Saudi Banks show signs of stress

The Pak Banker - - COMPANIES/BOSS -

Saudi bank­ing stocks have fallen to the low­est lev­els in at least a decade rel­a­tive to their net as­sets, show­ing the slump in oil is stok­ing con­cern that bad loans will in­crease. Fol­low­ing a 10 per­cent slide since the start of the year, an in­dex of 12 lenders on the Tadawul All Share In­dex is trad­ing at an av­er­age 1.3 times book value, near the weak­est since Bloomberg started track­ing the data in 2006. Four of those have fallen below their net as­sets, com­pared with two in De­cem­ber, while two oth­ers are trad­ing at mul­ti­ples of just above 1. They in­clude Samba Fi­nan­cial Group and Riyad Bank, the na­tion's third- and fourth-big­gest banks.

In­vestors are pun­ish­ing fi­nan­cial stocks be­cause "there's an ex­pec­ta­tion of non-per­form­ing loans go­ing up and for de­posit out­flows to con­tinue," said Chi­radeep Ghosh, a re­search man­ager at Manama-based Se­cu­ri­ties & In­vest­ment Co. This "sug­gests banks will have to pay more to get their fund­ing back. A weak eco­nomic en­vi­ron­ment would also im­pact the banks' bro­ker­ages and in­vest­ment bank­ing busi- nesses," he said.

Still, NPLs made up just 1.2 per­cent of to­tal loans held by Saudi banks at the end of Septem­ber, while lenders have set aside pro­vi­sions for more than the debt is worth, cen­tral bank data show. Banks should there­fore be able to ab­sorb a "rea­son­able amount" of toxic credit, ac­cord­ing to Ghosh, who called val­u­a­tions "very at­trac­tive." Brent crude re­bounded 8 per­cent last week, in­clud­ing a surge that hap­pened af­ter Saudi mar­kets closed on Thurs­day.

The Tadawul, whose price-to-book ra­tio of 1.4 is still higher than the MSCI Emerg­ing Mar­kets In­dex, has fallen about 34 per­cent in the past year, mak­ing it the third worst per­form­ing mar­ket tracked world­wide by Bloomberg. The price of oil, the king­dom's pri­mary rev­enue source, re­treated about a third in Lon­don over that pe­riod, forc­ing Saudi Ara­bia to scale back spend­ing. The slow-down in de­posit growth is credit-neg­a­tive for the na­tion's lenders, Moody's In­vestors Ser­vice said in a Jan. 28 re­port. The rat­ing com­pany ex­pects non-per­form­ing loans to in­crease to 2.5 per­cent of to­tal loans over the next 12 months.

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