Markets in Turmoil
Considering the recent financial turmoil, we have decided to review our forecasts for the companies in our research universe. Even though we initially chose these companies and gave positive recommendations because of their sound operational outlook, we have gone back to assess the impact of slower regional GDP growth as well as the recent global slowdown/recession.

The global financial crisis will undoubtedly have a negative impact on the Saudi and UAE banking sectors, despite the two sectors’ minimal direct exposure to international financial markets. Both sectors will be impacted in similar ways, the most important of which is slower balance sheet growth, which will translate into lower profitability. However, we believe that Saudi banks are in a better position than their UAE counterparts in terms of liquidity, risks derived from real estate exposure, and their ability to control costs going forward. In Saudi Arabia, what we are concerned about is asset quality and the short-term performance of the investment portfolios of all our covered banks and especially Samba and Riyad. We believe ANB is the most undervalued, offering a 68% upside potential. In the UAE, we are concerned about asset quality and about ADCB’s subprime-related exposure, its significant wholesale funding, and its exposure to the real estate market and stock market. We believe NBAD is a safer investment than ADCB, although real estate exposure is also a concern for NBAD. Nevertheless, we believe both banks are offering around 40% upside potential.

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