FALCOM SECTOR REPORT - فالكم للخدمات ... · FALCOM SECTOR REPORT ... 7 6. Porter’s Five Forces ... Five of the eleven listed banks (namely Riyad Bank, SAMBA, Al Rajhi

Snehdeep FulzeleHead of Research+966 1 211 [email protected]

Gaurav Kumar Analyst

FALCOM

SECTOR

REPORT

FALCOM Financial ServicesP.O. Box 884Riyadh 11421Kingdom of Saudi Arabia

SAUDI ARABIAN BANKING SECTOR REPORT

First Half 2009

September 1, 2009

2009

FALCOM Research SAUDI ARABIAN BANKING SECTOR REPORT

Saudi Arabian Banking Sector – Sturdy in the Storm With its epicentre in the US, the global financial crisis has sent shock waves throughout the world. Unlike the dot com bubble which emanated from the overvaluation of the software industry and crises related to currency and policy imbalances, the current crisis has its resemblance with the Great Depression of 1929 and the savings and loans crisis of 1980s, where banks involvement had been central to the crisis. Without exception, the Saudi Banking system also felt the tremors, however, the contraction here was relatively low and the banking system has been relatively resilient to the crisis. Continued growth in total assets, increasing deposits, diversified loan portfolios and rise in investments further attest the sturdiness and resilience of the Saudi Banking sector. Twelve domestic banks and growing number of foreign banks (eight as of now) are managing the expectations and needs of the burgeoning consumption oriented Saudi economy.

In the second quarter of 2009, Saudi Arabia faced the defaults by two high profile families. Saudi Arabian Monetary Agency (SAMA) froze the bank accounts of Mr. Maan Al Sanea, the founder of Saad group, and his family. Apart from those mentioned above, there have not been any further threats of significant defaults. In a recent interview, Mr. Al-Jasser, governor of SAMA expressed his views on the two families and mentioned that there are no systemic risks on the Saudi banking system from their debt; however, he said the profitability of banks might get affected. He also mentioned about the setting up of a special committee which will investigate the two firms and take appropriate actions. He also ruled out the moves to buy the debts of the two troubled families.

The Saudi Central Bank, SAMA (Saudi Arabian Monetary Agency) has been proactively managing the liquidity in the Saudi economy. Amid global financial crises, SAMA undertook a number of measures to pump in liquidity into the local market and spur lending by the commercial banks; the regulator cut the official repo and reverse repo rates to 2% and 0.25% respectively since October 2008, decreased the reserve requirement on demand deposits from 13% to 7%, injected liquidity into the banking sector through demand deposits and provided guarantees for deposits at commercial banks. In order to apply international control and strengthen risk management practices of KSA banks, SAMA has also implemented the Basel II standard in The Kingdom. The Saudi banks have relatively better capital adequacy ratios compared to their global peers.

Nominal GDP of the Kingdom grew at a CAGR of 17.1% over five years until 2008. IMF estimates real GDP to shrink by 1% in 2009, however, the forecasted growth of real GDP for 2010 is 2.9%. As per SAMA annual report, the country had a population of 24.8 million in 2008. IMF expects the Saudi population to grow at around 2.5% in 2009 and at a CAGR of 3.2% from 2009 to 2014. According to SAMA, around 27% of the population is Non-Saudi and 78% of the population is below the age of 40 years. The Kingdom was the 37th richest country in the world with per capita GDP of USD 23,834. The per capita GDP of The Kingdom increased at a CAGR of 4% from 2006 to 2008. To manage the expectations of such diverse and growing population is a challenge that is constantly accomplished by the technology savvy banks.

Islamic banking is attracting world attention for its conservative policies. Banks in The Kingdom give special importance to Sharia’ compliant banking practices. Four banks viz. Al Rajhi Bank, Al Inma Bank, Al Bilad Bank and Al Jazira Bank undertake only Islamic transactions of which Al Rajhi Bank is the largest Islamic bank in the world. These banks have comparatively higher capital adequacy ratios and also enjoy relatively higher spreads.

