GCC stock markets witnessed mixed trends ahead of the 2Q-2007 earnings season. Kuwait markets continued to surge as it reported monthly growth of 3.5% in June-07. As a result, the Kuwait market benchmark index reported YTD growth of 30% by the end of 1H-2007. After reporting strong growth in the previous month, UAE markets witnessed profit-booking as NBAD Index registered monthly decline of 1.1%. It is worth noting that by the end of 1H-2007, only one market, Saudi Arabia, reported YTD decline of 12.2%.
GCC tourism sector
The tourism sector in GCC has been showing healthy performance in recent years. Although political issues in the Middle East have been constantly perceived as a detriment to growth, its effect has been minimal as tourism has been increasing at higher rates lately. According to the World Tourism Organization, tourist arrivals in the Middle East and North Africa (MENA) region grew by 6% in 2006 on a year on year basis to reach 40.7mn, and represented 4.8% of the world's total number of tourist arrivals. The boom in tourism was mainly due to increased international demand and a healthy intra-regional market, coupled with an inflow of investments that are further developing the tourism sector in the region and adding to its capacity.
Whether it's leisure, cultural, religious, or business tourism, the industry is growing at rapid rates across all GCC countries. To accommodate the increasing flow of business as well as leisure travelers, as many as 80 new hotels are being developed in the GCC. According to market sources, over 25,000 rooms and suites are estimated be added to the existing stock by 2008.
Strong economies backed up by comfortable levels of liquidity resulting from high oil prices contributed to the growth in tourism in GCC during recent years, with a lot of this oil money finding its way into tourism- related projects. Around US$272bn worth of tourism projects are expected to be completed in GCC by 2018 according to a recent article published by Zawya. The UAE alone accounts for around 86% of these projects (US$233bn), while Oman, accounts for 6%, Qatar (3%), Bahrain (2.1%), Saudi Arabia (1.6%) and Kuwait (1.3%).
Within the GCC the top performer in terms of tourist arrivals is Saudi Arabia driven mainly by Hajj and Omra visitors. However, the government has been lately trying to promote other forms of tourism. In February 2006, the Kingdom announced it was relaxing visa restrictions and would provide a tourist visa service for Muslims as well as non-Muslims. The cost of tourism projects in Saudi Arabia is estimated at US$4.48bn. The projects include the US$1.3bn Jebel Omar project in Mecca, which will include a two five-star hotels, three four-star hotels and six three-star hotels. In addition, the kingdom is investing US$1.3bn into the expansion of King Abdulaziz International Airport.
In terms of hotel occupancy rates, Dubai has been the top performer with the highest occupancy rates in the region and among the highest around the world with a reported occupancy rate of 86% in 2006, compared to 82.7% in New York, and 80% in Singapore. According to market sources, the emirate of Dubai has 295 hotels 41 of which are five-star hotels. In 2007, more than 20 hotels are scheduled to open. New projects are expected to add around 8,000 rooms in the next two years, not enough to meet current demand.
Other emirates such as Abu Dhabi and Ras Al Khaimah have been following the footsteps of Dubai with continuous expansions in the tourism sector. Abu Dhabi has been trying to focus on cultural tourism. Among Abu Dhabi's major infrastructure projects is the US$27bn "Saadiyat Island", which is divided in six distinct districts: residential, downtown, environmental, cultural, hotel and resort, adding over 7,000 rooms. In addition, the first ever annex of the Paris museum, The Louvre, will take place in Abu Dhabi. Other emirates like Ras Al Khaimah is also witnessing the construction of mega projects such as the US$1.5bn ‘Saraya Islands’ project, a joint initiative of the RAK Government, Saraya Holdings and Arab Bank.
Other GCC countries have been also trying to catch up with Dubai as well, through the development of mega tourism projects such as Failaka and Bubiyan Islands in Kuwait, while others are attracting tourist interest through big events such as the Formula1 Grand Prix event in Bahrain, and the Asian Games hosted in Qatar during Dec.2006. In 2006, the number of tourists visiting Qatar reached 900,000 a major increase from the 500,000 figure reported in 2004. The country aims at becoming a hub for tourism in the region by investing over $15bn in tourism projects such the Pearl and Lusail projects. In addition, the country is investing US$5.5bn into the New Doha International Airport (NDIA). Oman on another hand with it natural topography advantage has been attracting European travelers. Mega developments in Oman include the Wave, Blue City, Muscat Golf & Country Club, and Yitti.
Allowing foreign ownership in certain projects has been also driving tourist activity across GCC as the concept of holiday homes and resorts is spreading with projects such as Durrat Al Bahrain, and Amwaj Island in Bahrain, and the Wave, the Blue City in Oman.
According to a recent Deloitte survey, hotels throughout the Middle East recorded a 21% growth in revenue per available room (revPAR) in 2006. In addition, many Gulf carriers such as Emirates airlines, Qatar airways, and Gulf air are expanding their fleets and adding new destinations across the world.
We believe that GCC countries have enough potential to sustain and improve their tourism sector. The positive trend is not expected to reverse in the near term especially as GCC countries continue to pump millions of dollars into new projects, airport expansions and aggressive marketing campaigns.
