10/04/2016 05:24 AST
Saudi Arabia’s banking sector has continued to perform strongly in the stock market despite challenging macro-economic developments, partly as a result of rising interest rates, according to Jadwa Investment.
“We see some bright spots for the banking sector, with one potential area of growth being residential lending,” Jadwa stated in latest report on the Saudi Stock Exchange.
“Although net new residential loans for real estate were down by 68 percent year-on- year during 2015, to SR7.7 billion. We see this as a result regulatory changes being applied throughout last year, rather than any reorientation of credit toward corporations,” said the Jadwa researchers.
“More recent amendments to credit rules by Saudi Arabian Monetary Agency (SAMA) have made it slightly easier for borrowers to take out loans and less riskier for lenders. Borrowers are now only required to make a down payment of 15 percent rather than 30 percent previously, with Ministry of Finance (MoF) guaranteeing the other 15 percent,” the report added.
“When banks adopt these new regulations during the course of 2016, lending activity in the residential segment will rise, especially as the supply of residential units increases too, thereby supporting profitability in the sector,” Jadwa Investment stated.
According to the report, the Tadawul All Share Index (TASI) has dropped dramatically since mid-2015, making it one of the worst performing equity markets among major global and regional indices.
While the decline in oil prices has been an obvious factor in this fall, a number of other developments have played their part in dampening investor sentiment.
In general, a deteriorating outlook over Chinese economic growth led to a reversal of portfolio equity flows from emerging markets.
More specifically, the TASI suffered due to an escalation in regional political upheaval and energy price reform, whilst an overreaction by retail investors with short term investment horizons added to declines.
These factors have also contributed to a slow take-up by Qualified Foreign Investors (QFIs) since the TASI opened up in July 2015, but as we have noted on previous occasions, the risks of over pricing of stocks in the short to medium term also discouraged initial QFI entry.
“In recent weeks we have seen some tentative signs of recovery in the TASI. A mild improvement in oil prices and stability in global equity markets has afforded us an opportunity to be cautiously optimistic as we move forward,” the Jadwa research team added.
“Most sectors have seen profitability decline in line with tougher macroeconomic conditions and whilst profitability will be challenged further, some sectors, such as banking and agriculture and food, are expected to remain resilient despite challenging market conditions,” said the report.
It said that the government has continued supporting economic activity despite the prevailing subdued oil pricing environment and still has ample foreign reserves and debt financing ability to ensure continued to support for the economy.
“However, we see the absence of clarity on the agenda for economic reform making further sizable gains for the TASI more difficult,” the report added.
“This makes the announcement of the National Transformation Plan even more necessary, as it will reassure investors of the government’s commitment toward structural economic reform, helping the private sector to make a more informed and confident decision with respect to investment, which will ultimately help boost corporate activity,” stated the Jadwa report.
Arab News
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