<?xml:namespace prefix = v ns = "urn:schemas-microsoft-com:vml" /><?xml:namespace prefix = w ns = "urn:schemas-microsoft-com:office:word" /><?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Global Investment House – Kuwait – GCC Market Review – February 2007 – The GCC stock markets witnessed buying activity as four out of six regional indices registered monthly gains in Feb-07. The region’s biggest market, Saudi Arabia, witnessed across-the-board buying spree by both retail as well as institutional investors as it registered a whopping monthly growth of 16.1% in Feb-07. Kuwait and UAE stock market indices too reported monthly gains of 2.7% and 1.4% respectively amidst increase in trading activity.
Table 01: Index Performances
Source: Respective Stock Exchanges and Global Research
UAE Banking Sector – Core earnings to lead growth..
The oil price-led liquidity in the economy was a blessing for the UAE banking sector, which saw excellent growth in the last few years. Good times predominantly owed to the high credit and deposit growth on the back of relatively low interest rate environment, high oil prices and a flourishing economy. Banks in UAE primarily belong to two categories, national (local) and foreign, with the latter being restricted from operating more than eight branches. Currently, there are 46 banks operating in UAE, including branches and offices of foreign banks. There are 21 national banks in UAE, all of which are listed either on Abu Dhabi Securities Market (ADSM) or Dubai Financial Market (DFM).
Among the GCC countries, UAE has the second highest number of banks after Bahrain. On July 31st, 2006, Central Bank of UAE granted Saudi American Bank (SAMBA) and Doha Bank of Qatar a license to open a branch to carry-out commercial banking business in the UAE. With the opening of branches of these two banks, there will be representation of GCC national banks from all GCC Countries. Currently, the national banks present in UAE are National Bank of Oman, A1-Ahli Bank of Kuwait and National Bank of Bahrain. Another notable feature is the rapid stride that Islamic banking has made in the UAE. A range of Sharia-compliant products was introduced in the market and Islamic finance deals like Ijara transactions have become common in property purchasing deals. The region has witnessed Islamic Sukuks attracting large investor volumes with subscriptions exceeding expected issuance, even in big issues.
The ratio of credit deployment to GDP for UAE is relatively higher as compared to other GCC countries. Oman has the lowest penetration level in terms of system credit to GDP. UAE's ratio as at end 2005 is around 58% as compared to around 61% for Kuwait, Bahrain around 53% and Qatar is around 56%. The requirements for increased liquidity also forced a number of banks in the country to approach the bond market, a phenomenon not so popular in the country till some time back. The highlight of the various such issuances was that the banks were able to leverage on the current good health and raise the money at a relatively low cost. Armed with the wherewithal to expand, banks in the UAE have been looking abroad aggressively in the last 12-18 months. Taking strategic stake in foreign banks to expand ones own exposure was a popular step, while some banks also entered into joint ventures. This signals not only the aggressive posture adopted by the UAE banks but also the fact that banks would have to increasingly look abroad in a scenario of the local market getting more and more competitive.
Consolidated assets of the banking sector grew by 41.9% to AED638.01bn at the end of 2005, thanks to the total credit growing by 43.0% to AED247.0bn on the back of strong economic growth. In terms of the size of the banking assets, UAE is second only to Saudi Arabia, which has aggregate banking assets of US$202bn as against UAE’s US$174bn at the end of 2005. Due to surplus liquidity in the system on the back of high oil prices helped banks to strengthen their deposit franchise during the last two years. Total deposits (excluding government deposits) increased by 35.4% to AED306.54bn at the end of 2005, whereas increased by only 7.7% to AED330.22bn at the end of first quarter of 2006. However, the share of deposits in total liabilities declined to 44% in the 1Q-06 from 50.4% at the end of 2004. Over the years, credit facilities have led the asset growth of the UAE banking sector. After a sedate growth in 2001, growth of total credit accelerated in the following two years. Cashing in on the favorable macro-scenario, total credit increased by 37.7% to AED394.89bn in 2005, with the credit to residents growing at faster rate by 43.0% to AED353.14bn. The total credit and credit to residents grew further by 21.4% and 22.5% in the first quarter of 2006.
During the period 2002-05, asset size of the banks grew at a CAGR of 28.9%. In terms of size, the top three banks namely NBAD, EBI and ADCB contribute 50.7% of the overall size of the banks under review. Deposits grew at a CAGR of 26.0% for the period 2002-05 from AED132.22bn in 2002 to AED264.71.5bn in 2005. Net loans grew at a CAGR of 33.7% for the same period. The net loan book increased from AED100.8bn in 2002 to AED241.1bn in 2005. In 2005, the net loans increased by 47.1% as compared to 2004. The growth on the consumer lending will still remain healthy for the banking sector. We also believe the banks will continue to witness strong lending requirements from the service and real estate sectors, especially the services sector. Going forward, asset size of the banks under coverage is likely to register a CAGR of 16.7% over the next four years and deposit mobilization to grow at a CAGR of 17.8% over the next four years
The year 2005 has been a record year for UAE banks, as they were the most profitable thanks to the surging capital markets and IPOs tapping the market. The average return on average assets and return on average equity at 3.6% and 27.8% respectively reported in 2005, where as the average ROAA and ROAE in 2004 were 2.3% and 18.6% in 2004 respectively.
