Saudi banks rally on economic plan

Saudi Arabian bank shares rally on bets that lenders will gain most from economic transformation plans

Saudi Arabian banks led gains on the kingdom’s stock market on Monday, on expectations that lenders will be among the biggest beneficiaries of a mega economic plan outlined in greater depth by Prince Mohammed bin Salman, the deputy crown prince, over the weekend that aims to make the country less dependent on oil.

In the long term, the kingdom’s banks will benefit from measures such as reduction of subsidies and the introduction of a value-added tax, but in the short term they are more likely to benefit from the government tapping the debt market to plug a deficit, and guarantees they may make to banks on mortgages to promote home ownership, investors said.

Al Rajhi Bank, the biggest Saudi Arabian bank by market capitalisation, led the gains, jumping by as much as 4 per cent. Prince Mohammed told Bloomberg over the weekend that the reform measures he planned would raise at least an additional US$100 billion a year by 2020.

“One of the things that has been talked about is that they will issue new debt or issue new bonds, and if that happens it will mean a pickup in yields for the banks,” said Sachin Mohindra, a portfolio manager at Invest AD, an Abu Dhabi-based asset manager.

“It will probably be marketed to Saudi banks at a much more favourable rate. If things pick up on the mortgage front, banks will also become beneficiaries.”

Saudi Arabian banks have not been having the best of times. Low interest rates have been crimping profitability at a time when loan growth has been slowing as sagging oil prices dent business confidence. Saudi Arabia's riyal is pegged to the US dollar, and therefore it has to follow US Federal Reserve monetary policy.

Even the opening up of the Saudi stock market to foreign investors last year has failed to spark interest in bank shares after many heated years of anticipation. Touted as the biggest developing market that was closed off to foreign investors, its opening came amid a slide in emerging markets. Foreign investors have continued to shy away this year as the price of oil flounders.

And the mood on Saudi Arabian banks is becoming increasingly bearish, especially for foreign investors, as they are proxies to the wider hydrocarbon economy, much of which is in the hands of the government.

On Thursday, the ratings agency Standard & Poor’s lowered its long-term counterparty credit ratings on Al Rajhi Bank, National Commercial Bank, Riyad Bank, Samba Financial Group and Saudi British Bank, five of the nation’s biggest, because of the heightened risks they face in a low oil price environment that has limited the ability of governments to spend.

Unlike the UAE, Saudi Arabia has a more concentrated number of banks – 12 local banks and 12 foreign. The most recent earnings results for the sector show that banks are starting to come under strain and that the fortunes of the industry will be tied to the fate of oil prices.

Mr Mohindra said that any reforms made now are likely to have an immediate effect over the next year, but that much will depend during that time on the fortunes of the value of oil.

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