Half time report.

Summary: The markets are operationally strong despite a pullback says Amer Khan, Fund Manager at SHUAA Asset Management

Sell in May and go away resounded firmly across global markets through the month as European woes, like clockwork given the time of year, resurfaced driving investors into 'risk-off' mode. Of significant note, renewed Spanish bank stress, a new French president at odds with a thus far German led and austerity focused effort at dealing with Europe's debt crisis as well as the emergence of a markedly anti-euro party in Greek elections all cast doubt on the sustainability of the single currency.

MENA markets, suffering from a lack of immediate local catalysts followed international markets lower, however we note the largely healthy relative performance of banks across the region, most notably in UAE, Qatar and Egypt. UAE banks declined minus three per cent outperforming the UAE bourses and stand to gain 4.5 per cent for the year while Egyptian banks have weathered a minus five per cent market drop only declining minus one per cent through May. Their Qatari peers actually posted a minor gain this month even as the DSM declined minus 2.6 per cent. Disappointingly, Saudi banks declined minus eight per cent, slightly ahead of the minus seven per cent decline in the TASI but remain up eight per cent for the year.

In contrast to these declines, banking sector data in Saudi Arabia remains encouraging and despite indicating some competition fueled margin pressure, April data follows up strong Q1 earnings with loan growth on track to deliver another double digit year. Qatari banking sector data once again highlighted the short term liquidity squeeze as lending, mainly driven by public sector loans, rose 4.1 per cent MoM while deposit growth remained flat pushing the LTD ratio to a seven year high of 124 per cent. This should reverse gradually over the year with liquidity returning to the system once Qatar embarks on its large infrastructure spending plan outlined in its recently announced budget.

Interestingly in the UAE, where investors remained wary of asset quality and upcoming debt maturities remain a concern, two key Dubai entities i.e. DIFC and JAFZA publically addressed redeeming their debts due in June and November of this year respectively, notably JAFZA indicating that it would redeem early.

This is a very positive development for the UAE banking sector, already sporting significant exposure to GREs, and coupled with the resurgence of real estate prices in the UAE, increased economic activity in most sectors and despite slow loan growth, bodes well for valuations going forward.

After the recent pull back some MENA bank valuations have begun to look remarkably attractive especially given the banks' sturdy economic operating environment as well as their high capitalisation levels. Despite improving sector data Saudi banks slip significantly to 1.69x book value offering investors 17 per cent ROE with prospects of further improvement in profitability going forward intact. For similar ROE Qatari banks remain at 1.86x BV having barely moved through an otherwise difficult month. Although Qatari banks continue to suffer from near term headwinds and no country is an island when it comes to global market sentiment, we do note that a stable operating environment as well clarity on future growth may combine with rising divided yields - a function of recent retracements - to mitigate the prospects for further sustained declines. This was clearly evidenced through May. UAE banks slip slightly to 0.86x BV for about 14 per cent ROE.

These valuations in light of the recent developments in the Emirates look markedly appealing with asset quality concerns seemingly more than baked in. Lastly, we note the resilience of Egyptian banking despite high levels of volatility on the EGX, however caveat emptor, the political picture in Egypt is far from clear and may yet easily deteriorate further pressuring valuations.

All in all, although May was a difficult month for MENA banks from a price perspective, we highlight that prices diverged from otherwise robust operational strength across banking sectors regionally. nBME

2012 CPI Financial. All rights reserved.

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