GCC Market Review For September 2006
Prepared by :<?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Global Investment House “Global”
Date :October 2006
· Global : GCC Market waiting for 9Month Results….
<?xml:namespace prefix = v ns = "urn:schemas-microsoft-com:vml" /><?xml:namespace prefix = w ns = "urn:schemas-microsoft-com:office:word" />Global Investment House – GCC Market Review – September 2006- The month of Sep-06 saw mixed trends in the GCC stock market as 4 out of 6 benchmark indices witnessed monthly gains. Oman market continued to reported strong buying interest as it notched an impressive monthly growth of 7% in Sep-06. Kuwait and Saudi markets too witnessed buying interests ahead of the earnings season. The trading in the holy month of Ramadan remains slightly subdued which is likely to keep the markets range-bound. However, we expect increased trading activity after Ramadan as investors take new positions and churn their portfolios after analyzing the 9M-2006 earnings announcements.
Table 01: Index Performances
|
Country |
Measured by |
|
Index Close |
MTD Growth (%) |
YTD Growth (%) |
Source: Respective Stock Exchanges and Global Research
3Q earnings round the corner…….
The 3Q earnings of the GCC corporates will be much watched out for reasons more than one. On one hand, the markets have started firming up in 3Q-2006 which is likely to have a positive effect on the investment income (which was the major cause of decline in 1H-2006) of the corporates. On the other hand, the core income of the corporates especially banks and services companies have gone up with the improved business environment in the region.
The regional corporate earnings of around 400 companies listed on GCC bourses exhibited lackluster growth in the first half of 2006, reporting an increase of 9.6% compared to the corresponding period of the previous year. On the country level, we expect that the listed companies will be able to show growth in 3Q-2006 compared to the corresponding period of the previous year.
Table 02: 3Q-2006 Corporate Profitability Estimates
|
Net Profit Figures in USDmn |
No. of companies |
1H05 |
1H06 |
Growth |
3Q06 (Expected) |
|
Saudi Arabia |
63 |
8,084 |
10,077 |
24.7% |
5,482 |
|
Kuwait |
139 |
4,626 |
3,856 |
-16.7% |
2,198 |
|
Qatar |
31 |
1,446 |
1,815 |
25.5% |
1,009 |
|
UAE |
47 |
3,978 |
4,107 |
3.3% |
2,202 |
|
Bahrain |
37 |
651 |
805 |
23.7% |
437 |
|
Oman |
82 |
501 |
485 |
-3.3% |
268 |
|
GCC |
399 |
19,288 |
21,146 |
9.6% |
11,595 |
Source: Global Research
Among the sectors, banking sector is likely to show another round of solid performance even though the fee income is likely to take a hit in 3Q-2006. The core income of the GCC banks are rising in the high interest rate environment, keeping in mind that the GCC banks (especially Saudi Arabian) have a high chunk of non-interest bearing deposits. GCC banking sector achieved a profit growth of 41.80% during the first half of 2006 and we expect banking sector to show around 30% growth in 3Q-2006 earnings as well.
As mentioned in our earlier report, the major correction witnessed in the GCC capital markets hindered the profits of insurance and investments sector which were directly impacted by the stock market slump. We believe that investment sector is likely to return to black in 2006 backed by better investment realizations and increased businesses relating to investment banking activities. With the markets trying to make a comeback, the companies with the significant exposure to stock markets are likely to reap the benefits. We believe that the telecom sector in the GCC region is likely to show more than 25% growth in profitability as they gain the advantage of high ARPU and increased penetration level in the region.
Traditionally, second half of the year has always been more profitable as compared to the first half and we expect that trend to continue this year as well where the combined corporate earnings will better the 9.6% growth in profitability recorded in the 1H-2006 compared to 1H-2005.
Global Competitiveness Report 2006-07 – GCC economies gaining ranks…
On September 26, 2006, the World Economic Forum released its annual Global Competitiveness Report 2006-07. This annual study is a valuable tool to enhance understanding of the key factors which determine economic growth, and explain why some countries are much more successful than others in raising income levels and opportunities for their respective populations. By providing detailed assessments of the economic conditions of nations worldwide, the Report offers policymakers and business leaders an important tool in the formulation of improved economic policies and institutional reforms. It is one of the leading monitors of the competitive condition of economies worldwide. The rankings are drawn from a combination of publicly available hard data and the results of the Executive Opinion Survey, a comprehensive annual survey conducted by the World Economic Forum, together with its network of Partner Institutes (leading research institutes and business organizations) in the countries covered by the Report. This year, over 11,000 business leaders were polled in a record 125 economies worldwide.
The Report also ranks a host of other key factors which directly or indirectly influence the national economies of the 125 nations under review, including infrastructure, faith in public leaders, ethical behavior of firms, local competition, efficiency of legal framework and others.