With increasing competition in domestic market due to entry of foreign banks, domestic banks are tapping opportunities beyond the country’s boundaries as well. This report takes stock of Saudi Banking Sector and discusses drivers, challenges, emerging trends among other aspects of the sector. FALCOM Research has calculated various financial ratios and provided the ranking matrix on various parameters.

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FALCOM Research SAUDI ARABIAN BANKING SECTOR REPORT

Contents

Banking Sector – Kingdom of Saudi Arabia ................................................................................ 11.Overview .................................................................................................................................................... 12.Drivers for Banking Sector in Saudi Arabia ............................................................................................... 13.Challenges for Banking Sector in Saudi Arabia ........................................................................................ 34.Key Trends ................................................................................................................................................ 45.The Banks .................................................................................................................................................. 76.Porter’s Five Forces................................................................................................................................. 117.Our Outlook ............................................................................................................................................. 118.Stock Market Perspective ........................................................................................................................ 12

Key Highlights

The total assets of commercial banks’ in The Kingdom increased at a CAGR of 18.5% which is in line with the growth in nominal GDP of 17.1% (2003-08).

SAMA cut the official repo and reverse repo rates to 2% and 0.25% respectively since October 2008 and decreased the reserve requirement on demand deposits from 13% to 7%.

The average interbank lending rate in The Kingdom has declined significantly from September 2008 levels.

Total number of bank branches in The Kingdom increased by 17% from 1,203 in 2003 to 1,410 in June 2009.

Number of ATMs increased at a CAGR of 19% from 2003 to 2008; in H1 2009 it increased by 7%.

The total assets of commercial banks in The Kingdom grew by 2.7% in H1 2009.

The loans and advances to the private sector declined by around 1% in H1 2009 due to bank’s preference towards holding cash which led to the increase in cash and deposits with SAMA.

Short term loans is more prevalent in The Kingdom accounting for around 60% of the loans & advances to private & govt. sector.

The deposits grew at CAGR of 18.5% from 2003 to 2008, however, in H1 2009 the deposits increased at a slower pace of 8%.

After declining for the last two years, net foreign assets increased by 8% in H1 2009.

In order to measure and compare the financial health of the banks, FALCOM has assigned rankings to each of the banks on the basis of various financial parameters.

The total market capitalization of eleven listed banks represents around 28.5% of the market capitalization of the index (as on 26th August 2009).

Banking sector index gained 10.5% till 26th August 2009.

As on 26th August 2009, the banking sector index had a lower PE ratio than TASI.

FALCOM Research has ranked the banking stocks on the basis of the valuation and capitalization parameters.

Contents


Key Highlights
















Contents


Key Highlights
















FALCOM Research 1SAUDI ARABIAN BANKING SECTOR REPORT

Banking Sector – Kingdom of Saudi Arabia

1. Overview Banking sector plays an important role in the economy by acting as an intermediary between the suppliers of credit on one side and those in need of it on the other side. The banking sector (as defined in this report) in Saudi Arabia consists of eleven publicly listed banks and National Commercial Bank (NCB).

Prior to the discovery of oil in 1939, the financial services sector in The Kingdom consisted of money exchangers and trading houses. SAMA was established in 1952 to regulate the banking sector in The Kingdom. The first local bank to receive license from SAMA was NCB in 1953 followed by Riyad Bank in 1955 and Al-Watany Bank in 1958 (operations of Al-Watany bank merged with that of Riyad Bank).

The most recent bank to get license was Alinma Bank (in May 2008). Prior to Alinma, Al Bilad Bank, which was formed by the merger of eight money exchangers, received the license in 2005. Five of the eleven listed banks (namely Riyad Bank, SAMBA, Al Rajhi Bank, Al Bilad Bank and Alinma Bank) and NCB are local whereas the rest have foreign participation with SABB, Saudi Hollandi Bank, Banque Saudi Fransi and Arab National Bank having substantial foreign ownership.

