Essay on Saudi Stock Market

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In the unique market that is the Arab world, the Saudi stock market – Tadawul, stands out as a beacon of strength and stability open to individuals looking for investments opportunities in conservative environment.  With a market capitalization of over $ 50 billion (Tawadul.com, 2010), the Saudi stock market grounded solidly.  It should be noted however that its growth has not been robust when compared to its western counterparts both in terms of size and transactions.  However, this could be put down to the conservatism of the Saudi nations coupled with ignorance by the investing public on the opportunities available.

In this paper, the focus will be to critically critic two of the bourses strong players – Saudi British Bank (SABB) and Samba Financial Group.  In this paper, the desire will be to establish whether the two are grounded enough to operate and indeed offer leadership not only in the country but also regionally as well as globally.  Various issues have been examined about these corporations; such as their departments, financial problems, historical returns, beta, and stock prices have been examined, and a candid comparison has been made about the companies.

Company Information for Samba Financial Group

Samba Financial Group (SAMBA) is one of the largest firms in the banking industry of the Kingdom of Saudi Arabia and also the leader in the Saudi Arabian credit card industry. In total, Samba, previously known as The Saudi American Bank, has 66 branches in the Kingdom of Saudi Arabia and has an international network consisting of a branch each in London and Dubai.  It also has a partner that has 28 branches located in major cities in Pakistan. The firm’s credit card services are well established; it offers the platinum credit Card, Gold credit card, silver credit card, SONY card, Al-Mamlaka card, Al-Khair Card, Al-Ladies Card, Al-Fursan Card, Mobily Crad, Samba Al-Khair Business Card and the 0% Taqseet. Using these credit cards, consumers can enjoy credit offers in a wide range of operations such as hotels and resorts, car and travel, personal care, shopping and dining and delicatessens. In addition to these credit cards on offers, Samba also provides the Samba Mobily Credit Card, the first Islamic co-branded credit card in the Kingdom of Saudi Arabia with privileges such as earning free minutes as one shops (samba.com, 2010).

SAMBA also offers personal finance services, which are a Shariah compliant solutions and is divided into two departments: the Al Khair personal finance for Saudi nationals working with the government or semi-government sectors with a maximum amount offer of SR 750,000; and the Al Khair personal finance for Saudi Nationals working with private sector employees also with a similar maximum amount offer. Other personal finance services are provides for expatriates with Assignment of End-of-Service Benefits (EOSB); Expatriates without Assignment of End-of-Service Benefits (EOSB); Newly-Arrived Expatriates, GOSI & PPA Retirees; and Personal Finance with Zero% Profit Rate. Another significant department at SAMBA is the home financing department, which is offered by the Bayt Al Khair, a Shariah compliant solution, which provides financing solutions that have a fixed profit rate and little or no down payment (samba.com, 2010).

In addition to individual services, SAMBA provides services to businesses, and one of the company’s most important department is the Corporate Banking financial products and services, which are offered to entities in the Kingdom as well as internationally. Other than Corporate Banking, SAMBA also provides Commercial banking Services.

SAMBA is also a Saudi Arabian public joint stock company involved in providing a wide variety of banking and financial services. SAMBA’s major activities are conducted through three principal intra groups; the Corporate and Investment Banking Group (CIBG), Private Banking & Investment Management Group, and the Treasury Group. The CIBG provides financial products and services to local and global entities while Private Banking & Investment Management Group provides brokerage services, asset management as well as private banking products and services. SAMBA also provides banking products that are non-interest based and additionally are authorized and supervised by a self-governing Islamic Sharia board founded by the bank. Besides, SAMBA operates a subsidiary that is fully owned, Samba Fund Management Limited (Guernsey), and is dedicated to mutual funds. SAMBA’s headquarters are located in Riyadh, Saudi Arabia (samba.com, 2010).