As per the report, Switzerland, Finland and Sweden are the world’s most competitive economies. Denmark, Singapore, the United States, Japan, Germany, the Netherlands and the United Kingdom complete the top ten list, but the United States shows the most pronounced drop, falling from first to sixth. Switzerland is number one in The Global Competitiveness Report for the first time, reflecting the country’s sound institutional environment, excellent infrastructure, efficient markets and high levels of technological innovation. The country has a well developed infrastructure for scientific research, companies spend generously on R&D, intellectual property protection is strong and the country’s public institutions are transparent and stable.
Arab nations demonstrated their impressive financial strength and future potential once again, with four nations appearing on the world renowned report’s top 50 listing. The UAE ranked 32nd, Qatar moved up eight places to rank 38th while Kuwait and Bahrain ranked 44th and 49th respectively. Terms-of-trade gains linked to oil prices have boosted growth rates of these countries and reinforced already high levels of confidence in the business community, resulting from ongoing institutional modernization and improvements in macroeconomic management. However, in many of the resource-rich countries, the availability of public finance appears – at least for now – not to have translated into improvements in human capital, which would play an important role in helping these economies that are highly dependent on oil and vulnerable to external shocks to diversify their economic base, the report says.
In addition to overall competitiveness ranking, the report reviews and publishes key indicators within individual economies of each nations under review, including GDP data, macroeconomic performance, market efficiency, technological readiness and others. For much of the criteria, Arab nations demonstrated extremely impressive economic gains and performance, ranking far above the other Middle Eastern nations in terms of GDP, as well as superb macroeconomic and institutional performance in relation to the region. Furthermore, on a scale of 1 to 7, these nations scored a near perfect rating in terms of health and primary education for its citizens, a key factor indicating the performance potential of such nations.
We believe that ranking of the GCC countries will improve further in the years to come as many countries in the region are adopting proactive approach to bring economic reforms. GCC countries continue to adopt new laws and regulations with a view to making their investment environments more investor friendly. The regional countries are working further on this line of liberalization for the sectors other than oil & gas, which will further help them in scaling up their competitiveness with rest of the world.
Saudi Banks – Biggest beneficiary of the economic boom …
Saudi Arabia, the biggest economy in the region continued to surge ahead with the nominal Gross Domestic Product (GDP) estimated to have grown by 22.7% in 2005 to reach SR1,152.6bn (US$307.4bn) while real GDP is estimated to have grown by 6.3% to SR767.7bn (US$204.7bn). The regulatory steps to enhance economic activity is likely to establish a solid base for sustained growth of the economy. The biggest beneficiary is likely to be the banking sector.
During the period 2002-05, consolidated assets of Saudi banks grew at a CAGR of 13.3%. Going forward, we expect the asset size of the Saudi banks under coverage to grow at a CAGR of 11.3% for the period 2005-09E. During the period 2002-05, the number of branches in the Kingdom have increased from 1,203 in 2002 to 1,251 in 2005, witnessed a CAGR of 1.2%. The number of ATMs grew much faster by 13.8% CAGR from 3,108 in 2002 to 4,576 in 2005. Alternative delivery channels have gained importance to provide better services to customers and in turn help banks reduce transaction cost thereby enhancing operational efficiency.
The ratio of credit deployment to GDP for Saudi Arabia is low as compared to other GCC countries. Oman has the lowest penetration level in terms of system credit to GDP. Saudi Arabia's ratio as at end 2005 is around 39% as compared to around 61% for Kuwait. For UAE, this ratio is around 70% and for Bahrain around 53%. In case of Qatar, this ratio is around 56%. The penetration level in terms of deposit to GDP ratio for Saudi Arabia is low. As at end 2005, this ratio stood at around 43% as compared to 64% for Kuwait, 63% for UAE, 66% for Bahrain and 68% for Qatar. Oman has the lowest penetration in terms of deposit to GDP ratio and as at end 2005, this ratio was around 32%. This fares well for the Saudi Banking sector, as the ratio of system loans to GDP and system deposits to GDP is low compared to its regional counterparts. Around SR600bn of infrastructure projects are in the pipeline. These are big ticket projects that will be long-term in nature. The current system loans for the entire Saudi banks is around SR450bn. Low penetration levels in terms of credit deployment and deposit mobilization coupled with the opportunities to deploy for these big ticket projects, the banking system is likely to witness strong core banking business growth.
Deposit mobilized grew at a CAGR of 12.9% for 2002-05. We expect resource mobilization to grow at a CAGR of 11.8% (2005-09E) to reach SR832.7bn in 2009E. The contribution of demand deposit to total deposits increased marginally by 40bps from 44.4% in 2002 to 44.8% in 2005. We believe, that the growth in time deposits is likely to remain strong over the next two years as banks structure innovative products coupled with higher rates offered. In order to support loan growth, banks will require to increase their deposit franchise. Going forward, the banks’ ability to increase their branch network will help mobilize deposits further. Strong deposit franchise will help banks to support loan growth (both from the corporate as well as retail segment). In our opinion, earnings from core banking activities will drive Saudi banking growth.
