Middle East banks have outperformed their global peers YTD (year-to-date), with Saudi banks returning 9.5 percent, Credit Suisse said on Tuesday in its report on EMEA/Saudi Arabia Equity Research. This is much better than the negative 2 percent returned by the MSCI Emerging Market banks, it said. Samba has been the best performer (up 16.3 percent), while SABB (Saudi British Bank) and Arab National Bank (ARNB) have underperformed, increasing only by 6.5 percent and 6.1 percent respectively. Saudi banks are currently trading just 10 percent above their all-time lows at 2.15x (price-to-book ratio (P/B) trailing. This translates into a 49 percent discount to the long-term average. “Even if we exclude 2006 (when valuations were unusually high), the sector is still trading at a 31.5 percent discount to its average multiples.” Even on a country basis, banks are trading the cheapest among the three key sectors, at a forward P/E of 13.5x, while the petrochemicals and telecom sectors are trading at 18.5x and 15.1x, respectively. Loan growth in the Saudi banking sector remained low, growing at 1.4 percent qoq in Q1 10, following a 1.1 percent contraction in 2009. The growth in Saudi lending was led by a strong 7.6 percent qoq growth in the “commerce” segment. While deposits grew a healthy 11.2 percent yoy in 2009, Q1 10 witnessed a 2.1 percent qoq contraction in the same period. For FY 2010E, we estimate that both loan and deposit growth will remain fairly muted, at c7 percent yoy each. After seeing four consecutive years (2006-2009) of negative-to-flattish consumer loan growth, the Saudi banking sector reported 3.9 percent qoq growth during Q1 10, lower than only Qatar (5 percent qoq). Banks now also seem comfortable with increasing their real estate exposure, with lending to this sector increasing by 7.8 percent qoq in Q1 10 in Saudi Arabia. This follows a steep 17.7 percent yoy decline in 2009. Al-Rajhi continues to gain market share, having increased its loans and deposits by 3.5 percent qoq and 7.4 percent qoq, respectively, in Q1 2010. Arab National Bank was the only bank to report contractions in both loans and deposits, by 2 percent qoq and 6.1 percent qoq, respectively. The loan deposit ratio (LDR) of the Saudi banking sector has increased from 78 percent in Q4 2009 to 81 percent in Q1 2010. BSF reported the highest LDR of 90.7 percent in Q1 2010, while Samba continued to report the lowest number among our covered Saudi banks, at 62.1 percent (although it has increased from 57.2 percent in Q4 2009). The Saudi banks' net interest income-to-total income ratio has declined from 77.3 percent in Q4 2009 to 69.8 percent in Q1 2010. This may be partly due to lower margins and higher fee income during the quarter. However, Credit Suisse also noted that the balance-sheet composition has been changing over time, with loans now accounting for just 54 percent of total assets, the lowest in the GCC. For the Saudi-7 banks, gross loans declined by 1.3 percent yoy in 2009, while deposits grew by 3.5 percent. For 2010E, we expect balance-sheet growth to consolidate, with gross loans and deposits growing at 7.2 percent yoy and 6.8 percent yoy, respectively, on our estimates. The report forecast growth will resume by late 2010 owing to a pick-up in economic activity, higher interest rates and lower credit costs. It estimated that gross loan will grow by 13.4 percent in 2011 and deposits by 11.9 percent. We think 20 percent plus balance-sheet growth is not achievable since most of the large domestic corporate houses are already close to their SOL (Single Obligatory Limits). Samba is likely to grow its loan book the fastest in 2010 and 2011, as it looks well positioned due to its lowest LDR of 62.1 percent in Q1 10. The Saudi banks' net interest margins, having remained flattish from Q2 09 to Q4 09, fell by a steep 25bps qoq during Q1 10. While the yield on interest-earning assets fell by 39bps qoq, the cost of funds fell by less (11bps qoq). Banks that have grown their loan book the most have seen their net interest margins (NIMs) also decline the most. However, we think that lower yields on fixed income portfolios may have been more significant than lower yields on loans. the Q1 NIM decline could have been higher if it were not for the increase in the demand deposit ratio (from 46.1 percent in Q4 09 to 49.1 percent in Q1 10) and buoyant retail lending. During Q1 10, Al-Rajhi's NIM fell the most, by 79bps qoq to 5.7 percent, while that of SABB fell the least (a decline of just 1bp) to 2.9 percent. NCB's NIM expanded by 4bps qoq. Al-Rajhi's NIM was affected by the 7.4 percent qoq deposit growth during Q1 10. However, interest rate behavior in Saudi Arabia continues to be in sync with the US Fed rates owing to the dollar pegging. While the Credit Suisse house view is for a Fed rate hike in September this year, our global equity strategist, Andrew Garthwaite, highlights that even a late Q4 increase would not be surprising. NIMs were seen to remain close to Q1 levels throughout 2010 at 3.52 percent for the sector and forecast a NIM expansion of 39bps to 3.91 percent in 2011. Every 100bp rate increase would result in a 40bps NIM expansion. Moreover, every 100bp rate increase (over and above our base case) would offer (on aggregate) 11 percent increase each in net interest income, net income and valuations.
