30/01/2018 05:54 AST
GCC banking stocks have had a fantastic year so far, and the rally was largely a predictable one.
Amongst the GCC banking indices, the Tadawul (+8.7 per cent), Qatari banking index (+7.5 per cent) and ADX (+7.2 per cent) have all rallied steeply YTD, followed by Kuwait (+5.2 per cent) and DFM (+4 per cent), while Omani banks broadly underperformed (YTD -1.8 per cent) the benchmark GCC peers by a mile.
The steep move in the stock price suggests that investors have prepositioned to take advantage and maximise their return on capital through dividends.
The strategy of timing these purchases is clearly a trading one, and will eventually die out when the stocks going ex-div.
We believe the banking stocks rally is getting long in the tooth, which leaves us to determine whether the move can continue well into the remainder of 2018.
We have highlighted below, the story so far on Q4 results space in the GCC, which will lead the investors to differentiate and pick regional markets with tailwind stories.
We note that Saudi banks are yet to announce their Q4 results, although the price movements are in anticipation of higher dividends and a stronger economic backdrop.
In Kuwait, NBK reported 9 per cent increase in Q4 net profit, in line with consensus estimates.
We note that Kuwaiti banks have two broad catalysts coming into play this year a) fundamental – as banks will benefit from high interest rate cycle and strong balance sheet momentum b) technical – FTSE EM inclusion will remain key story in 2H18, which will increase the foreign investors flow to the market.
On the economy front, Kuwait has the lowest macro risk in the GCC and government spending will continue to propel the lending growth in 2018. Given the tailwinds, the banking sector valuations (1.7x 2018 PB) are undemanding, in our view.
Net-Net it is likely to be yet another promising year for the banking sector in Kuwait. In the UAE, of the tier 1 banks, we had ENBD, DIB, ADCB and Mashreq reporting their numbers. ADCB came slightly shy of consensus driven by higher impairments on retail segment while ENBD came broadly in line with street expectations, and DIB beat consensus by 9 per cent.
On dividends, as expected, DIB remained the highest dividend payer (6.9 per cent yield), while ADCB inched up their DPS by two notches (5.6 per cent yield), while ENBD maintained their DPS (4.7 per cent yield).
Going into 2018, the management guidance of ENBD and DIB hinted that broadly similar trends of 2017 is likely to flow through 2018, suggesting a low- double digit net profit growth for this year.
Despite similar fundamentals, the stock performance of ENBD and DIB could yet again be different (2017: DIB +11 per cent, ENBD –3.4 per cent), given the former’s restricted foreign ownership limit.
The glitch for DIB could possibly come from a likelihood of rights issue as mentioned by the management in the conference call.
At the macro level, in the UAE we have seen some strong data from the PMI, tourist numbers, output and cargo traffic all indicating the robustness of the economy. PMI data for the month of December reached 57.7, the highest reading in 34 months. Output and new orders both rose sharply in December, underpinning improvement in the headline PMI. With oil at $70 (Dh257), we suspect Abu Dhabi could witness a recovery in their investment plans sooner than later. With positive macro data’s hovering around the corner, we believe the value has clearly opened up for the UAE.
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