Corporate earnings

Heavyweight Banking sector, contributing to nearly 30 percent TASI’s earnings, grew 11.9 percent YoY in 2012. Al Rajhi Bank, the leading lender in the Kingdom, registered a 6.9 percent YoY increase in earnings to $2.1bn, representing 27.5 percent of the sector’s total earnings. Strong fee income and an expanding loan book continued to support the stock. Riyad Bank reported a 10.1 percent YoY rise in earnings to $924.2mn due to higher operating income.

Telecommunication & Information Technology, the next largest contributor to TASI’s earnings (12.1 percent of total earnings) grew at 6.8 percent YoY, led by improved performance of Etihad Etisalat Co whose earnings grew 18.4 percent YoY in 2012.The growth in earnings was driven by a robust 17.9 percent top line growth.

Robust

Cement companies in the Kingdom continue to enjoy robust demand given the increased focus on government expenditure. On the other hand, Dar Al Arkan Real Estate Development Co’s earnings decreased to $263.6mn in 2012 from $290.1mn in 2011 (down 9.1 percent) on rising operating expenses and finance cost.

KSA’s Agriculture & Food Industries sector grew 16.2 percent YoY, contributing 3.9 percent to TASI’s earnings in 2012. The sector’s earnings were broadly driven by three major companies: Almarai (representing 38.3 percent of the sector’s earnings); Savola Group (37.3 percent) and Saudi Airlines Catering Co (13.0 percent). Factors such as favorable demographics, rise in discretionary spending and an expansion in new segments remain the primary growth drivers. Almarai’s earnings increased 26.4 percent YoY to $384.1mn in 2012 supported by a strong distribution network and expansion in new segments.

UAE posted a strong set of earnings numbers, rising 28.8 percent YoY in 2012 (including DP World — DIX), with growth witnessed in Abu Dhabi as well as Dubai markets. Corporate earnings in Dubai advanced 88.2 percent YoY in 2012, outperforming Abu Dhabi (grew 13.6 percent YoY). A recovery in the Real Estate segment helped both markets to continue the momentum from 2011. Abu Dhabi Corporate earnings in Abu Dhabi increased 13.6 percent YoY in 2012. This was led by sector heavyweights, Banking, Real Estate and Telecommunication, which grew 9.3 percent YoY, 104.4 percent YoY and 12.9 percent YoY, respectively. Banking sector remained the biggest segment in 2012, constituting 58.4 percent of total earnings, followed by Telecommunications (22.3 percent) and Real Estate (7.3 percent).

The Banking sector was led by National Bank of Abu Dhabi (up 16.9 percent YoY), First Gulf Bank (up 12.1 percent YoY) and National Bank of Ras Al Khaimah (up 16.6 percent YoY). Though the sector grew 9.3 percent YoY in 2012, it was considerably lower than the growth witnessed in 2011. The Banking sector continues to soften with tougher regulations in recent times. In addition, higher liquidity and lower borrowing appetite of companies has further exerted pressure on margins.

In the Telecommunications sector, Emirates Telecommunications (Etisalat) was the leader with a gain of 15.5 percent YoY in 2012. This could be ascribed to an increase in the subscriber base and focus on cost optimization measures throughout the year.

The Real Estate sector rebounded strongly during the year, advancing 104.4 percent YoY in 2012, after declining in 2011. Growth was mainly led by Aldar Properties and Eshraq Properties. The former’s earnings increased 108.7 percent YoY in 2012, while Eshraq Properties posted a net profit of $77.8mn after incurring a loss of $0.3mn in 2011. The sector’s expansion is primarily ascribed to a recovery in overall construction activity in the UAE in 2012.

Recovery

The Dubai market posted a strong performance in 2012, with corporate earnings growing 88.2 percent YoY. Growth was mainly led by a recovery in the Real Estate sector, which surged 282.0 percent YoY in 2012. Banking (up 24.1 percent YoY), Telecommunications (up 80.4 percent YoY) and Insurance (up 16.4 percent YoY) sectors also remained buoyant. The Banking sector was the biggest contributor to total earnings in 2012 at 47.5 percent. The Real Estate sector accounted for 20.2 percent, while Telecommunications constituted 15.4 percent of total incremental earnings.

The Banking and Investment & Financial services sector witnessed a recovery due to an improvement due to lower provisioning and higher lending activity during 2012. Gulf General Investment Company and Emirates Islamic Bank posted gains of $79.5mn and $22.1mn, respectively, in 2012, after recording losses of $293.5mn and $109.3mn in 2011. Mashreq bank gained 60.0 percent YoY, with net profit totaling $357.3mn in 2012 from $223.4mn in 2011. However, currently, the banking sector continues to reel under pressure due to tighter regulations and lower borrowing capacity of corporates.