One of the key developments that have been instrumental to the success of Samba Financial Group has been the implementation of e-banking.  This has enabled the bank to provide faster, easier and more reliable services improving its competitive position as well as image, and most importantly, meeting the demands of its clients (Muassasat, 2009). E-banking has also improved a variety of aspects in the bank’s performance, including creating new markets, reducing operational costs, administrative and workforce. In spite of these benefits and developments, there have been increasing concerns that banking systems, especially those in the Middle East, are faced with numerous challenges which affect their efficiency in making use of the unique features of e-banking for improving their competitive competitions and images (Oxford Business Group, 2007).

Company Information for Saudi British Bank

Saudi British Bank (SABB), is a partner of the global financial services and banking major HSBC Group, one of the leading banking and financial services organizations in the world with more than 10,000 offices in 83 countries and regions in Europe, the Americas, the Asia-Pacific region, the Middle East as well as Africa. The corporation was founded in 1978 and its headquarters are located in Riyadh, the Kingdom of Saudi Arabia. SABB provides a variety of banking and financial services in the Kingdom of Saudi Arabia as well as globally, with a deposit product line that consists of (sabb.com, 2010).

SABB also has a loan product line that consist s of credit cards, overdrafts, commercial loans and consumer loans, and also offers an assortment of private banking services, for example investment services, financing services, banking services, wealth planning and specialist advisory services. In addition, the company provides a choice of individual products and services, such as cards, financing, safe deposit lockers, traveler’s checks, telegraphic transfers, and demand drafts. Additionally, SABB offers assorted business products and services consisting of business accounts, institutional banking, private banking, trade services, treasury services, credit cards, payments and cash management. As at December 31, 2008 the Saudi British Bank operated a system of 68 branches and 31 exclusive ladies’ divisions in the Kingdom of Saudi Arabia. The leading global publication Global Finance magazine recently (in a 2010 analysis) listed SABB as the Best Trade Finance Bank in Saudi Arabia (sabb.com, 2010).

Financial Performance of SABB and Samba

Both Samba group and SABB have not been immune to the financial crisis that has affected financial institutions world over.  However it should be noted that from their financial statements for the year ending 31^st December 2009, SABB did experience an overall drop in revenues.  This coupled with an increase in provision of credit losses especially with respect to commercial loans and overdrafts – had a 278.4% increase, from SAR 380 million in 2008 to SAR 1.4 billion in 2009.  This was not the case with Samba group.  On their part they reported an overall rise in after tax profits of 2.49% – from SAR 4.4 billion in 2008 to SAR 4.5 billion in 2009.  This was achieved despite an increase in the provision for credit losses of 126.5% – from SAR 267 million in 2008 to SAR 604 million in 2009.

This could be attributed to the international exposure of SABB which has an extensive presence world over as opposed to Samba which has single branches in London and Dubai.   It could additionally be interpreted as to show the strength of the Saudi financial market as well as the strong financial discipline and stringent oversight pursued by the Saudi central bank.  This is especially evident in the books of Samba which was able to have an increased earning per share of 2.4% – SAR 5.07 to SAR 4.95.  SABB on its part, despite heavily providing for credit losses, its earnings per share fell marginally by 43.5% – from SAR 3.89 to SAR 2.71.

The stock market performance for Samba and SABB.

From a 2008 survey conducted by NBK Capital it found that Samba was a bank that was well positioned for the future.  It was found to have a strong brand recognition, with a strategy for diversification of income steam through regional inorganic growth.  In addition the survey found that Samba was the market leader in Saudi Arabia in the investment banking sector with their Sambacapital franchise (NBK Capital, 2008).  Samba has been to offer the highest upside potential amongst the banks while trading at the most attractive multiples. NBK Capital additionally assigned Samba a risk rating of 2 (on a scale of 1 to 5).  This is based on the belief that the major risk faced by Samba relate to its desire for regional expansion, and its exposure to instruments that were negatively affected by the meltdown in the US subprime mortgage market (NBK Capital, 2008).  This turned out to be true given the figure reported in the 2009 financial report, when Samba had to increase the provision for credit losses with the major increment happening with respect to loans and advances (Samba, 2009).

