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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
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 (
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
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
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
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 31st 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
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
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).
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.