Watheeqa Thematic Reports
Equity markets in the MENA region witnessed a golden run in the pre-financial crisis period outperforming all major global equity indices. However, the picture was quite different during the period post the financial crisis. MENA markets were clear laggards only with the exception of the Qatari market. This underperformance, in our view, might be attributed to significant contraction in MENA Return on Equity (RoE) and hence the consequential decline in excess return measured as the differential between RoE and Cost of Equity (CoE). Concomitantly, regional market valuations got adjusted reflecting the shrinkage in excess returns.
Egypt Banks; Moving Towards Higher Sustainable ROE – 14 – April – 2011
The recent uprising witnessed in Egypt might usher in a new regime that would pave for enhanced economic growth in the medium-to-long-term keeping a keen eye on fair and equitable distribution of income. Having said that, the uprising, undoubtedly, had blemished the near-term growth prospects of the Egyptian economy (at least in FY2010-11). International Monetary Fund (IMF) in its latest “World Economic Outlook” had revised its FY2010-11 real GDP growth forecast down to 1.0% - this is 400bps lower than the growth witnessed in FY2009-10 and 600bps lower than the real GDP growth during Egypt’s golden era that lasted through FY2005-2008. It is, however, pertinent to note that real GDP is expected to be back on growth trajectory from FY2011-12 onwards.
A corollary of lower economic growth is lower business growth for the domestic banking sector as well. Quite naturally, we have seen earnings estimates of the banking stocks being pruned down in the range of 10-12% for the next three financial years (FY2011-FY2013). The banking index (EGXBANK Index) is down by 34% year-to-date – much worse than the 26% decline in the EGX30 index and 17% in EGX70 index.
We broadly remain in sync with the consensus over the near term prospects of the Egyptian banking sector given the current political uncertainty. However, we believe that the medium-to-long term prospects of the banking sector are intact given the strong structural tailwinds like favorable demographics and significant under penetration of financial products. Consider this - Egypt is the most populous nation in the MENA region (11 countries consisting of Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia & United Arab Emirates) accounting for nearly half of the total population in the region. Egypt is the third largest country in GDP (nominal) terms in the MENA region. It accounted for 15% of MENA’s nominal GDP in FY2010. Egypt’s loan-to-GDP ratio stood at 38% at the end of FY2010 (end-June) – this is nearly one-third that of UAE and half that of Bahrain and Qatar. Retail loan penetration (as % of GDP) remained in single digits; at nearly a third of UAE, Kuwait and Bahrain. System liquidity, as measured by the loan-to-deposit ratio (lower the better), stood at 48% at the end of December FY2010 – this is nearly half of the average witnessed in the GCC countries.
Although we remain skeptical in the near-term, we opine that medium-to-long term sector valuations would warrant a re-rating in the event of a structural shift towards higher sustainable return on equity (ROEs) owing to the anticipated expansion in the retail sector loans. Our thematic study examines how the retail book expansion might improve the banking sector ROEs, thereby resulting in a probable sector re-rating.
Egypt Intifada - Market Implications - 02-February-2011
Egyptian stock markets remain closed since January 27, 2011. What is likely to happen when the equity market reopens for trade – is something every investor would worry about. Given the chaotic political environment and uncertainty that looms large; we believe further downside risks cannot be completely ruled out. This leads us to think (i) how much more can the market fall? And (ii) would valuation support come into play in event of further decline from the current levels?
The Oil Story – 22-March-2010
You may be keen to know, in the final analysis, what we think of the Oil prices and how they are likely to pan-out, going forward. We re-cap our conclusion below.
Our Concluding thoughts
Demand is expected to grow sedately and supply is not a constraint in the near future, in the absence of any major supply cut offs. Given the demand-supply dynamics, we expect the oil prices to stay high (above $65-70 a barrel) but do not expect to breach the $100 per barrel this year. In our view, a near term price band of $70-100 a barrel is the most likely range in 2010. However, from a longer term perspective, we expect the oil prices to stay below the $110-115 a barrel during 2011. Oil prices will have to rise more than 36% from $80.68 (as of 19th March 2010) to breach $110 a barrel. Currently, given the weak global macroeconomic landscape – we suspect if such a sharp rise would happen by the end of 2011.
An Overview - Sukuk Market – Saudi Arabia – 21-March-2010
The Kingdom of Saudi Arabia (KSA) is witnessing unprecedented economic growth stimulated by an aggressive public spending plan. This has led to huge financing requirements for both the government and private sectors. KSA also has one of the largest investor bases in the region with total assets under management exceeding $22.7 billion. The increasing requirement of long term financing and huge local investor appetite provides an excellent opportunity to develop a vibrant Islamic debt capital market (DCM) in the country.
Currently, the Saudi Sukuk market is small compared to other countries with comparable economic indicators. Though it has seen some large issues, the number of local currency issues listed on Tadawul is only five from two issuers (SABIC & SEC). The size of the total outstanding Sukuk is $8.1 billion. The need to have a well developed DCM was felt more than ever during the 2008 financial crisis. Bank lending to the private sector slumped to 3.6 per cent in July 2009, its lowest rate in more than six years (SAMBA, Economic Monitor, September 2009). Despite several interventions by the Saudi Monitory Agency (SAMA), banks became very reluctant in providing long term financing and increased their margins across the board. This left businesses with no other option except to abandon or reschedule their projects.
Further development of the Sukuk market in Saudi Arabia requires proactive involvement of the government authorities in addressing some of the key issues faced by the DCM issuers and investors.
Wealth Creation Studies – A Primer – Saudi Arabia
The primer on Wealth creation studies (Stock Universe) not only shows the wealth created/destroyed in absolute SAR terms but also captures the dividend inflows to the investors had they invested in end 2004 – accumulated the dividends – and liquidated the stock at the end of 2009. The study is for a five year period 2004-2009.
Some quick observations from the study
- Mid-caps have by and large created value.
- Contrary to perception – SABIC the market heavy weight though in absolute SAR has created value but viewed from a return perspective – IRR at 2% is disappointing.
- STC another blue-chip – Solid dividends but has destroyed value big time measured from a returns perspective.
Since this is a preliminary study with the objective of picking potential stocks – we have kept the study simple and hence assumed the dividend inflow to investors are not re-invested.
A footnote on IRR calculation is included at the end of the report.