In the last one decade, SAMA has offered licenses to a number of regional and international players to operate in The Kingdom. Gulf International Bank of Bahrain was the first to acquire the license in 2000. The regional and foreign banks having operations in The Kingdom currently include Gulf International Bank of Bahrain, National Bank of Kuwait, Emirates Bank and Bank Muscat.

2. Drivers for Banking Sector in Saudi Arabia 1. Economic growth – The growth of the banking sector is directly correlated with the growth of the

economy. The increase in economic activity is funded by the growth in credit from banking institutions. The total assets of commercial banks’ in The Kingdom increased at a CAGR of 18.5% which is in line with the growth in nominal GDP of 17.1% (2003-08). As per the IMF estimates, the real GDP of The Kingdom is expected to reduce by around 1% in 2009 which might lead to a decline in credit growth.

2. Monetary policies of SAMA – The monetary policies undertaken by the regulator also has a direct impact on banking activities in an Economy. SAMA uses tools such as the repurchase rate, reverse repurchase rate and reserve requirements to monitor the growth of banking sector. Amid global financial crises, SAMA undertook a number of measures to pump in liquidity into the local market and spur lending by the commercial banks; the regulator cut the official repo and reverse repo rates to 2% and 0.25% respectively since October 2008, decreased the reserve requirement on demand deposits from 13% to 7%, injected liquidity into the banking sector through demand deposits and provided guarantees for deposits at commercial banks. All these positive efforts by SAMA have helped the banking sector in The Kingdom to weather the global crisis relatively well. However, lately the banks in The Kingdom are feeling some pain related to credit problems.


Figure 1: Historical Repurchase and Reverse Repurchase Rates in The Kingdom

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3. Improving liquidity and confidence levels among banks – The average interbank lending rate in The Kingdom has declined significantly from September 2008 levels suggesting increasing liquidity and rising confidence in the banking sector.

Figure 2: One month and three month Average Saudi Inter Bank Offer rates

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Source: Bloomberg. Data till 6th August 2009.

4. Income levels – The income levels in The Kingdom are relatively high. As per IMF 2008 estimates, The Kingdom was the 37th richest country in the world with per capita GDP of USD 23,834. The per capita GDP of The Kingdom increased at a CAGR of 4% from 2006 to 2008. The value is expected to increase at a slower pace in 2009 mainly due to expected 1% decline in real GDP.


Figure 3: Per capita GDP and its growth rate for The Kingdom

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Source: IMF

5. Population growth and favourable demographic profile – %. As per SAMA annual report, the country had a population of 24.8 million in 2008. IMF expects the Saudi population to grow at around 2.5% in 2009 and at a CAGR of 3.2% from 2009 to 2014. In 2008, around 32% of the population was below the age of 15, the income levels are expected to increase in coming years as this set of population starts earning. The increase in income levels are expected to increase the deposits for the banks.

3. Challenges for Banking Sector in Saudi Arabia 1. Declining savings rate – The savings rate (private & govt., at current prices) in The Kingdom

declined from 47% in 2005 to around 42% in 2008 (Source: Central Department of Statistics & Information, and Ministry of Economy & Planning of Saudi Arabia).

2. Decline in International Trade – Due to the decline in international trade, the private sector lending related to imports and exports in The Kingdom are expected to grow at a slower pace than historical levels. However, our outlook remains positive for 2010 as the global economy starts to recover.

3. Lack of mortgage laws – Due to the lack of proper mortgage laws in The Kingdom, banks are not tapping the potential mortgage market.


4. Key Trends

Increasing branch and ATM coverage Total number of bank branches in The Kingdom increased by 17% from 1,203 in 2003 to 1,410 in June 2009. Number of ATMs increased at a CAGR of 19% from 2003 to 2008; in H1 2009 it increased by 7%. The bank branch and ATM coverage as indicated by number of branches and ATMs per 10,000 sq. km also increased significantly from 2003 to June 2009.