SABB when evaluated on the Discounted Equity Cash Flow (DECF) valuation was assigned a neutral recommendation because of its high trading multiples.  BMG using a discounted rate of 12 percent and a terminal rate of 2 percent, SABB share price offers over 10 percent upside potential to the current market price (Hanware, 2009)

Using two methods of evaluation: a DECF valuation with a 70% weight and a peer valuation method with a 30% weight, an analysis of the rate of return as well as the premium rate of the SABB bank can be determined as follows. The DECF valuation recorded a fair value target of SAR 44.9 per share and was based upon a five year cash flow estimate period as well as a fading period of 25 years whereby the ROAE level approaches cost of equity at about 11.8%.

By deducting the retentions needed from projected net income to uphold a tier 1 capital ratio of not more than 10%, it was possible to calculate flows. So as to reflect overcapitalization as well as over provisioning of the bank, one way would be to incorporate PV of excess capital and the PV of excess provisioning in the terminal value.

Further, so as to reflect the high risks that would affect the industry, it is appropriate to amend the valuation parameters so as to reflect higher risks for the industry, which translates to an increase in the cost of equity to an increase of 8.7% to 11.2%. The resultant effect is that the revision of the total earnings of SABB resulted to a SAR 42.4 per share of the earlier DECF fair value target, although the change of valuation entities led to a SAR 17.6 downgrade (Shuaa Capital, 2010).

Recommendations

• Increase investment on e-banking – Innovative e-banking systems play a major role on the performance of a bank, by ensuring quality services are provided, facilitating ease of access, and most importantly, fulfilling consumers’ needs. This calls for not only the development of e-banking systems in Samba and SABB, but also the management of challenges that may impede the implementation of these services.
• Develop innovative systems- One of the major sources of profit for banks in the last decade has been the growth in consumer finance. This brings to the fore the importance of coming up with innovative systems through which borrowers can assign a piece of their salaries to banks, creating new markets and a secure sector.
• Provisions and impairments- NPLs should peak in the Saudi stock market, and to ensure that the banking industry achieves this, SABB and Samba should constantly continue to book high provisions so as to achieve minimum provisions coverage, of about 100%. Although the estimated provisions in the third quarter recorded by Samba appear to be low, the company has demonstrated the ability to control costs, create a large loan-deposit gap and most importantly, stabilize revenues. This means that the company may enjoy a boost from investment portfolio performance which is related to markets recovery. Aggressive Provisioning, therefore, should continue in SABB and Samba and what is very important now is to work towards building up their NPL coverage. For instance, it is fundamental that these companies come up with an achievable goal such as targeting NPL coverage of more than 90 percent before the end of this financial year.
• Better management of Balance sheet liquidity- The decline in net loans played a major role in reducing the net special commission, and the revenues were strongly impacted by the hold back in Balance Sheet Growth. Following the absence of loan growth, revenue growth will definitely remain subdues and there will be a lower level of trading activity at the Tadawul. However, utilization should record smaller levels, because of the slow loan growth. It is therefore fundamental that these companies continue to look for opportunities and various ways through which they can shed excess liquidity.

Conclusion:

The paper has responded to its research objectives by thoroughly examining the financial performance of SABB and Samba Financial Group. Following the review of each company, their departments and key developments, and each of their performances in the Saudi Stock Market, results indicate that SABB and Samba have what it takes to record massive success in the Tawadul and to become the leaders internationally in banking. However, complacency should be the last option, and there is need to work very hard because of the highly competitive market in the face of the insecurities in the global economy. It is therefore the task of SABB and Samba to put the aforementioned recommendations into practice, and to constantly maintain high class innovation and keep in pace with the rapid technological development.