EFG-Hermes sees value in Middle East banks

UAE banking sector has seen sharp asset price deflation, but is in better shape than feared. 
EFG-Hermes sees value in Middle East banks
By Reuters
Wed 07 Oct 2009 08:35 PM

Middle East banks still present attractive value relative to international peers, with return on equity expected to remain around 20 percent over the medium term for most, Egypt's EFG-Hermes Research said on Wednesday.Credit growth is expected to show strong recovery in 2010 as risk appetite improves, despite pressure on the region's banking sector from economic slowdown and the deflation of asset prices, the Cairo-based investment bank said in a research note.

"We believe that banks are strongly positioned for a recovery, justifying our view that the valuation discount for MENA (Middle East and North Africa) banks to their historical averages should narrow. We highlight the United Arab Emirates, Egypt and Saudi Arabia as our top picks," the note said.

EFG-Hermes said that Qatar, Saudi Arabia and Oman were likely to show the quickest recovery, with credit growth expected to go up to a range of 12 to 15 percent in 2010 after having dipped to 4 to 6 percent in 2009.

Saudi banks, helped by state infrastructure investment, will continue to head toward higher valuations, which will be aided by strong and fairly liquid balance sheets. That has made them less vulnerable to a sudden rise in non-performing loans.

"With the government taking a strong counter-cyclical stance to the slowdown in private sector spending, business confidence is gradually recovering," EFG-Hermes said.

It said both Banque Saudi Fransi and Arab National Bank looked attractive on a valuation standpoint.

The UAE, which EFG-Hermes said was hit hardest in the region by the global financial crisis, suffered sharp asset price deflation but is in better shape than was feared.

Abu Dhabi has proven more resilient to the crisis than Dubai owing to a wealth of resources that have enabled it to absorb losses and provide required funding, it added.

"We believe the expansion of Abu Dhabi and more general infrastructure spending will ensure positive growth. However, the trend for de-leveraging businesses in Dubai ... is likely to weigh on balance sheet development," the bank said.

EFG-Hermes highlighted First Gulf Bank and Emirates NBD as its top picks in the UAE.

In Egypt, banks were expected to sustain an average return on equity of 25 percent in 2010 despite an expected continued rise in non-performing loans, thanks to diversified loan books and a focus on prime large corporate sectors, EFG-Hermes said.

"Egypt remains one of the most attractive countries in the region from a long-term perspective, given its large domestic population, low banking penetration and our expectation that income per capita levels should rise progressively," it added.

EFG-Hermes highlighted Commercial International Bank for strong positioning and ability to deliver returns.

It rated both the Kuwaiti and Moroccan banking sectors as underweight. Kuwait was expected to see the slowest recovery in the region, with minimal momentum for credit growth compared to its Gulf Arab neighbours.

Morocco's banks, which trade at a premium relative to MENA markets, were less profitable than MENA counterparts, it said. (Reuters)

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