Figure 4: Branch and ATM coverage in The Kingdom

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Source: SAMA, FALCOM Research, IMF

Increasing use of banking services like cards and POS transactions in The Kingdom The number of ATM cards issued in The Kingdom doubled from 6 million in 2003 to 13 million in June 2009. Also, the number of ATM and POS transactions done per day tripled from around 1 million in 2003 to 3 million in June 2009, suggesting the increasing penetration of banking services in The Kingdom. Given the fact that around one third of the population is below 15 and the high spending habits of residents, we expect the penetration to increase further in coming years.

Figure 5: Penetration of transaction services of banks in The Kingdom

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Source: SAMA, FALCOM Research, IMF


Increasing total assets of commercial banks The total assets of commercial banks in The Kingdom grew at a CAGR of 19% from 2003 to 2008 and by 2.7% in H1 2009. The growth was mainly fuelled by the inflow of petrodollars in the last five years. The growth is expected to be sluggish for 2009; however, from 2010 onwards we expect healthy growth.

Figure 6: Commercial Banks’ Total Assets Composition (SR million)

12,218 10,019 11,007 10,28939,843 98,595 86,164 118,479

129,796147,712

153,986178,872

650,936 773,552 997,616 981,749

8,353 9,757 10,624 12,12119,943 35,586 42,873 36,171

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Cash in Vault Deposits with SAMA Foreign Assets Total Claims* Fixed Assets Other Assets

Source: SAMA. *Total claims include claims on private sector, govt. & quasi-govt. sector, non-monetary financial institutions and banks.

Lending to private sector declined in H1 2009 The loans and advances to the private sector increased at a CAGR of 27% from 2003 to 2008, however, in H1 2009 the loans have declined by around 1% due to bank’s preference towards holding cash which is evident from the increase in cash and deposits with SAMA. We expect the lending to start growing by the end of 2009 as the global markets recover and the economic activity in The Kingdom picks up.

Short term lending is more prevalent in The Kingdom Short term lending is more prevalent in The Kingdom than medium/long term. Short term loans account for around 60% of the loans & advances to private & govt. sector followed by long term (25%).

Figure 7: Bank credit to private and govt. sector by maturity

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Total - SR 861,089 million Total - SR 1,075,222 million Total - SR 1,302,272 million Total - SR 1,337,681 million


Growing deposit base The deposits grew at CAGR of 18.5% from 2003 to 2008, however, in H1 2009 the deposits increased at a slower pace of 8%. Though demand deposits and quasi monetary deposits (mainly foreign currency reserves) recorded increase in value, time & savings deposits decreased in H1 2009.

Figure 8: Commercial Banks’ Total Liabilities Composition (SR million)

591,259 717,564 846,118 916,444

59,199 105,213 112,466 78,116

114,612 136,290 161,750 181,683

16,731 20,832 28,521 34,4072,453 5,294 36,778 25,86376,835 90,029 116,639 101,168

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Source: SAMA. *Capital Accounts include reserves, capital and period profits

Figure 9: Deposit composition of commercial banks

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Investments by banks in private and govt. sector as a percentage of deposits declined in H1 2009 The investments by banks in the private sector & govt. sector increased at a CAGR of 24% and 7% respectively from 2003 to 2008. However, in H1 2009, the investments in private sector and government sector declined by 2% and 13% respectively. The decline in govt. sector securities might be because of buyback of securities by SAMA in the open market to inject liquidity.

Total - SR 861,089 million Total - SR 1,075,222 million Total - SR 1,302,272 million Total - SR 1,337,681 million


After declining for the last two years, net foreign assets increased by 8% in H1 2009 The foreign assets and liabilities grew at a CAGR of 14% and 23% respectively from 2003 to 2008 causing the net foreign assets to increase slightly at a CAGR of 0.2%. However, in first half 2009, the foreign assets increased by 16% and foreign liabilities declined by 31% causing the net foreign assets to boost by 143%.

