dominant position despite the entrance of foreign and regional investment banks.
During the boom Saudi banks focused on expanding their networks, upgrading their capabilities and introducing new retail and securities business products.