Q4 prospects for GCC financial sectors (page 1 of 2)

The Dubai Financial Market (DFM) was boosted by the Dubai World debt accord, but the Kuwait Stock Exchange was the main winner of this year's summer rally. In 2009 the northern Gulf state did end the year as the GCC's trouble child. Out of 23 Kuwaiti investment companies only three generated profits according to data by Global Investment House. Conversely, this year KSE heavyweights National Bank of Kuwait (NBK) and Zain Telecom were riding the market rebound which began on July 4th, and lifted the KSE by 6,9% until Eid al-Fitr.

Connected to the world
In its quarterly sector reports, Kuwait-based Global Investment House examined the impact of the Blackberry row on the telecom sector. "It is hard to quantify the impact of a possible Blackberry ban on the telecom companies, it is likely to have a negative impact on telecom service providers as many corporations use it as the system of first choice", the investment bank writes. Kuwait did not join Saudi Arabia and the UAE in pinning down Blackberry-producer Research in Motion (RIM) in order to obtain access to the smart phone's transmitted data. Saudi Arabia (and India) eventually came to an agreement with RIM to get access to data. The UAE meanwhile has set RIM a deadline of October 11.

Global says RIM has a lot to lose, with 500,000 clients in the UAE and 700,000 in Saudi Arabia. "Keeping in mind the imposition of blackberry ban in UAE, we believe the price performance of UAE companies will remain subdued till the issue is sorted out. In the GCC telecom space we remain overweight on (Kuwait's) Wataniya Telecom and Mobily (KSA)", Global writes. Indeed, the shares of GCC's largest telecom provider Etisalat, in relation to its market capitalisation of $21.6bn, failed to join the bullish bandwagon, whilst they are attractive regarding the dividend yield of 6%.

Is the worst over for GCC banks?

The Dubai World debt deal was long awaited and triggered a bank shares rally at the DFM, and the ADX likewise. Shortly before Eid on September 10th, government-related entity Dubai World announced that it had received formal agreement from over 99% by value and approximately 99% by number of its creditor banks to restructure approximately $24.9bn of debt. The GCC's largest bank by assets, Emirates NBD, surged 15% over one month (as of the close of trading of September 15).

Financials also advanced across the board at markets in Abu Dhabi, Riyadh and Kuwait. "In our opinion, the announcement by Dubai World is an important and necessary support factor for the UAE to enjoy a revival in risk appetite", Fahd Iqbal, director of research at EFG Hermes in Dubai says. Dr Mohamad Damak, credit analyst at Standard and Poor's in Paris says that the Dubai World issue has somewhat dampened global market access to the GCC-based financial institutions.

According to Damak, "after GCC banks spent more than $20 billion on loan loss provisions and investment impairments since 2008, we believe the asset quality of Gulf banks should improve from 2011 and that their good margins and efficiency will provide a solid foundation for their return to high profitability." These uncertainties led to heavy losses among insurers, at Riyadh's Tadawul market in particular.