Stock market crash obscures Saudi boom
Opening the doors to the kingdom
Muhammad Al-Jasser, vice governor of the Saudi Arabian Monetary Agency, must be glad he doesn’t have to worry about the stock market and its recent fall except to the extent that it might have an effect on the banking system. Apparently he has been sleeping soundly. “The banking system is not facing any systemic risk as a result of the events in the stock market,” Al-Jasser tells Euromoney.
The Saudi banks have been heavily involved in the stock market boom both as providers of the retail technology to enable mass participation – Sama prodded them into this – and as lenders to stock market investors. Riyadh banking circles are awash with, possibly apocryphal, stories of retail customers buying goods such as cars with consumer loans from the banks, immediately selling them and stuffing the cash into the stock market as it boomed earlier this year. Now it has crashed.
Consumer lending is well-regulated and limited to debt service at a maximum of one third of salary. If customers are borrowing to invest in the stock market, collateral has to be 200% of loan value and they have to release shares to the banks. So, in theory, the market could halve before there were any forced liquidations or loan problems. As the market started overheating last year, Sama used its moral suasion with some of the banks that looked more exposed. They began to rein in margin lending and stopped accepting certain shares as collateral.
But even if loan problems don’t accrue, it seems inevitable that stock market related earnings must decline. Stock market loans might account for only 6% to 8% of banks’ total loan portfolios but brokerage might account for 15% or more of earnings.
At the height of the stock market boom, the banks’ newly built share-trading centres, of which there are dozens and dozens around Riyadh now, were standing room only. Today, there are still plenty of punters milling around. (“These people aren’t really rich,” the manager at one office tells Euromoney, “their net worth might be as little as $5 million to $10 million.”) But for the first time there are empty seats in front of the giant screens showing the Tasi bleeding red on the first day after share splitting. Not all the private side offices for wealthier clients are in use. “Are you making money?” the manager asks the occupant of one room. “Why else would I be here?” he replies, smiling. But the atmosphere is quiet and the market is down.
Al Rajhi Bank is one of the biggest in Saudi Arabia and the leading bank stock. In 2004 it grew earnings by 74% and in 2006 by 92%, with particularly strong growth in the third and fourth quarters. Retail banking, new corporate and asset management business and brokerage were all big contributors in 2005. “I believe we will have good growth in 2006,” says Abdullah Sulaiman Al Rajhi, CEO, “but 92% is a bit of a one-off.” He continues: “Brokerage will still contribute to our profitability but it will be slower in 2006. Still, even if it falls 50% from the peak in the second half, brokerage is not such a high proportion of our overall earnings.” He declines to specify just what proportion of the bank’s earnings does derive from the stock market.
