Industry analysis of the banking sector of Tadawul.
- Size of the banking / financial sector of Tadawul, performance during the last year and the various companies which are part of it.
The Tadawul is the only Saudi stock exchange and it is supervised from the Saudi financial authorities, the Saudi Capital Market Authority. It got a one share index, the TASI, and fifteen sectors part of it. Since its formation it has grown at an incredible rate. It reached its highest point in March of 2006 but since then it has been gradually declining. In fact, the Tadawul index of trading has been going ups and downs during the last year. The financial and banking sectors of it have been undergoing the most intense ups and downs due to the influence of the global financial crisis.
The industries compounding the Tadawul are media and publishing, hotels and tourism, transportation, real estate and property development, building and construction, industrial investment, multi-type investments, telecommunications and information technology, insurance, energy sector, food industries and agriculture, retail services, energy providers, cement and petrochemical industries and banks and financial services. In this paper we will deal exclusively with the banking and financial sector part of the Tadawul. It is only one of the fifteen sectors of the stock exchange but it is larger than most of the other industries.
- Size and growth trends in the industry.
Regarding the size of the sector, the banks and financial services sectors is the fifth largest industrial sector in Tadawul. At the present moment there are eleven companies listed in this sector. These participants are mainly banks. Yet, they have a very considerably large volume of trade and activity going on Tadawul. In comparison the banks and financial sector is approximately large like the petrochemical industries sector of Tadawul. The largest sector of the Saudi stock exchange is the insurance sector. After it comes the agricultural and food industry sector, than the industrial investments sector, than the petrochemical industries sector and finally the banks and financial services sector. Nevertheless, the importance of the banks and financial services sector is crucial to other sectors. In fact, many of the financial institutions and banks in this sector are directly related to the other companies listed in the industrial investments or agriculture, petrochemicals industries or the food industry. Many of these banks and financial institutions are investors of other companies comprising those sectors (Al-Muharrami et al, 3489).
The major players compounding the banks and financial sector of Tadawul are the Saudi British bank, the Riyad Bank, the Al Jazira bank, the Saudi Hollandi bank, the Saudi Investment bank, the Banque Saudi Fransi, the Arab National bank, Al Rajhi bank, BANK Albilad, Alinma bank and the Samba Financial Group. As we can see there is only one financial institution and the rest are banks. From them there is only one bank which is entirely dedicated to investments, the Saudi Investment bank. Regarding performance, today on May 20, 2010, this sector has closed in the market with 16,863.71points. That corresponds to a net change of 178.80 negative points since the opening of the market or the equivalent of a 1.05% decrease.
If we have to compare the data from the beginning of the year to date, we see that the banks and financial sector of Tadawul has had an index value of 15,674.21 on December 31, 2009.
Compared with the above mentioned value of May 20, 2010, we find that the sector index has risen by 1,189.50 points. That corresponds to a 7.59% growth rate (Market Summary, 1). Thus, this industry sector has been performing well during this first half of the year. In fact, it has been performing even better than the general TASI index has. In comparison, on 31 December 2009 the value of the TASI index was 6,121.76 points. To date, 20 May 2010, it has gone to 6,401.06 points. That is a difference of 279.30 positive points or an equivalent growth rate of 4.56% (Detailed quote, 1). As we can see from the data the banks and financial sector of this index has been outperforming the general index. Both of them have been growing but the banks and financial services sector has been growing by 3.03% more than the general TASI index.
In comparison with other sectors of the general index the banks and financial sector has also been performing better. For example, on 31 December 2009 the value of the largest sector of the index, the insurance sector, was 1,079.75. On May 20, 2010 the value of this sector has fallen by 104.06 points which is equivalent of a 9.64% decrease in value. In comparing the two sectors, it results that the banks and financial sector has been growing by a rate of 14.2% compared to the insurance sector.
Also, one of the growing sectors of the TASI index has been the agricultural and food industry, which is also one of the sectors larger than the banks and financial sector.
On 31 December 2009 this sector had a value of 5,010.55 points and to date it has grown by 333.55 points. That is equal to a 6.66% growth rate. Nevertheless, it is still a smaller growth rate related to the growth rate of the financial and banks industry.
