Saudi Arabian banking stocks underperforming

28 May 2013

Kingdom no longer trading at premium to regional peers as UAE banking stocks reach peak

Saudi banking stocks are no longer trading at a premium to regional peers, despite their structural advantages and growth potential, according to a report by Shuaa Capital published on 28 May.

The Dubai-based investment bank’s analysis over the past twelve month shows that compared to regional peers, the kingdom’s banks trade at a 4 per cent discount on price-to-book value and 7 per cent premium on price-to-earnings. Over the last five years that amount was much higher, with Saudi banks registering average premiums of 20 per cent.

“We view this de-rating as unjustified, given Saudi banks’ strong asset quality, attractive structural profitability and superior asset quality metrics,” the report said. “The market is pricing in a deteriorating outlook on both net interest margins and asset quality. However, we believe the downside appears limited from these levels.”

Over the past month, UAE banking stocks have been trading at record levels. Combined, the UAE stock markets grew more than 45 per cent over the past 12 months, with the rally in the banking sector even stronger – the Abu Dhabi Securities Exchange’s banking index outperformed the general index by nine per cent.

The share price of the strongest performer, Emirates NBD, doubled over the past year.

“This rally has either wiped or significantly reduced any prospects of an upside potential, given that fundamentals have not changed a lot,” said a report by Kuwait-based Global Investment House (GIH) on 26 May.

“Relative valuation multiples of the UAE banking sector are either at their three-year high or in short proximity to it, signifying that valuations have gone off the charts.”


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