Table 1: Key Ratios

Ratio Analysis 2006 2007 2008 Jun-09

Growth Ratios

Growth of Total Assets 13.4% 24.9% 21.1% 2.7%

Growth of Total Deposits 20.8% 21.4% 17.9% 8.3%

Growth of Loans and Advances 10.3% 21.7% 28.0% -0.7%

Growth of Net Foreign Assets 167.5% -39.8% -2.3% 142.7%

Performance Ratios

Bank Claims on Private & Govt./Total Deposits 107.3% 105.8% 115.4% 103.2%

Cash in Vault/Total Deposits 2.1% 1.4% 1.3% 1.1%

Deposits with SAMA/Total Deposits 6.7% 13.7% 10.2% 12.9%

Foreign Assets/Total Assets 15.1% 13.7% 11.8% 13.4%

Investments in private sector/Total Deposits 2.4% 2.9% 2.6% 2.3%

Investments in government sector/Total Deposits 20.8% 20.1% 24.8% 20.0%

Source: SAMA

Geographic Diversification The banks in The Kingdom lately have started to look for opportunities outside where Islamic banking services are prevalent. Al Rajhi Bank started its operations in Malaysia in 2006 and was the first foreign bank to receive full-banking license in Malaysia. Al Rajhi Bank currently has 19 branches in Malaysia with plans to increase this number in the future. Saudi American Bank (SAMBA) has international presence since long time now; SAMBA has full-fledged banking operations in UK (for over 20 years), Dubai (started last year) and Pakistan (started last year).

5. The Banks

Asset market share, growth and return on assets The total assets of the banking sector grew by 8.8% from SR 1.21 trillion on 30th June 2008 to SR 1.31 trillion on 30th June 2009. National Commercial Bank had the maximum share of the total assets whereas Riyad Bank’s assets experienced maximum annual growth. Al Rajhi had highest returns on average assets for the period June 2008 – June 2009.


Figure 10: Market Share of total assets, growth of assets and return on assets

12.5%, 9.7%, 4.2%

1.3%, 0.0%, 3.4%8.8%, 4.3%, 2.2%

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2.2%, 19.2%, 0.7%

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Al Rajhi Alinma* ANB Al Bilad Al Jazira Saudi Fransi

NCB Riyad Bank SABB Samba Saudi Hollandi Saudi Investment

Source: Zawya, FALCOM Research. *Annualized Net Income for Alinma Bank has been taken for the last 13 months (since listing) and the growth is zero since the bank didn't start operations in H1 2008

Total Income market share, growth and margins

Figure 11: Market Share of total income, growth of total income and net income margin

17.9%, 19.9%, 53.5%

1.0%, 0.0%, 83.7%

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2.1%, -7.1%, 12.9% 8.8%, -9.6%, 44.3%

16.2%, -10.3%, 5.4%11.0%, -5.1%, 31.3%

10.6%, -2.0%, 37.8%

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Market Share of Total Income (H1 2008-09)

Al Rajhi Alinma* ANB Al Bilad Al Jazira Saudi Fransi

NCB Riyad Bank SABB Samba Saudi Hollandi Saudi Investment

Size of the bubble represents the annualized net income margin (H1 2008 - 09)

Source: Zawya, FALCOM Research. *Annualized Total Income and Net Income for Alinma Bank has been taken for the last 13 months and the growth is zero since the bank didn't start operations in H1 2008(since listing)

The total income of Saudi banks declined by 3.4% from first half 2008 to first half 2009 mainly due to decline in banking fees and commissions and interest income. The total net income after tax/zakat declined by around 11% mainly due to increase in provisions given the increasing credit related problems. Al Rajhi Bank

Size of the bubble represents the annualized return on average assets


had the highest market share in terms of total income and was the only bank which recorded annual increase in total income whereas Alinma Bank had the highest net income margin followed by Al Rajhi Bank.