Competition and exchange rates
Saudi Arabia has been ranked 65th in the world’s economic freedom index (Al-Muharrami et al, 3487). It has made significant progress regarding competition in the market among private companies during the past decade. The banking industry has been one of those sectors of the economy where competition has grown fiercer during these years. The reason for this is the entering into the Saudi market of many foreign banks which showed interest for the local market. Many of them formed joint ventures with local financial institutions or banks. Some of these joint ventures are listed in the Saudi stock exchange in the sector we are discussing. Among them we can mention the Saudi British bank, or the Banque Saudi Fransie which is cooperation between a local bank and a French financial institution. There have also been big merging and acquisition processes in Saudi Arabia. The largest is the merger in late 1999 between Cairo Saudi Bank and the United Saudi Bank. This new institution that was formed was further merged with the joint venture Saudi American Bank and this newly formed entity was called the SAMBA Bank (Al-Muharrami et al, 3489).
This tactics of forming big institutions in order to gain as much market share as possible was followed by other banks. This process favored the increasing of competition in the industry.
Regarding the exchange rates, at the present moment the Saudi Riyal has been very stable in contrast to the two major world currencies, the United States Dollar ($) and the European Union Euro (€). At present one US$ is exchanged for 3.75 Riyal and one Euro for 4.6 Riyal. The currency has proven to remain stable even in difficult times. One crucial moment was in late 2007 when the US Federal Reserve decided to but dramatically interest rates because of the internal situation in the United States. The Riyal gained ground on the US$, situation which disfavored exports and transaction in the Saudi stock exchange and market. The Saudi Monetary Agency did not intervene fearing a rapid increase in inflation. The situation returned to its normality of 1 US$ = 3.75 Riyal just after a couple of months.
Stock selection and analysis
In this paper we will see the performance of the Samba Financial Group (SAMBA), the Saudi Hollandi bank (Saudi Hollandi, 1040), the Saudi British bank (SABB, 1060), the Al Rajhi bank (Al Rajhi, 1120) and the bank AlJazira (BJAZ, 1020).
As I have mentioned above, the Samba Financial Group has come as a result of the largest merging operation in the Saudi banking sector. Since the beginning of the year the value of the Samba in the banks and financial sector of Tadawul has been gradually increasing. The same is true regarding the banks and financial sector in general but compared to it the SAMBA has been growing by 7%-10% more. The peak arrived on 21 March 2010 when the stocks of SAMBA increased in value by 17.69% compared to the beginning of the year. Since that time until today the value has been decreasing.
In fact, it followed immediately with a rapid decrease of almost 9%. On 29 March it went down to 8.76% from 17.69%. The stock tried to rise up again but could not avoid the shock that it took on March 29. In comparison the Al Rajhi bank has been growing at the same rate as the bank and financial sector index for the first three months of the year. It is interesting to note that the same period that SAMBA took a shock, the fourth week of March, the Al Rajhi stock rose up by 5.4%. It rose rapidly from 7.8% to 13.24% compared to the traded volume at the beginning of the year (Detailed Quoting, 1).
Quite the opposite is has been the situation of the Saudi British bank. It has been rapidly falling in value during last December and continued during first month and a half of the present year. It went down to a historical figure of -18.87% on January 12 compared to the value of the beginning of the year. Nevertheless, the recovery was also rapid. Only six days later it went back to a mere -2.69% of the opening value of the year. It recovered more than 16 percentage points within the week. Since then it had a gradual increase in value up to reaching the highest point of 6.4% more than the opening year value, on February 23rd. Again, within the week it fell by more than 9 percentage points compared to February 23rd and went to -3.42% of the opening year value. Since then it has gradually declined even more to -8.18% to date. As we can see compared to SAMBA and the Al Rajhi the Saudi British has been performing worse. In fact it has been undergoing rapid ups and downs in the market. This is partly even because of the close ties it has with the British counterpart and the problems they have been facing in British and European markets.
Al-Muharrami, Said. Matthews, Karl. Karbhari, Yassir. “Market structure and competitive conditions in the Arab GCC banking system”. Journal of Banking & Finance, Vol. 30 pp.3487-501. 2006.
Detailed quoting of stocks. The Saudi Stock Exchange Online Portal (Tadawul). 2010. Web.
Market summary and history. The Saudi Stock Exchange Online Portal (Tadawul). 2010. Web.