Kingdom’s strong bank credit a magnet for offshore funds
The saudi Tadawul at 7,500 makes me nervous, though the DNA of the bull market is still intact. The Saudi stock market rally has been led by lower-priced, speculative shares and the usual retail churning. Its catalyst was both the ECB’s trillion-euro liquidity injection, $120 Brent crude oil, the surge in global equities and offshore flows motivated by a rumours of a Cabinet resolution to open the kingdom’s stock exchange to foreign investors and rule change to allow non-Saudi investors to list on the Tadawul. Though the Tadawul has reached its highest level since 2009, many shares have been gutted by the most traumatic six-year bear market in the modern history of the kingdom.
Saudi equities are not cheap but the kingdom’s strong bank credit growth, hugely expansionary fiscal policy, accelerating economic growth, petrocurrency windfall and new role as a magnet for offshore funds all justify a valuation premium to Kuwait, Bahrain and the UAE.
Is the rally in the Saudi stock market sustainable? I think so, though the easy money has long been made, global risk assets could well struggle now that the Bernanke Fed will not do QE3 and bank valuations are far too high. I believe Samba Financial should be a core holding in any regional bank portfolio, due to its expertise in complex corporate lending and project finance/loan syndication and liquid balance sheet Saudi retail banks will be hit by competition in funding markets and pressures on net interest rate margins. Samba, the second largest bank in the kingdom, posted SR1.145 billion in Q1 2012. The rally in Tadawul is also a windfall for Samba as it benefits disproportionately from higher trading volumes and strong trading gains. I would not be surprised to Samba rise as high as SR70 by the end of 2012 or early 2013.
Telecom shares are on a roll after STC, the incumbent flagship operator in the kingdom, delivered an incredible Q1 2012 net profit of SR2.52 billion, up 60 per cent since 2011. While the Haj pilgrimage traffic helped STC, the earnings power of the bellwether Saudi telecom derives from its global base of 160 million subscribers. Mobily is unquestionably the best managed, mobile growth share in Mena with its 36 per cent margins and 21 per cent annual profit growth, I still believe Mobily is the best play on the broadband/data growth potential in the youngest, largest consumer market in the Middle East. While I believe Tadawul 7,500 is not the optimal price to buy either Mobily or STC even though their dividend yields are still attractive (or any Saudi share, for that matter), I would wait for any 10 per cent correction to accumulate the shares of Sama, Mobily and STC.
European banks account for 70 per cent of all cross border credit to the GCC, according to the BIS. This is the Achilles heel of Gulf finance. A exodus of European banks from GCC loan syndication, corporation banking and project/trade finance is happening even now. This trend surely will determine the next twist in Gulf finance.