Deposit market share, growth and credit to deposit ratio

Figure 12: Market share of customer deposits, its growth and credit to deposit ratios

12.5%, 13.3%, 116.8%

0.1%, 0.0%, 528.7% 8.7%, 0.4%, 83.5%

1.3%, 11.6%, 92.5%

2.3%, 28.1%, 71.4%

9.2%, 5.8%, 90.1%

12.4%, 38.0%, 85.7%

9.3%, 2.7%, 86.0%

14.1%, 13.5%, 63.7%

5.3%, 23.3%, 76.7%

3.7%, -1.4%, 82.9%

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Market Share of Customer Deposits and CDs (H1 2009)

Al Rajhi Alinma* ANB Al BiladAl Jazira Saudi Fransi NCB Riyad BankSABB Samba Saudi Hollandi Saudi Investment

Size of the bubble represents the credit to deposit ratio (H1 2009)

Source: Zawya, FALCOM Research. *Growth for Alimna Bank is zero since the bank didn't start operations in H1 2008. Credit for AlRajhi, Alinma and Al Bilad Bank is equal to Islamic financing and investment

The expansionary monetary policy and the flight of stock market investors to safety boosted the deposits of banks causing it to increase by 17% from H1 2008 to H1 2009. The credit to deposit ratio for the Saudi banking industry stood at 79% at the end of H1 2009 which is below the statutory limit of 85%. As of the end of first half of 2009, Samba had the maximum market share in terms of total deposits closely followed by Saudi Fransi and Al Rajhi banks. Saudi Fransi experienced maximum growth of 38% in its customer deposits whereas Alinma Bank had maximum credit to deposit ratio.

Other Key Ratios

Table 2: Other Key Ratios for Banks

Other Key Ratios for Banks for H1 2009

ROE* Cost of Funds*

Yield on Investments & loans* Spread Capital adequacy ratio

(Tier 1 + tier 2) Tier 1 ratio

Al Rajhi 24.4% 0.8% 7.3% 6.5% 17.3% 21.0%

Alinma 3.6% 0.1% 23.6% 23.5% 379.0% 367.0%

ANB 19.0% 1.9% 4.8% 2.9% 15.0% 11.7%

Al Bilad 2.0% 0.5% 5.5% 5.0% 22.6% 22.4%

Al Jazira 4.1% 2.0% 5.6% 4.1% 17.8% 17.3%

Saudi Fransi 18.4% 2.0% 4.7% 2.7% 12.4% 11.8%

NCB 2.2% 1.6% 5.5% 3.9% 17.4% 16.5%

Riyad Bank 9.0% 1.8% 4.4% 2.6% 17.4% 15.9%

SABB 21.4% 2.3% 5.2% 2.9% 12.6% 10.5%


ROE* Cost of Funds*

Yield on Investments & loans* Spread Capital adequacy ratio

(Tier 1 + tier 2) Tier 1 ratio

Samba 23.1% 1.7% 5.2% 3.5% 15.2% 12.3%

Saudi Hollandi 16.8% 2.2% 5.1% 2.9% 13.6% 9.8%

Saudi Investment 5.7% 3.4% 5.1% 1.7% 14.4% 13.2%

Source: Financial Statements, Tadawul, Zawya, FALCOM Research. *Annualized from H1 2008 – H1 2009

In order to apply international control and strengthen risk management practices of KSA banks, SAMA implemented the Basel II standard in The Kingdom. The capital adequacy ratios of the banks in The Kingdom are robust mainly due to lack of debt financing. Islamic banks namely, Al Rajhi, Alinma, Al Bilad and Al Jazira have higher capital adequacy ratios then their peers. The Islamic banks also enjoy relatively higher spreads, given their low cost of funds.


6. Porter’s Five Forces In order to assess the attractiveness of the banking sector we have used Porter’s Five Forces model.

Bargaining Power of Customers – Medium

The customers for the banking sector include the private sector (retail and corporate) as well as the public sector entities that receive credit from banks. The bargaining power of customers in this sector is affected by the socio economic conditions in The Kingdom, the concentration of customers and the service levels offered by the banks. Given the favourable and improving socio economic health of The Kingdom and the need of credit, the bargaining power of customers is expected to be low, however, taking into account the opportunity costs and relatively low savings rate in The Kingdom, we have assigned a medium rating to this force.

