No cause for pause as Saudi banks surge.

Regional markets have by and large remained buoyant through March alongside international markets driven mainly by positive macro data and policy expectations. MENA banks, with the exception of Saudi Arabia, have declined slightly yet remained ahead of their indices. The Saudi banking sector, a significant laggard until last year as we had pointed out, surged ahead over +7 per cent through March helped by renewed investor appetite for risk in Saudi Arabia as well as strong banking sector data for February. However, we point out that the stellar rise in volumes in the Kingdom has thus far comprised mostly retail investors and accordingly the better performers within the sector have been the more speculative names.

EYES ON EARNINGS

Going forward, as earnings season approaches, Saudi investors have a tendency to focus quite squarely on fundamentals and this should shift attention along with robust volumes to the stronger banks poised to post solid earnings growth.

Through March Qatari banks, and Qatari equities in general, have remained unloved, in some cases unjustifiably so, and declined -0.74 per cent while their peers in the UAE also lost -3.62 per cent on average. Egyptian banks have outperformed their bourse by declining only -2.8 per cent versus a -6 per cent fall for the index as the Central Bank lowered the reserve requirement allowing the banks to increase lending. However lending grew 0.6 per cent MoM in January, still pointing to mid single digit growth by year end. In contrast, Saudi Arabia sector data for February showed lending has surged 1.5 per cent MoM pointing to well over double digit growth for the year while annualised ROAE at 18 per cent is the highest since February of 2009. Qatar banking sector data shows a reversal in public lending from dismal January numbers, however a steady draw in public deposits has created somewhat of a liquidity crunch with LTD ratios climbing to recent highs. Whilst we expect this situation to reverse as public sector spending in Qatar picks up and projects are announced/commence, it may be a gradual process.

TRENDS

From a valuation perspective, trends point to solid fundamental strength being finally rewarded while some near term over-hangs are unduly punished. Saudi banks continue with their steady re-rating move up this month to trade at about 2.0x Book Value while offering investors a rising ROE of 17 per cent; this move reflects their solid and improving fundamentals going into earnings season.

We expect that further improving profitability, which remains likely given the booming economy in the Kingdom, will add yet more fuel to this re-rating. Qatari banks, in contrast, fall to about 1.83x Book Value while offering investors about the same ROE as their Saudi cousins. This discount reflects the market's perceived concerns on growth this year while perhaps prematurely ignoring the medium and long term clarity on the same growth in the coming years as Qatar hikes domestic spending ahead of the World Cup 2022. We expect this oversight to be rectified and such clarity to be steadily priced in through the coming quarters.

Banks in the Emirates decline slightly to about 0.94x Book Value offering investors about 14 per cent ROE with the market still pricing in Net Interest Margin pressures, limited growth opportunities and in some cases significant concerns on asset quality. Whilst the former concerns remain valid, we have seen a solid bank like FGB surge +26 per cent YTD while still offering an attractive valuation; accordingly, we expect that as upcoming debt maturities in the Emirates are adequately handled, the steep valuation discount assigned to selective banks based on asset quality concerns will eventually dissipate bringing the sector closer to its regional peers. NBME 

2012 CPI Financial. All rights reserved.

Provided by Syndigate.info an Albawaba.com company