Market analysis: Banks and builders struggle in fourth quarter

02/03/2017 06:24 AST

With the fourth-quarter earnings season just finished, it is clear that the performance and prospects of listed companies across the Arabian Gulf are div­erging.

Healthcare providers, entertainment and tourism companies and some property developers are doing relatively well, while construction firms and many banks are struggling.

In Saudi Arabia, healthcare companies and banks in general reported stronger fourth-quarter results.

Banks experienced some credit growth towards the end of last year, with many resuming lending to contractors that had been hit by payment delays. The sector reported an aggregate 5.4 per cent increase in 2016 net profit despite higher provisions, mainly for loans to the construction sector.

Saudi banks are likely to continue to perform well this year, especially if liquidity conditions continue to improve. And in a rising interest-rate environment, their net interest margins should widen, as their funding is largely made up of individual customer deposits – and these types of deposit rates can usually be held down while lending rates rise.

In the UAE, where funding is largely through the wholesale market or from corporate deposits, there will be less of a benefit for banks from the widely expected further rise in benchmark interest rates this year.

Although UAE bank results broadly beat expectations, it is clear that credit growth is weak and non-performing loans are on the rise.

While deposits grew across the board quarter-on-quarter, the loan book contracted by about 2 per cent at a couple of UAE banks. Non-performing loan ratios ranged from 2.3 per cent at FGB and 9.1 per cent at Emirates Investment Bank, prompting a rise in provisions across the sector.

Meanwhile, we can expect the leading UAE developers, such as Emaar, to achieve better earnings this year. Emaar reported a 56 per cent increase in fourth-quarter net profit, boosted by higher revenues from property developments as well as the performance of its malls and hospitality businesses.

However, margins for construction companies in the region continue to be squeezed and are suffering from reduced spending on physical infrastructure. Exceptions to this may be contractors that are heavily involved in delivering Dubai Expo 2020 and Qatar Fifa World Cup infrastructure.

UAE retail and tourism companies – such as Emaar Malls and DXB Entertainments – will benefit from greater local and regional visitor growth numbers this year. With Legoland and Bollywood Parks Dubai already open, the emphasis this year is on the full opening of all rides at Motiongate Dubai.

Plans for international amusement park company Six Flags to open in the UAE in 2019 at the Dubai Parks and Resorts destination alongside additional hotels create further investment opportunities for 2017 – especially after recent share-price correction.

Emaar Malls, which recently announced a 13 per cent year-on-year increase in net profit, has prime exposure to the increasing tourist numbers in Dubai. The company is looking to expand The Dubai Mall retail space this year by about 15 per cent and at current valuation of 15.7x earnings, which is a 15 per cent discount to emerging market peers, this offers an attractive dividend yield of 3.7 per cent.

With crude oil forecast to fluctuate in the US$50 to $60 range – about double the lowest level hit in early 2016 – regional economic activity and liquidity conditions should gradually improve.

GCC fiscal deficits are expected to narrow slightly to an aggregate of 6.5 per cent of GDP in 2017, with governments prioritising spending on sectors that have a direct beneficial effect on the lives of local populations.

Companies involved in health care, education and social and human capital development should do well. Saudi Arabian healthcare companies such as Al Mouwassat an

The National