Bahrain banking sector
After the oil and gas sector, the financial institution sector remains the highest contributor to the Bahrain’s GDP. Central Bank of Bahrain (CBB) replaced the Bahrain Monetary Agency (BMA) on 7 September 2006. The introduction of new central bank in the country, with the objective to monitor and enhance the banking sector regulations. Bahrain’s financial services industry continued to develop and expand during 2005 and 2006, with 7 new licenses issued in 2005 and 9 new licenses issued at the end of 3Q-06. The total number of banks and financial institutions at the of end of 3Q-06 was 371. This comprises 150 banking institutions, 151 insurance firms, 36 capital market brokers and 34 others. The country has continued to attract a good mix of locally incorporated, regional and international institutions.
In July-2006, the Bahrain Monetary Agency (BMA) announced details of a comprehensive package of regulatory reforms to modernize and strengthen the licensing framework for banks operating in the Kingdom. This is line with BMA's effort to create a clearer, more modern bank licensing regime, whilst strengthening Bahrain’s position as the leading international finance centre in the Gulf. Similar licensing reforms have already been implemented for the insurance and investment business sectors, in April 2005 and April 2006 respectively. The total assets of the banking system grew at a CAGR of 22.9% during the period 2003-2006. The total assets of the banking system (Retail and Wholesale) at the end of 2006 stood at BD70.43bn (US$187.35bn), a substantial increase of 33.5% as compared to the previous year. The growth of the asset size is comparatively higher when compared to the growth attained during the last two years, which was 17.8% in 2004 and 18.1% in 2005.
Wholesale banks dominates the banking system in Bahrain and contributes 87.7% of the total Bahrain banking assets. The contribution of the wholesale banks have remained in the range of 88.2% - 87.7% during the period 2003-2006. Market share of retail banks in terms of total assets was 12.3% at the end of 2006. The total assets of the Islamic banks grew at a CAGR of 43.2% during the period 2003-2006, which has exceeded the growth of the entire banking system of Bahrain. The total assets of Islamic banks operating in Bahrain stood at BD4.59bn (US$12.21bn) at the end of 2006, which was an increase of 52.4% over its 2005-year end level.
The importance of Islamic banking can be further substantiated with the increasing contribution of Islamic banking assets to the total banking system. The total assets of the Islamic banks have grown at a much faster rate than the Bahrain banking system assets. As a result, the contribution of Islamic banking to total assets increased from 4.1% in 2003 to 6.5% in 2006. Going forward, we believe that Islamic banks will continue to grow at a faster pace than the conventional banking assets, as many investors are migrated from conventional banking to Islamic banking. The total loans and advances of the banking system grew at a CAGR of 19.0% from BD1.79bn (US$4.79bn) in 2003 to BD3.03bn (US$8.07bn) in 2006. In the year 2006, it increased by 15.6% and stood at BD3.03bn (US$8.07bn) as compared to BD2.62bn (US$6.98bn) at the end of December 2005. The lending to business sector accounted for 53.4% of the total credit, while personal and government sector accounted for 41.3% and 5.3% respectively.
The peer group comparison is done on five banks, namely Ahli United Bank (AUB), Bank of Bahrain and Kuwait (BBK), National Bank of Bahrain (NBB), Bahrain Islamic Bank (BIsB) and Bahraini Saudi Bank (BSB). Al Salam Bank was not included in the peer group comparison. The size of the banks under our coverage increased from BD5.3bn in 2003 to BD11.8bn in 2006, registering a CAGR of 30.9%. In the year 2006, the size of banks under coverage increased by 35.9% as compared to the previous year. Over the next four years (2006-2010), we expect the banking assets for the banks under review to register a CAGR of 11.3% to reach BD18.14bn in 2010.
Deposits for banks under review grew at a CAGR of 26.3% for the period 2003-06 from BD2.8bn in 2003 to BD5.7bn in 2006. The top three banks (NBB, BBK and AUB) deposits grew at a CAGR of 10.2%, 7.7% and 47.7% respectively for the period under review. Over the next four years (2006-2010), deposits are likely to grow at a CAGR of 15.7% for the banks under review to reach BD10.24bn in 2010
On the lending side, gross loans and advances grew at a CAGR of 29.3% for the period 2003-06. Gross loans increased from BD2.6bn in 2003 to BD5.5bn in 2006. Net loans for the banks under review grew at a CAGR of 31.5% for the period 2003-06, from BD2.4bn in 2003 to BD5.4bn in 2006. Over the next four years (2006-2010), gross loans are likely to record a CAGR of 15.3% for the period 2006-2010 to reach BD9.79bn in 2010.
Profits of the banks under review, increased from BD82.5mn in 2003 to BD182.9mn in 2006, growing at a CAGR of 30.4% for the period under review. In 2006, profit of the banks under review witnessed a growth of 29.8% from BD141.03mn in 2005 to BD182.9mn in 2006Over the next four years (2006-2010), net profits of the bank under review are likely to record a CAGR of 16.8% to reach BD340.29mn in 2010. The return on average equity (ROAE) improved from 12.8% in 2003 to 15.2% in 2006. The return on average assets improved from 1.50% in 2003 to 1.78% in 2006. BBK had the highest ROAE of 18.2% in 2006, followed by BIsB with 17.8%. In terms of average ROAA, BIsB was leading the way with RoAA of 3.4% followed by NBB at 2.3% respectively in 2006. (Global Investment House-Kuwait- GCC Market Review)