Bargaining Power of Suppliers – Medium

The suppliers for the banking sector are the sources of funding for banks which again can be retail or corporate entities (deposits) or public entities. The financing for banks can also come from capital markets through issue of equities or debts. In The Kingdom, deposits are the main source of financing constituting for around 65% of the total assets of commercial banks. Given the low cost of funds and the need for deposits, the bargaining power of suppliers should be low, however, given the increasing competition in the industry with new banks coming up (both local and international), we have assigned a medium rank to this force as well.

Threat of Substitutes – Low

The banking services and products are necessary for the customers and as such don’t have threat of substitutes. However, within the industry there are different kinds of products and levels of service available which compete as substitutes. We have assigned a low ranking to this force as it doesn’t have much significance in this industry.

Threat of New Entrants – Low

With improving role of the region in the global economy and increasing fiscal balances and discretionary income, foreign and local players have already entered the market in the recent past. Banking sector is one of the most regulated sectors in The Kingdom and the capital requirements are also substantial, this in addition to the relatively low market concentration reduces the threat of new entrants.

Industry Rivalry – Medium

The top four banks namely, NCB, Samba, Riyad Bank and Al Rajhi share around 60% of the market in terms of total assets. The Herfindahl-Hirschman Index, which is calculated to be around 1,200, suggests moderate level of competition.

7. FALCOM Outlook Our outlook for the rest of the year for banking sector is neutral given the expected decline in real GDP and fiscal deficit. The growth of loans to private sector will remain sluggish for rest of the year due to contraction in the economic activity and low risk taking by banks. The net income might also decline slightly (from 2008 levels) due to losses related to banks’ investment portfolios and high provisions. However, we are optimistic for 2010 as the world economy recovers, the monetary and fiscal measures start providing desirable results and the international trade kicks in again. The expected increase in economic activity (infrastructure and manufacturing), increasing number of Small & Medium Enterprises (SMEs) and trade activity is also expected to cause growth in loans and income for the banks in The Kingdom in 2010.


8. Stock Market Perspective

The Banking Sector Index – Trending with TASI The banking sector index consists of the eleven listed banks in The Kingdom and over the last one year has moved steadily with TASI. The total market capitalization of eleven listed banks represents around 28.5% of the total market capitalization of the index (as on 26th August 2009).

Figure 13: TASI and Banking Sector Index

10,000

12,000

14,000

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TASI Banking & Financial Services Sector

Source: Tadawul, FALCOM Research

Performance & Statistical Analysis of Banking Stocks

Table 3: Price Performance & Statistical Indicators for Banking Stocks

Price Performance & Statistical Indicators for Banking Stocks*

Company ClosePrice YTD 2008 30 day average

volume One year

High One year

Low Volatility** Correlationwith TASI#

1 yr Beta

RIBL 23.4 10.1% -57.1% 373,924 36.5 18.0 2.83% 77.4% 0.83

BJAZ 19.8 31.6% -69.4% 432,842 32.3 13.3 3.24% 82.5% 1.02

SIBC 17.6 6.0% -67.6% 143,273 32.8 14.1 3.19% 69.5% 0.83

Saudi Hollandi 33.4 4.4% -36.0% 50,020 65.0 31.5 3.23% 67.0% 0.82

Saudi Fransi 40.0 14.0% -61.0% 61,879 63.0 31.0 3.21% 73.7% 0.90

SABB 44.1 2.1% -39.6% 64,259 70.2 36.4 3.20% 67.4% 0.82

Arab National 44.0 41.0% -63.2% 107,483 63.0 25.7 3.48% 79.9% 1.05

SAMBA 45.0 -12.2% -57.3% 138,527 82.5 38.2 2.96% 67.0% 0.75

Al Rajhi 67.8 21.0% -52.3% 1,786,241 91.0 40.6 3.15% 91.2% 1.09

AL Bilad 20.0 -28.8% -30.4% 556,377 43.5 17.6 2.95% 63.8% 0.71

Alinma Bank 12.9 16.2% 11.0% 17,964,122 18.0 10.0 2.77% 85.3% 0.90

Banks & Financial 15,028.6 10.5% -55.5% 21,678,947 22,572.1 11,242.3 2.53% 95.7% 0.92

TASI 5,762.8 20.0% -56.5% 167,420,973 9,001.2 4,068.1 2.64% 100.0% 1.00

Source: Tadawul, FALCOM Research. *As of 26th August 2009;**Standard Deviation of daily returns for last one year; #correlation of daily returns for last one year.