Overall system loans grew at a CAGR of 29.0% for the period 2002-05. The key driver of credit growth during the last three years has been consumer loans, which grew at a CAGR of 50.6% for the period 2002-05.We expect gross loans to grow at a CAGR of 13.4% for the period 2005-09E. Gross loan portfolio of the banks under review is likely to increase from SR450.5bn in 2005 to SR744.9bn in 2009E. The key driver of credit growth during the last three years has been consumer loans. The consumer lending segment grew at a CAGR of 50.6% for the period 2002-05, much higher than the overall system credit growth of 29.0%. Consumer loans grew by 38.6%, 57.3% and 56.6% in 2003, 2004 and 2005 respectively. In order to keep a check on strong expansion in consumer lending so as not to affect the asset quality, the regulator issued guidelines on consumer lending.
Saudi banks are among the most profitable in the GCC banking sector with the return on average assets and return on average equity at 4% and 33.1% respectively reported in 2005. Profits of the banks under review grew at a CAGR of 36.3% for the period 2002-05. Going forward, we expect core earnings to contribute towards bottom line. We expect profits of these banks to grow at a CAGR of 22.5% for the period 2005-2009E. Aggregate profits of these banks is likely to increase from SR27.0bn in 2005 to SR60.9bn in 2009E. Non-commission income of banks increased from SR7.9bn in 2004 to SR15.2bn, a growth of 91.0%. During the last three years, non-commission income has grown at a CAGR of 51.5%. Fees from banking services increased from SR5.6bn in 2004 to SR11.7bn in 2005, a growth of 108.1%.
Saudi banking system is well on its way to the implementation of Basel II and we expect that banks will remain highly capitalized under the new standard. It is worth mentioning that SAMA's approach in applying Basel II Accord is an integrated one aimed at raising the level of risk management in order to maintain the continued strength of the banking system. Saudi banking sector is well capitalized to support strong growth in risk-weighted assets.
Total non-performing loans of the listed banks amounted to SR7.76bn in 2005 which represented 1.7% of the banks’ aggregate loan portfolio at the end of year 2005. Saudi banks follow a conservative policy regarding provisioning for loan losses. In 2005, the average coverage ratio (PLLs-to-NPLs) was 179% with all the banks having coverage ratios of more than 100%.
Most banks in the Kingdom have launched Islamic banking products, either through a separate Islamic window or a subsidiary. Islamic banking is turning into a fast-developing, highly-profitable banking product. Also the division between the Islamic banks and conventional banks is reducing as many banks have a large chunk of their deposits as non-interest bearing which positively affected their spreads.
Saudi Arabia’s financial regulator Saudi Arabian Monetary Agency (SAMA) has been active in liberalizing the sector and has licensed a number of GCC/foreign banks to establish their presence in the Saudi market. Most banks witnessed a surge in their cost of funds in 2005, as banks were offering higher rates on term deposits to attract depositors. In the bargain, their cost of funding increased. With the demand for funds being strong due to strong economic growth and massive infrastructure projects in different sectors being announced, we expect banking sector’s growth to remain strong.
Market activity…..
The month of Sep-06 saw increased trading activity which can be attributed to the investors taking positions before the advent of Ramadan season. The value of shares traded on the GCC bourses amounted to US$157.6bn in Sep-06 as compared to US$136.3bn reported in the previous month.
Table 03: Exchange Activity
|
Country |
Total Volume Traded |
Total Value Traded (US$) |
Market Cap (US$) |
No. of Transactions |
|
Bahrain |
67,669,007 |
44,610,329 |
21,227,130,796 |
2,074 |
|
Kuwait |
3,217,466,000 |
4,619,492,254 |
141,200,865,826 |
116,721 |
|
Oman |
49,198,552 |
246,473,613 |
12,761,038,961 |
36,967 |
|
Qatar |
127,512,873 |
1,101,419,369 |
65,770,866,238 |
138,964 |
|
Saudi Arabia |
6,250,619,180 |
136,446,540,807 |
455,642,330,229 |
9,593,386 |
|
UAE |
8,048,043,871 |
15,138,893,786 |
177,849,880,983 |
390,769 |
Source: Respective Stock Exchanges and Global Research
GCC stock market breadth was heavily skewed towards the advancers as 295 stocks reported monthly gains as compared to only 163 decliners. The region’s biggest market, Saudi Arabia recorded the highest advance-decline ratio of 3.71 as 63 out of 81 listed stocks recorded monthly gains in September. Oman market too witnessed strong buying activity as 56 stocks reported monthly gain in Sep-06 as compared to 23 decliners.
Table 04: Market Breadth
|
|
Advancers |
Volume |
Decliners |
Volume |
Unchanged |
Volume |
Total |
|
BSE |
21 |
60,184,363 |
7 |
5,078,504 |
22 |
2,406,140 |
50 |
|
KSE |
107 |
2,659,316,000 |
42 |
454,145,000 |
26 |
104,005,000 |
175 |
|
MSM |
56 |
122,522,643 |
23 |
25,136,094 |
99 |
1,539,815 |
178 |
|
DSM |
8 |
3,360,474 |
28 |
124,152,399 |
- |
- |
36 |
|
Tadawul |
63 |
5,808,101,261 |
17 |
