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Earnings unveil uneven roads to growth.

Summary: Regional markets paused through April after a stellar quarter of gains that have propelled four MENA markets into the ten best performing globally. Amer Khan, Fund Manager at SHUAA Asset Management takes a look back

Banks across the region have largely followed their respective indices lower as investors booked gains and looked to first quarter earnings for further guidance. The Saudi banking sector, on a tear this year, declined 3.6 per cent nearly in line with the Tadawul but yet remains up 19 per cent for the year. As mentioned last month, a material part of these gains is comprised of surging speculative names, however first quarter earnings for the sector as a whole point to solid growth and a well justified re-rating. UAE banks declined a further 4.7 per cent this month bringing their average annual gains to a modest 7.2 per cent in sharp contrast to the fortunes of the broader market in the Emirates. Growth and asset quality concerns remain a worry for investors who are clearly choosing to play an improving macro picture in the UAE via other sectors.

However, as mentioned earlier, selective outperformance has been sharp and sustained, as in the case of FGB, and likely to persist further. Qatari banks remain regional underperformers with the sector declining over six per cent for the year; sector data as well as first quarter earnings continue to point to weak loan growth with an added negative of margin contraction.

While the data is not overly concerning for now, its lumpiness and lack of momentum has kept investors unexcited about Qatari banking despite what we view as a clear medium to long term growth story that remains quite intact. Saudi bank earnings mirrored the earlier stronger sector data posting a whopping 23 per cent year on year gain highlighting their improving profitability. Lending growth surged to the highest level since 2008 and although net interest margins have begun to betray the pressures of aggressive competition, brokerage fees at banks with substantial market share like SAMBA and Jazira have accelerated sharply alongside surging traded volumes on the Tadawul. Lastly, UAE bank earnings have remained steady despite very well flagged weak or absent loan growth, however asset quality remains firm year on year which bodes well for valuations going forward.

In line with the market performance through the month, valuations remain little changed although increased certainty on profitability is likely to selectively drive some over the coming quarter. Saudi banks retrace to trade at about 1.92x book value offering investors a rising ROE of 17 per cent; given their robust results through the earnings season as well as momentum in the Saudi economy it is likely that this improving profitability will continue to be priced in. Qatari banks fall to about 1.81x Book Value while offering investors similar ROEs as their Saudi cousins but also likely subdued near term growth as well as a few new questions on the system's liquidity. Whilst somewhat unjustified, much like the performance of the Qatari market as whole year to date, this investor focus on the near term at the expense of a clearer long term picture has proved sticky. Although the current opportunity cost of investment in a sector without catalysts may understandably be high for short term investors, valuations and clarity on long term growth should begin to draw investors with longer time horizons. Banks in the Emirates decline further to about 0.90x Book Value offering investors nearly 14 per cent ROE; the key factor for them remains asset quality which has shown little sign of further deterioration this year. If this trend continues, and it should as long as upcoming debt maturities in the UAE are addressed and the real estate market continues to improve, the Emirati banks' steep discount to regional peers should dissipate in short order, growth concerns notwithstanding. nBME

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Publication:Banker Middle East
Date:May 24, 2012
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