Saudi pullback presents opportunities

Saudi Arabia’s recent pullback shouldn’t overshadow the fact that while net credit issued during April reached SAR3.2bn, well below the SAR7.4bn in March, YTD figures are still more than double the amount seen during the same period last year–an upward trend in extended private sector credit that analysts expect to persist in the near-term against the backdrop of King Abdullah’s hitherto mandated fiscal expansion plans (i.e. a new housing loan guarantee scheme by the Real Estate Development Fund and an increase in wages).  A sneaky way to tap this phenomenon as well as the Kingdom’s ever-impending paradigm shift in mortgage financing could be through Oman-listed Al Anwar Ceramics (AACT.OM) which, per Fincorp, an investment research firm, “enjoys a 50% market share in Oman and is seeing growing acceptance of its products in markets such as Saudi Arabia and Abu Dhabi, where demand for ceramic tiles remains robust.”  In fact, per one observer the GCC region remains a net importer of ceramic tiles, with factors that fuel demand including opening up of property ownership, growth in tourism, and the growing young population that props up demand for housing units.   A game changer for AACT, so to speak, came recently when the firm was allocated natural gas by Oman’s Ministry of Oil and Gas (in lieu of the firm’s originally-planned use of costly liquefied petroleum gas) sufficient for its 3 million square meter expansion which, per EFG Hermes, an investment bank should help bump gross profit margins going forward.  “The recent allocation of gas coupled with a cash flush balance sheet has increased AACT’s prospects of organic growth over the next three years [whereas] the lack of gas allocation would have challenged the company’s ability to expand organically,” it wrote to clients.  To date this year AACT has achieved 7% y/y growth in sales revenue and a 5.4% increase in net profit; its current ~10 p/e at projected 2012 EPS indicates some 33% upside in the stock versus current levels.

If Oman’s the ‘odd one out,’ then Bank Muscat is ‘in’

A recent FT piece quoted Bank of America Merrill Lynch analysts who estimate that Oman’s real economic growth rate will “continue to be relatively healthy, at 4% this year and 5.4% in 2010.”  And while down from an estimated 6.2% growth of last year, the bank concluded that “in the region this [growth] will be outdone only by the growth of gas-powered Qatar.”  Vis a vis the banking sector in particular, the article noted that “credit growth at commercial banks has slowed to 21% in June, down from a peak of 55% in 2008, but banks have continued to lend at a healthier clip than in most Gulf countries.”

Omani banking–and moreover the entire country’s economic recovery–runs through Bank Muscat–recently recommended by investment bank EFG Hermes, which cited the firm’s “commanding market share of 44% of the banking sector’s assets and 42% of the total banking sector’s deposits in Oman–almost 3x as big as its closest competitor.”  Of primary concern to the sector as a whole, however, remains the rising number of non-performing loans (NPL).  That said, Moody’s, a credit ratings agency, has given two reasons why Oman, and Bank Muscat in particular, are exceptions.  For instance, Oman’s banking sector as a whole is relatively stable, the agency noted, thanks to the country’s “relatively insular economy.”  Furthermore, Dubai Financial Group’s (DFG) recent 15% stake purchase in Bank Muscat, making it the second largest shareholder behind The Royal Court Affairs, a Sultanate of Oman’s governmental body, “is likely to contribute to the development of [the bank’s] franchise in the longer term both domestically and abroad.”

Fitch dour on GCC banks’ retail lending

A recent report issued by Fitch Ratings concludes that the more challenging operating environment has negatively affected prospects for retail banking in the Gulf Cooperation Council (GCC, consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE), although the degree of severity will vary.  Fitch views the potential risks from retail lending as high in the UAE (particularly Dubai) and Oman, moderate in Bahrain, Kuwait and Qatar, and low in Saudi Arabia.

The report notes further that the most negative impact could be realized in the UAE, particularly in Dubai, because the UAE retail sector is the largest in size and UAE retail loans grew the quickest in the GCC.  Dubai’s economy has been hit especially hard by the global recession, as the UAE has an exceptionally high proportion of expatriates, at more than 80% of the population (90% in Dubai).  Expatriate residence visas are nearly always linked to employment in the GCC; rising redundancies are therefore likely to result in higher defaults as expatriates leave, Fitch notes.  Furthermore, the regulation of retail loans is not as tight in the UAE compared with certain other GCC markets.

Risks is also high for Omani banks as their relative exposure to retail lending is the highest in the GCC, at 38.5% of end-2008 banking system loans.  In addition, Fitch views the levels of leverage available to retail customers as among the highest in the GCC, and regulation of the retail sector as not as tight compared with certain other GCC states.  Finally, the negative impact from retail lending will be least severe in Saudi Arabia, where the market is relatively strictly regulated; demand is sustained by a large, growing young indigenous population rather than expatriates; and the local economy has been more insulated from the impact of the global recession than many other GCC states, though declining energy prices are of concern.

Oman maintains A2 ratings despite “sizeable projected fiscal deficit”

Oman’s extensive offshore financial assets, in addition to the central bank’s foreign exchange reserves (the combination of which amount to roughly 75% of GDP) will enable it to provide fiscal stimulus and fund projected deficits without resorting to debt accumulation, at least over the short to medium term, according to Moodys Investors Service’s latest annual credit report on the country. Oman, the economy of which relies heavily on oil and gas exports, thus retained its A2 investment-grade sovereign rating despite a collapse in world oil prices since July 2008, and dour growth prospects predicted for the current year.

One additional challenge facing Oman is its use of enhanced albeit expensive oil recovery techniques, which analysts note pushes up the cost of production. The average cost of pumping oil in Oman rose from around $8/barrel in 2005 to $16/barrel in 2008, and is likely to climb further over the medium term, commented Tristan Cooper, a Moodys Vice-President and Senior Analyst.

Savings to help oil-exporters maintain spending, run deficits

The current account surplus of $400 billion among the Middle Eastern and North African oil-exporting states will turn into a deficit of $30 billion this year, according to the latest IMF report, which classifies said exporters as Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the U.A.E. and Yemen.

That said, according to IMF Middle East and Central Asia Department Director Masood Ahmed, “for most countries, this deterioration is from a position of significant strength, and thus can comfortably be sustained by the large stock of reserves that these economies have built up.”  Riyadh-based investment bank Jadwa Investment, for example, stated that Saudi Arabia’s net foreign assets of roughly 433 billion dollars gives the Arab world’s largest economy “an advantage over most other countries in alleviating the impact of the extreme financing pressures.  It can push ahead with strategic projects such as key infrastructure, oil, power and water, and support the private sector where necessary.”

But this is not to suggest the collective regions are in the clear.  Risks to the outlook for the countries in the region include the following, said Ahmed:

“First, if oil exporters cut their long-term oil price expectations and, consequently, their spending, growth prospects would be weaker for the entire region. Second, a more prolonged global recession would imply even weaker exports, tourism, and remittances for most emerging markets and developing countries. Finally, if asset price corrections deepen and the impact of asset price corrections feed through to corporate and, ultimately, bank balance sheets, some financial institutions in the region may be under stress.”