* Bank earnings weighed down by low interest margins
* Fees for foreign workers hurting construction firm
* But loan growth fast, margins may expand in response to
* Global economy to continue weighing on petrochemicals
* But gains in efficiency, production capacity to offset
By Nadia Saleem
DUBAI, July 4 Solid second-quarter earnings
among Saudi Arabian banks and petrochemical companies may give
the country's stock market a boost in the second half of this
year, analysts believe.
Those two sectors together account for over half of the
market's capitalisation, so they are key for the performance of
the bourse. The market's main index is up 11.9 percent
year-to-date, far underperforming rises of over 30 percent by
other Gulf markets such as Dubai and Kuwait.
Saudi bank shares have slightly outperformed other sectors;
the banking index is up 15.2 percent year-to-date. But
banks' earnings growth has been dampened by low interest rate
margins and, to a lesser extent, by payment problems at some of
their construction company clients.
Late last year the government began imposing fees on
companies that hired more foreign workers than locals, in an
effort to reduce unemployment among Saudi nationals.
Construction firms have been among the hardest hit by the policy
as their hiring costs have increased.
"Contractors are complaining of labour issues and this is
affecting their ability to service debts," said Asim Bukhtiar,
head of research at Riyad Capital.
Saudi banks may have to take loan loss provisions for their
exposure to construction firms in their second-quarter earnings,
which will be announced in the next few weeks.
However, other factors are working in favour of the banks.
Bank lending to the private sector surged 16.5 percent from a
year earlier in May, the fastest pace since February 2009, after
a 16.0 percent increase in the previous month, central bank data
Riyad Capital estimates the banking sector's net income will
rise 7 percent from a year earlier for the second quarter, with
Bank Aljazira posting growth of 19 percent and Saudi
British Bank a rise of 5 percent.
Profits may start to climb faster if, as many expect, U.S.
interest rates rise over the next year or two as the U.S.
Federal Reserve scales back its stimulus policy. Because of
Saudi Arabia's currency peg to the dollar, Saudi lending rates
would be likely to rise too, though with a lag; this could
expand banks' profit margins on their loans.
Saudi Arabia's NCB Capital estimated in a research note that
a small increase of just 0.1 percentage point in net interest
margins for the ten banks it monitored would boost their net
income by 4.6 percent, leading to a 10.1 percent increase in
Meanwhile, export-focused petrochemical shares have been
performing poorly mainly because of uncertainty about the global
economy; the petrochemical sector's index is up just
3.9 percent year-to-date. But many companies have succeeded in
improving their profit margins while additions to production
capacity in recent months should push up sales volumes,
offsetting a drop in product prices during the second quarter.
"I'm expecting good numbers for second quarter because
margins should be higher," said Iyad Ghulam, petrochemical
analyst at NCB Capital.
"We've increased our price targets by an average of 6
percent and remain overweight in some companies. Upside is lower
than before (because of a recent rally by the shares) but
overall, sentiment is positive."
Saudi Arabia provides ultra-cheap natural gas to its
petrochemical firms, giving them a competitive edge against
global firms. Investors have been concerned that this subsidy
could be scaled back in 2013 but there has been no official
statement to that effect, so analysts now believe companies will
continue to enjoy that cost advantage for the time being.
Concern about the global economy may continue to affect
Saudi petrochemical stocks for some time. Kuwait-based NBK
Capital said it was neutral on the sector for that reason.
"China's credit crunch as well as the potential tapering of
the Fed's quantitative easing programme present some near-term
downside risk to major chemical product prices," it said.
Nevertheless, it forecast 5 percent quarter-on-quarter and
30 percent year-on-year growth in second-quarter earnings for
six Saudi petrochemical firms which it covers.
Shares in Saudi Basic Industries Corp, the world's
largest chemical producer, closed at 92.25 riyals on Wednesday.
NBK Capital says fair value for the stock is 106.50 riyals,
while NCB Capital has a price target of 121.50 riyals.