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Nomura Starts Coverage of Saudi Arabia’s Banking Sector with Positive Outlook

(Reuters) / 21 August 2009

DUBAI — Saudi Arabian banks are resilient to the global economic downturn due to the relative strength of the region, solid fundamentals and a conservative regulatory environment, said Nomura, which began coverage of the Saudi banking sector with a 
positive outlook.

Saudi banks are an attractive way of taking advantage of a rising interest rate environment, Nomura said in a note dated August 19.

Owing to their high share of demand deposits and free funds, they should see their profits bolstered in the rising rate environment, the brokerage added.

“We believe banks’ high profitability should also derive from strong lending activity — thanks to government spending and retail/Islamic banking,” Nomura said. 

In the short term, government’s infrastructure spending would be the main catalyst for a pickup in corporate lending volume growth, the brokerage said.

Saudi Arabia has pledged to spend $400 billion until 2013 to upgrade its infrastructure and has also launched a plan to build five economic and industrial cities to create new jobs.

The government has doubled capital spending in the first quarter and is drawing on foreign reserves to weather the global crisis.

“We believe Saudi banks should capture at least part of this large stimulus package by financing contractors,” Nomura said.

In the mid-term, retail and Islamic banking would be the main drivers of balance sheet expansions, the brokerage added.

Nomura, however, said while the banks have curtailed risks in their investment securities, asset-quality deterioration due to “name lending” — a practice of granting loans based mainly on clients’ reputations — was likely to hurt their profits and partially offset top-line expansion. 

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