This analysis is by Bloomberg Intelligence Senior Analysts Edmond Christou and Lea El-Hage. It appeared first on the Bloomberg Terminal.
Greater private-sector activity is crucial for Gulf and South African lenders to deliver revenue expansion as more Fed rate hikes could leave more scars on Gulf banks than any returns. Saudi and Qatari banks’ valuation metrics already rerated lower amid declining energy prices, a slowing global economy and specific structural issues. Saudi lenders’ limited liquidity and rising cost of capital remain a theme, but their growth trajectory aids a premium rating. A turnaround to Qatari banks’ misfortunes may be due in 2H, but exposure to property loans is a risk. UAE bank ratings reached their highest since 2015, but increased borrowing costs and corporate tax may challenge more reratings.
More rate hikes could leave more scars on Gulf banks than adding returns. The Fed’s downward policy shift should be regarded as positive for Qatari and Saudi peers as it cuts the cost of capital and supports growth. A solid project pipeline and property market aid UAE’s rating, but new tax and high borrowing costs are a risk. A weak economy overhangs South African banks.
Gulf Banks’ wish list: Oil above $80, end to Fed tightening
Gulf banks trade at a median 1.2x forward price-to-book or 11x price-to-earnings in 2023-24, with their valuations following the trajectory of local economies. Oil prices above $80 per barrel offer indirect exposure to the energy sector and a large project pipeline of more than $1.5 trillion. Crude prices have declined since 2H22, but the current level is still supportive of fiscal spending and the non-oil economy is expanding. Still, oil below $80 would pose a challenge and more Fed rate hikes would be hard to pass on to borrowers, even though rising rates pushed up margins last year, particularly those of UAE and Saudi banks.
UAE and Saudi Bank rally on growth; Qatar and South Africa trail
Saudi banks trade at 1.6x forward price-to-book, a premium over regional peers, aided by a solid asset-growth trajectory given the kingdom’s $536 billion project pipeline (up from $521 billion in April). Yet P/B has rated lower since peaking at 2.3x in May 2022, reflecting new norms. UAE banks have been on upward path since late 2020, helped by a strong property market and private-sector activity. Though UAE property prices may still gain, likely at a decelerating mid-single-digit rate, the risk to upside lies on high borrowing costs and corporate tax. Qatari banks are trading below UAE peers for first time due to less visibility on growth vs. the UAE and an oversupplied property market.
Weak economic prospects, escalating electricity-load shedding and high unemployment are a dire overhang for South African lenders’ ratings.
UAE valuation diverges among banks; Gap is forming above Qatar
UAE banks’ overall price to book (P/B) is 1.2x, above Qatari peers (1.1x) for the first time since 2018. Since the FIFA World Cup spending spree, Qatari lenders have been recalibrating amid declining asset quality, a margin drag and muted construction activity vs. UAE and Saudi peers. Ratings differ among UAE banks, with ENBD trading at a low P/B vs. high returns, underlining Turkey’s risk, but the return to conventional reforms helps prospects. Sustaining property and tourism are vital given ENBD’s cyclical exposure. DIB is emerging from de-risking, but prudent provisioning and selectivity are key. ADCB’s margin is improving, but a returns beat may not happen soon.
ADIB may sustain its high returns. FAB is acting to boost profitability, but its ROE is unlikely to top peers by a margin due to a less risky balance sheet.
Saudi Banks’ returns metrics are crucial to valuation rating
Albilad and Alinma are trading at higher price to book (P/B) than Riyad Bank with a similar return. These banks focus on scaling up operations, growing fast and tackling inefficiencies, but Albilad still has work ahead to cut high cost to income. Their tactics become harder amid tighter liquidity. Al Rajhi’s has the highest returns vs. peers, but its P/B is at a 28% premium (with the six-month average at 33%). Rajhi’s ROE may reset lower amid capital retention and higher cost of capital. SNB and SAB offer higher returns for a close valuation to Saudi Fransi.
Saudi Fransi and ANB are undergoing strategic transformation. The market may find Riyad Bank’s higher returns unsustainable vs. Albilad and Alinma as Riyad trades below their multiples. Al Jazira needs solid strategic KPI to beat returns and justify its rating.
Bloomberg
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