MATEIN KHALED

Gulf bank shares face myr­iad macro risks in 2014.

Gulf Business - - CONTENTS - Matein Khalid is a global eq­ui­ties in­vestor and ad­vi­sor to re­gional fam­ily of­fices.

Gulf bank shares face myr­iad macro risks in 2014.

GCC BANKS WERE THE ben­e­fi­cia­ries of the broad stock mar­ket ral­lies in the re­gion, in 2013, up 25 per cent at a time when the Mor­gan Stan­ley emerg­ing mar­kets bank in­dex lost six per cent. This sig­nif­i­cant out­per­for­mance was due to a com­bi­na­tion of earn­ings mo­men­tum, val­u­a­tion rerat­ings, ac­cel­er­at­ing credit growth, lower pro­vi­sion­ing on real es­tate loans as property mar­kets rose and global cap­i­tal flows into fron­tier mar­kets not ex­posed to dol­lar fund­ing risks. 2013 was un­ques­tion­ably the best year for GCC bank in­vest­ing since the fail­ure of Lehman, the sub­se­quent ice age in global in­ter­bank and fund­ing mar­kets, the de­pos­i­tor run on Kuwait’s Gulf Bank, the $24 bil­lion Saad Al-Go­saibi cor­po­rate loan scan­dal, the Nakheel stand­still agree­ment and crash in Dubai real es­tate trau­ma­tised the sec­tor. I ex­pect GCC banks to con­tinue to be prof­itable in­vest­ments in 2014, though in­vestors will need to stock pick spe­cific banks for out­per­for­mance. The macro en­vi­ron­ment will be less be­nign as the Federal Re­serve will de­cel­er­ate the ex­pan­sion of its bal­ance sheet, now al­most $4 tril­lion. This means global liq­uid­ity will con­tract and credit spreads for emerg­ing mar­ket bor­row­ers in global bank whole­sale fund­ing mar­kets will rise.

Oil pro­duc­tion growth in Iran, Iraq, Libya, US shale, Gulf of Mex­ico and off­shore West Africa at a time when Saudi Ara­bia has re­fused to play the role of swing pro­ducer in OPEC and en­gi­neer a cut to OPEC’s 30 mil­lion out­put cap, means that there is now a non-triv­ial prob­a­bil­ity of a ma­jor fall in Brent crude oil, pos­si­bly to as low as $85-90. This is not bullish for GCC govern­ment in­fra­struc­ture spend­ing or the trade/ project fi­nance com­po­nent in GCC bank earn­ings cen­tral banks in the GCC are also con­cerned about em­bry­onic as­set bub­bles in property mar­kets, high­lighted by the IMF’s warn­ing about a property bub­ble in Dubai. The UAE Cen­tral Bank has in­tro­duced lend­ing caps on re­tail lend­ing and credit ex­po­sures to state owned com­pa­nies. The Saudi Ara­bian Mon­e­tary Agency has cracked down on ex­ces­sive fees in Saudi bank wealth man­age­ment prod­ucts. Kuwait has still not re­solved its prob­lems of zom­bie in­vest­ment man­age­ment com­pa­nies

“As po­lit­i­cal vi­o­lence rages in Egypt, Syria, Le­banon, Iraq, Ye­men and Sudan, losses on GCC banks Arab world sub­sidiaries and af­fil­i­ates are in­evitable. It is es­sen­tial that in­vestors be pru­dent and se­lec­tive in their bank in­vest­ment strat­egy in 2014.”

whose fail­ure could hit bank prof­its. The ten year US Trea­sury bond note has risen from 1.4 per cent in July 2012 to as high as 2.9 per cent now, mean­ing GCC banks face losses on their in­ven­to­ries of re­gional cor­po­rate bonds and sukuk. Loan growth is flat in the UAE and Saudi Ara­bia and ex­pected to de­cline in Qatar and Bahrain. Only Omani bank loan growth will rise from 10 per cent in 2013 to 14 per cent next year. Mar­gin com­pres­sion is in­evitable in UAE bank­ing as fund­ing costs rise while spreads on cor­po­rate and re­tail lend­ing com­presses. How­ever, de­spite the reg­u­la­tory and macro caveats, as­set qual­ity and earn­ings power of GCC banks will im­prove in 2014, as non-per­form­ing loans and pro­vi­sion­ing for bad debt falls. The re­cent diplo­matic rap­proche­ment be­tween Iran and the US could also be pos­i­tive for trade fi­nance in Dubai banks if sanc­tions ease. As po­lit­i­cal vi­o­lence rages in Egypt, Syria, Le­banon, Iraq, Ye­men and Sudan, losses on GCC banks Arab world sub­sidiaries and af­fil­i­ates are in­evitable. It is es­sen­tial that in­vestors be pru­dent and se­lec­tive in their bank in­vest­ment strat­egy in 2014.

Saudi bank shares have the great­est upside po­ten­tial in 2014. SAMBA, with its 19 per cent cap­i­tal ad­e­quacy and 73 per cent loan to de­posit ra­tion as well as its unique cor­po­rate lend­ing fran­chise, is the most at­trac­tive bank share in Saudi Ara­bia. SAMBA trades at a mod­est 10 times for­ward earn­ings and 1.4 times price/book value. My buy/sell ranges on SAMBA are 45-60 Saudi riyal. NBAD is the flag­ship state owned bank of Abu Dhabi, an Arab safe haven credit that boasts 100 bil­lion bar­rels of proven crude oil re­servs and $800 bil­lion in sov­er­eign ex­ter­nal as­sets. NBAD has the low­est fund­ing cost and NPL ra­tio in UAE bank­ing with sec­u­lar earn­ings growth rate of at least 12 per cent in 2014.

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