Expectations of higher margins on lending, cross-border deals and potential inclusion in global equity benchmarks are some of the reasons banks are rising to the top of the list for Middle East stock investors and analysts.
“Banks is where we go,” Mohammed Ali Yasin, chief executive officer of FAB Securities LLC, the brokerage arm of the UAE’s biggest bank, told Bloomberg Television when asked how he’d put money to work right now. “With the increase in interest rates, and oil prices where they are, they are going to have a lot of ammunition in terms of deposits to lend to the market.”
Here are some views on investing in banking stocks across the Middle East:
“Going into 2018, UAE banks screen most attractively” relative to others from European, Middle East and African emerging markets, said Hootan Yazhari, head of MENA and global frontier markets at Bank of America Merrill Lynch in Dubai.
He expects economic growth to pick up this year, “driven by a number of factors, including the often-talked-about Expo 2020. The UAE banks are among the cheapest globally, despite offering healthy growth potential and one of the most robust dividend yields out there, at just over 6 percent. And it is dollarized.”
Emirates NBD PJSC, Dubai’s biggest bank, is preparing a March bid for Denizbank, a Turkish unit of Sberbank, people with knowledge of the matter said.
That deal “could unlock a lot of value” for the lender, said Jaap Meijer, head of equity research at Arqaam Capital in Dubai.
If the bank relaxed its five-percent cap on foreign ownership, the shares could rise as much as 40 percent, according to Meijer.
“There is a queue of investors trying to get into the stock,” he said. Emirates NBD trades at 5.8 times its 12-month estimated earnings, compared with 9.2 times for emerging-market lenders tracked by MSCI Inc.
EFG-Hermes Holding turned overweight on the Saudi stock market on Feb. 19, with banks among its top sector picks because of “attractive yields, relatively good valuations, potential for earnings growth on rising rates and expansionary spending” by the government, analysts including Mohamad Al Hajj and Shabbir Malik wrote in a report.
Al Rajhi Bank could attract about $1.5 billion in passive inflows if Saudi Arabia wins emerging-market status from FTSE Russell and MSCI, EFG-Hermes estimates. National Commercial Bank could attract $1.2 billion. A decision on the classification from FTSE is expected March 28, while MSCI’s is due in June.
While dividend payouts for Kuwaiti lenders this year were seen as “conservative,” banks will benefit from a high interest-rate cycle and fortified balance sheets, said Aarthi Chandrasekaran, vice president for research at Shuaa Capital in Dubai. National Bank of Kuwait is in a “sweet spot,” given their accumulated excess provisions and Kuwait has strong ability to withstand oil-price shocks, relative to peers within the six-nation Gulf Cooperation Council, she said.
Kuwait International Bank has an “attractive valuation,” as it trades at 0.8 times expected book price for 2018, she said, compared to an average of 1.2 times for the MSCI EM Banks Index. Kuwait’s inclusion in FTSE’s emerging-market index in the second half of the year will also increase foreign-investor interest in lenders.
Lenders from the North African country should sustain high profit levels, even as interest rates drop and interest margins narrow gradually, according to Monsef Morsy, head of financials at the research arm of CI Capital Holding SAE in Cairo. That’s because banks should see stronger fees and commissions generated by increased lending. “We should expect to see throughout 2018 and 2019 a pick-up in loan volumes in working capital financing to the corporate segment,” he said.
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