LONDON, 13 November 2004 — Another sign of the continued buoyancy of the Saudi banking sector in 2004 is the bullish performance of banks irrespective of size. Take for instance, Arab National Bank (ANB), a medium-sized bank ranking sixth in the Kingdom in terms of assets; and The Saudi Investment Bank (SAIB), the second smallest bank in terms of assets after Bank Al-Jazira.
Global Research, the research arm of Kuwait-based investment bank, Global Investment House (GIH), has recommended investors to buy SAIB stock and those who own ANB stock to hold on to them in its latest reports on the two banks published in October 2004.
Global Research values SAIB shares at an intrinsic value of SR461.8 per share. This compared to a market price of SR420 in mid-September 2004, which implied that the value reached through its dividend discount and comparative valuation methods is about 10 percent higher than the prevailing market price at the time.
On the other hand, in the case of ANB, shares are valued at an intrinsic value of SR638.2 per share. This compared to a market price of SR590 in mid-September 2004, which implied that the value reached through its dividend discount and comparative valuation methods represents about an 8.2 percent premium to the prevailing market price at the time.
SAIB currently has a 3.6 percent market share of total Saudi banking deposits. Following the approval by the Saudi Arabian Monetary Agency (SAMA) in 1984 to allow SAIB to offer fully-fledged conventional banking services, the bank has in the last two years been restructuring to concentrate more on retail banking including consumer finance, leasing, and credit cards, where for instance, it has a joint venture with American Express.
SAIB, capitalized at SR1.375 billion, but with SR2.9856 billion in total shareholders’ equity, is one of the highest capitalized banks in the Kingdom, with a Tier 1 Capital ratio of 21 percent and Tier 2 Capital ratio of 25.8 percent at end 2003. J.P. Morgan Chase had a 7.5 percent equity stake in the bank at end June 2004, which has since then been diluted.
Armed with a 32.5 percent increase in net profits in first half 2004 to SR293.9 million compared with SR221.8 million for the same period in 2003; and a surging non-commission income especially fees from banking activities, SAIB, says Global Research, is making “a conscious effort to increase its market share in the retail banking business especially in the high margin consumer finance business.” The bank has “aggressive” expansion plans including opening more branches and ATM machines, and increasing its Internet presence. Its NPL ratio of 1.8 percent in 2003 was also the lowest in the sector.
However, its size in terms of balance sheet and number of branches at 15, is a major constraint on its ability to exploit retail banking business in Saudi Arabia, which is hotting up because of competition especially from the larger domestic banks, and the foreign banks which have been allowed to open branches in the Kingdom. Because of this pressure, it may be wise, suggests Global Research, for SAIB to concentrate on its core strength of investment banking business.
SAIB will also concentrate on new niche areas “such as Islamic banking that is growing at a strong rate in Saudi Arabia.”
Arab National Bank (ANB), in which Jordan’s Arab Bank Ltd. has a 40 percent equity stake, at the same time, reported even stronger interim net profits of SR575.7m in 2004 — up 52.6 percent on the same period in 2003 — the second highest in the Saudi banking sector. ANB, with a paid up capital of SR1.8 billion at end 2003, however, had a NPL to gross loans ratio of 4.8 percent in 2003, due mainly to its stringent write-off policy.
The bank, says Global Research, has a critical mass of branches (116 in the Kingdom and one in London, UK) and ATM network through which it can now leapfrog in terms of increasing the deposits and asset base. It also has one of the best spreads among the conventional banks in Saudi Arabia.
Like other banks in the sector, ANB has also been increasing its Islamic banking activities including the introduction of the Shariah-compliant Tawarruq consumer finance program, a cash flow management product through which the customer can buy and sell local commodities.
One area where ANB is expected to leverage its position is through its tie-up with Global AXA, one of the largest insurance companies in the world. With the demand for pension products, life, health and other types of insurance set to increase in the region, ANB through this tie-up will be in the position to provide best-in-the-class products to customers, perhaps through a “one-stop-shop” concept for all their financial services needs.
ANB similarly will feel the pressure as the Saudi banking sector is opening to foreign regional and global players. However, it has tie-ups with international players in fund management and investment banking business. In the retail banking sector, it also has a tie-up with British Airways to launch a niche market credit card.
In this way, says Global Research, the bank will continue to increase its market presence by doing co-branded marketing exercises in collaboration with the leading players in the consumer market. It signals out big ticket infrastructure finance, in which it predicts ANB to play a leading future role, given its recent successful lead managing of the SR6 billion loan facility for Saudi Electricity company.
The outlook for 2004-2005 is “quite positive” for banks in the Kingdom and the GCC region, says Global Research.
Oil revenues will be much better than forecasted, with the result there will be a huge inflow of liquidity. Banks’ credit portfolios are likely to increase as corporates take advantage of the current low cost of borrowing. Global Research may be a bit too optimistic in its suggestion that the expanding Saudi economy, nurtured hitherto on an array of state subsidies and protectionist measures, has enough room to absorb new competition.