Year till date (as on 26th August 2009) the banking index is 11% up, thus underperforming the TASI which is 20% up. The banking sector has very high correlation with TASI returns over the past one year and also has equivalent risk (measured by the standard deviation of daily returns for last one year).

Following are some of the highlights for the banking stocks.

Among the banking stocks, ANB has the best price performance for the year 2009 whereas Alinma bank has the minimum standard deviation of daily returns (for last one year).

Al Rajhi Bank has the highest return correlation with TASI and Al Bilad Bank has the lowest. Three of the eleven banks namely Bank Al Jazira, ANB and Al Rajhi Bank have beta greater than 1

whereas the rest other banks have beta less than 1 (with TASI). The most active banking stock in the last one month, in terms of volume, was Alinma Bank.

Valuation and Market Capitalization

Table 4: Valuation and Market Capitalization Parameters for Banking Stocks

Banking Sector Stock Valuations and Market Capitalizations*

Valuation Parameters Market Capitalization

Company PE PBV Dividend Yield Total Mkt. Cap (SR million) % Floated

RIBL 14.6 1.3 6.0% 34,950 38.7%

BJAZ 31.2 1.3 2.5% 6,000 73.6%

SIBC 19.2 1.1 0.0% 7,763 61.2%

Saudi Hollandi 11.0 1.8 1.8% 10,882 29.4%

Saudi Fransi 10.5 1.9 2.0% 28,784 54.7%

SABB 11.8 2.5 1.7% 33,075 32.9%

Arab National 11.4 2.2 2.3% 28,405 49.1%

SAMBA 9.0 2.1 3.7% 40,680 55.4%

Al Rajhi 15.7 3.9 4.3% 104,625 49.9%

AL Bilad 90.5 1.9 0.0% 6,015 77.0%

Alinma Bank 109.1 1.2 0.0% 19,350 69.9%

Banks & Financial 13.6 2.1 3.2% 320,528 52.4%

TASI 16.5** 2.0 3.6% 1,135,855 37.4%

Source: Tadawul, FALCOM Research. *As of 26th August 2009. **Excluding loss making companies

Highlights:

The banking sector index had a lower PE and slightly higher PBV ratio than TASI. Five of the banking stocks namely Saudi Hollandi, Saudi Fransi, SABB, ANB and SAMBA are

trading at PE ratios lower than that of the sector. Riyad Bank has the highest dividend yield followed by Al Rajhi Bank. Al Rajhi Bank has the highest market capitalization whereas Bank Al Bilad has maximum % of

floating stocks.


FALCOM Valuation and Capitalization Parameter Matrix

FALCOM Research ranked the banking stocks on the basis of the valuation parameters and market capitalization figures.

Table 5: FALCOM Valuation and Capitalization Parameter Matrix

Table 6: FALCOM Valuation and Capitalization Parameter Matrix

Company PE PBV Dividend Yield Total Market Capitalization % Floated

RIBL 6 4 1 3 9

BJAZ 9 3 4 11 2

SIBC 8 1 9 9 4

Saudi Hollandi 3 5 7 8 11

Saudi Fransi 2 7 6 5 6

SABB 5 10 8 4 10

Arab National 4 9 5 6 8

SAMBA 1 8 3 2 5

Al Rajhi 7 11 2 1 7

AL Bilad 10 6 9 10 1

Alinma Bank 11 2 9 7 3

Source: FALCOM Research. First, second and third ranks for each parameter are marked in darker shades of grey for reference.

Documents

FALCOM SECTOR REPORT - فالكم للخدمات ... · FALCOM SECTOR REPORT ... 7 6. Porter’s Five Forces ... Five of the eleven listed banks (namely Riyad Bank, SAMBA, Al Rajhi