There is an old Chinese curse “may you live in interesting times”. 2019 was definitely an interesting, eventful year in Arab banking – mega bank merger announcements in Saudi Arabia and UAE, historic IPO’s like the Saudi Aramco flotation, a banking and sovereign debt meltdown in Lebanon, J.P. Morgan’s inclusion of five GCC countries in its bellwether (EMBI) emerging markets bond index, civil wars, uprisings and revolutions in Syria, Iraq, Yemen, Sudan, Algeria and Libya, a continued Coalition blockade of Qatar, three FOMC interest rate cuts, record performance in the GCC bond/sukuk capital markets and the unveiling of Basel IV international bank capital adequacy protocols.
However, as I scan bank shares from Casablanca to Muscat, from Cairo to our own Dubai’s DFM, there are certain banks/financial institutions whose franchise footprint, earnings power, government shareholding, free float, shareholder value optimization ethos and macroeconomic context makes them natural long term wealth compounders in my admittedly biased world view. These are precisely the MENA banks where the risk reward calculus to make money is skewed in my favour as long as I am disciplined in my entry and exit price levels since no listed CBOE options market exists to hedge macro risk. There is no shortage of leprosy/zombie banks in the Arab world, so the ability to distinguish between chicken salad and chicken merde, both confusingly white, is mission critical for investment success. A fool and his money, alas, are soon parted with relish in the stock exchanges of the Arab world.
First Abu Dhabi Bank (FAB) is the largest, safest, retail, commercial and investment bank in the UAE, a $140 billion asset colossus backed by the government of the world’s wealthiest Arab petrocurrency emirate with $2 trillion in sovereign wealth and 100 billion barrels in proven crude oil reserves. However, while the bank is obviously a proxy for the UAE’s cyclical growth momentum in 2020 as oil prices surge, I believe this delta is fully reflected in the bank’s current share price of AED 15.30 as I write.
I would ideally buy First Abu Dhabi Bank at 13 AED on a market correction to benefit from its vast and diversified loan book, its razor thin funding costs over LIBOR, its Basel Common Equity Tier One capital adequacy ratio of 13.3, its projected 13% ROE, its impressive net interest rate margins and syndications, trade finance, FX, Treasury, asset management and capital markets fee income. The bank trades at a current valuation multiple of 12, a tad high for my taste and a 1.5 times price to book value. This the reason I love the bank but not its current share price. At 13 AED, I believe a compelling risk reward calculus exists in FAB and its ex Citigroup management who created fairy tale shareholder value at First Gulf Bank in the last two decades.
There is no doubt in my mind that Egypt has the best macroeconomic metrics and most underpenetrated banking growth market in MENA, especially since the flotation of the Banque de Caire IPO will prove a sensation for emerging market fund managers worldwide. Commercial International Bank (CIB) was up a phenomenal 37% in 2019. I see no reason to believe that CIB’s bull run is over, though 2020 gains will be more muted at 14 – 15%. My buy/sell range for CIB in 2020 is 74 – 95 Egyptian pounds.
I have fond memories of young executives from CIB, who used to spend a day with me in their capital markets training program at One Chase Manhattan Plaza in New York. I used to always take them for dinner at Windows of the World on the 107th floor of the WTC North Tower and give them a taste of Matt’s favourite “boys will be boys” hangouts in my Greenwich Village neighborhood. They always ended up wanting to work with moi in New York LOL!
At the time, CIB was managed by Chase Manhattan, the alma mater of legendary Egyptian financiers Yasser Malawany, Hassan Heikal and Adel al-Labban. The IMF expects Egypt to grow its GDP by 6% in 2020 and the central bank, which slashed rates by 450 basis points in 2019, could cut interest rates by at least another 100 basis points in 2020. This means the rally in Egyptian government bonds will continue and prove a steroid shot for CIB’s Treasury/proprietary fixed income portfolio.
Oman’s Bank Muscat dominates the sultanate’s loans, deposits, Islamic finance, asset management, retail, corporate and investment banking/project finance markets. This is the ultimate “too big to fail” Omani bank, relatively under leveraged at 6.7X with a Basel Tier One ratio of 17%, though its return on equity is below its GCC peers at 9%. The Omani economy is highly sensitive to a rise in Brent crude and PDO/Oman Oil/BP megaprojects coming online that will increase natural gas production by 50% in 2020. The World Bank expects Omani GDP growth to surge from the current 1 – 2% range to 5% in 2020. Bank Muscat trades at a modest valuation of 7 times 2020 earnings and offers a stellar dividend yield of at least 6.8%. My buy/sell range for Bank Muscat is a 0.42 – 0.46 OR, where a 16% total return trade idea makes it a low risk, strategic GCC bank holding for me.
Saudi Arabia’s Bank Al Jazeera is a full service corporate/retail bank and sponsors American Express/Visa credit cards in the kingdom. I believe the 2020 State Budget will be the most expansionary fiscal milestone in the history of Saudi Arabia. The blowout success of the Saudi Aramco IPO is positive for trading volumes in Tadawul and inflows into Saudi equities, mutual funds, both areas of specialization for Bank Al Jazeera. The bank is also aggressively increasing its 6% share in the Saudi home mortgage market, a secular growth theme in the kingdom. At a price/tangible net asset value of 0.9X, Bank Al Jazeera is unquestionably the cheapest major commercial bank in Saudi Arabia. My buy/sell range for this undervalued, underleveraged Saudi bank is 14 – 18 Saudi riyals.
2020 will be a historic year for Kuwait as MSCI, the world’s preeminent provider of index products, reclassifies its stock exchange from frontier to emerging markets with a potential 0.7% index weight. This is positive for Kuwaiti equities for multiple reasons even though Kuwait was up 30% in 2019, the star performer in the GCC, boosted by anticipatory foreign capital inflows. Kuwait has implemented a series of innovative capital markets reforms to attract foreign capital and reduce its economic dependence on oil and gas revenues.
Arqaam Capital estimates the MSCI upgrade will mean $2.8 billion in passive inflows. The London EM grapevine projects $7 billion in “active” foreign capital flows into the Kuwaiti stock exchange in 2020. The obvious beneficiary of the capital markets reforms and MSCI linked foreign portfolio inflows is the National Bank of Kuwait, the largest bank in Kuwait, though I believe its shares are fully valued after the December bull run. I would wait for a 12 – 15% correction in the Kuwaiti stock exchange to accumulate the shares of NBK, the emirates’s flagship, universal bank that has been among the Gulf’s elite banking institutions since the post October 1973 petrodollar recycling era in the Euromarkets.
Kuwait is both beneficiary and victim of recent political events in the Middle East. The US hit on General Soleimani and air strikes on the Kataib Hezbollah, an Iran backed militia in Iraq, heightens political risk for the fabulously rich Gulf emirate that was invaded and looted by Baathist Iraq in August 1990. Kuwait has also been the target of Iranian subversion ever since the assassination attempt on the life of the late Emir Sheikh Jaber Al Ahmed Al Sabah. Yet as a classic Gulf oil exporting emirate, Kuwait also benefits from the highest Brent crude oil prices since the September 14 Houthi/Iranian drone and missile attack on Saudi Aramco’s oil processing complex in the Eastern Province. Naturally, the risk of a full blown US-Iran war, which will have shockwaves from Iraq to Lebanon, Yemen to the Gulf, could also raise the risk premium on Arab banking shares. Be prudent, be vigilant and be wise as the angels of mega-death once again revisit the Middle East, an ancient haunted region defined by the violence of merciless autocrats.