The year 2006 has not been very rosy for the UAE banking sector, like seen in the year 2005. This is primarily because of the reduced fee and commission income, which saw a decline during the first nine months due to the slow down in capital market activity. However, the income from core banking activities has been healthy during 2006 which further substantiates our view that core income is likely to drive earnings growth going forward. We do not expect the spreads to increase in the future too, as the interest rates have already started going up, and it is unlikely that banks would be able to increase the lending rates commensurately. The Central Bank has been raising the interest rate on CDs in line with the increase in Fed rates, which is a pointer to the trail for interest rate expenses in the future. On the other hand, if the banks are presented with similar opportunities as now to take high risk exposures in segments like real estate and stock investment financing, we could see the sustenance of spreads for some more time.
Project financing and real estate financing are two of the segments to grow substantially lately, though not yet borne out by the bulk of numbers due to the nascent nature of such lending. On the real estate front, with the dramatic increase in demand, a number of developers have started leveraging, and at times make it risk free by asking the buyers to finance the construction by paying installments. Also, the loans given to projects, which are into production of building materials, surged in the last two years. Despite the increased lending to the newer segments, net non-performing loans (NPL) as a proportion of total loans remained in control at around 3%, though a result of heavy provision on a gross NPL, which forms more than 10% of the total loans. It should be noted that such high provision have a substantial negative effect on the profitability of banks, but then it can be expected in fast growing loan portfolio.
Aluminum sector– Benefiting from the competitive conditions in the region.….
Metals and Minerals sector in the Middle East region is attracting private as well as foreign investment and the area is in a favorable position in terms of lower fuel cost, geographic positioning for exports and government support to develop the sector. In the recent conference “Middle East Aluminum” attended by a Global representative, industry experts had a very positive outlook on the Aluminum industry.
According to McKinsey, Middle East, although in a positive position to produce aluminum, need to avoid overstretching the position. Although the region has competitive conditions for aluminum smelting in terms of lower energy prices, lower labor cost and logistics network to serve global markets, these condiditions might be challenged by increasing energy costs and increased competition in traditional export markets such as Europe from Chinese and Russian players.
According to CRU analysis, around 36% increase in aluminum prices was witnessed in 2006 which was mainly due to growth in aluminum consumption in China which has averaged 19.3% in the last couple of years. India’s aluminum demand too has grown by 13.5% over the past two years. Also, we are seeing increased substitution into aluminum from copper and steel, as their prices moved and higher. CRU believes that the current aluminum price level is unsustainable as it is attracting too much, high-cost, idled aluminum capacity back into production. It also projects that the aluminum market will shift to a surplus of 425,000 tonnes in 2007. Global demand for primary aluminium is rising about four per cent per year, but the supply gap will widen over the next few years as some smelters in Europe, China and North America will shut down due rising energy costs.
According to Alcan, the Middle East’s contribution to global aluminum production has shifted from 1% in 1980 to 6% in 2006 and is expected to increase to 10% in 2020. The major shift in production was witnessed in China as it contributed to 27% of global aluminum production in 2006 from only 2% recorded in 1980. However, its share of aluminum production is expected to slightly decrease to 23% of world’s total production by 2020. China has been responsible for almost 50% growth in the world primary aluminum consumption and production in the past decade. On the other hand, USA and Europe’s contribution to the world production has declined from 30% and 22% in 1980, respectively, to 7% and 12% in 2006.
In the region, the GCC demand for aluminum is set to hit five million tonnes before the end of the decade, up three fold from the 2005 high of one and half million tonnes, according to figures by MEED. The market heavyweight, DUBAL’s metal production capacity has quadrupled since 1980 to reach 920,000 tpa. According to DUBAL, 34% of their production goes to the Far East which has always been their biggest consumer. UAE's second smelter, US$8bn Emirates Aluminum (Emal) will produce one third of the five million forecasted demand when full capacity is reached in 2013. Aluminum Bahrain also wants to raise output by up to 45 per cent to 1.2mn tonnes. Qatar's Qatalum project will further add 585,000 tonnes to Gulf aluminum production by the end of 2009.
In a major project, aluminum major Sohar aluminum is building a smelter which will have a capacity of 350,000 tpa. It has a long term aluminum supply contract with Alcan which owns 20% of it, while the other 80% is equally distributed between Oman Oil and ADWEA. The total budget of the project is about US$2.4bn and it will commence production by 2Q-2008. DUBAL and MUBADALA also signed a Joint Protocol and a Joint Development Agreement in February 2006 with the project named as Emirates Aluminum (EMAL). The smelter will have an annual capacity of 1.4 M mtpa and the first phase is expected to start operations by 2010(700,000 tonnes).
GCC bourses saw 13.89bn shares being traded in Feb-07 as compared to only 9.54bn shares being traded in the previous month. This clearly shows that the investors have been taking new positions in the market after the earnings reports. The value of shares traded on the bourses too increased to US$80.5bn in Feb-07 as compared to US$59.5bn reported in the previous month. We believe that increased trading activity is likely to continue as investors look at stocks post-distributions and listing of some high-profile IPOs that have generated considerable investors’ interest.
Table 02: Exchange Activity
Source: Respective Stock Exchanges and Global Research
GCC stock market breadth was skewed towards the advancers in Feb-07 as 246 stocks reported monthly gains as compared to 208 decliners. Saudi market saw widespread buying in the month which resulted in 83 stocks out of 88 listed on the bourse to show monthly gains in Feb-07.
Table 03: Market Breadth
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