MENA WEEKLY MONITOR MARCH 14 - MARCH 20, 2021 _______________________________________________________________________Economy WEEK 12 p.2 S&P SEES LONG-LASTING ADVERSE EFFECTS FROM THE 2020 SHOCK ON GCC BANKING SECTORS A new report by Standard & Poor’s on GCC banks was issued this week. S&P sees long-lasting adverse effects from the 2020 shock on GCC economies and banking sectors. CONTACTS Treasury & Capital Markets Also in this issue p.3 Inflation in Saudi Arabia set to rise again over the next few months, as per Capital Economics Bechara Serhal p.3 UAE economy to post 2.5% growth this year after 5.8% contraction, as per the Central Bank (961-1) 977421 p.4 IPOs likely in GCC education sector as investor interest surges, as per Alpen Capital [email protected] p.4 UAE banks' gross assets increase 3% in January Private Banking Toufic Aouad Surveys (961-1) 954922 _________________________________________________________________________ [email protected] p.5 TUNISIA TOPS ARAB MENA COUNTRIES IN FREEDOM IN THE WORLD 2021 INDEX Freedom House, the US-based non-profit research organization, released its latest report titled “Freedom in Corporate Banking the World 2021: Democracy under Siege”, in which Tunisia topped Arab MENA countries and was the only country classified as “Free”. Carol Ayat (961-1) 959675 [email protected] Also in this issue p.6 One in ten UAE workers hasn't had a pay rise in over five years, as per Tiger Recruitment p.6 Islamic Fintech market projected to grow at 21% CAGR to US$ 128 billion by 2025 ________________________________________________________________________Corporate News p.7 SICO BUYS SAUDI-BASED MUSCAT CAPITAL IN US$ 14.4 MILLION SHARE SWAP Sico, one of the leading regional asset managers, brokers and investment banks based in Bahrain, announced that it completed the transaction to acquire a majority stake amounting to 72.7% in the Saudi-based Muscat Capital, an exclusively owned subsidiary of Bank Muscat after obtaining all relevant approvals. RESEARCH Also in this issue Marwan Barakat p.7 SABB and Alawwal Bank complete merger (961-1) 977409 [email protected] p.7 Aldar offers to buy 51% stake in top Egyptian developer SODIC p.7 Bahri seals time charter deal with Dubai shipper UACC Salma Saad Baba p.8 DP World JV completes first 10,000 container moves at Dubai port (961-1) 977346 p.8 Dubai's Grubtech secures US$ 3.4 million pre-series a funding [email protected] p.8 Egis takes over top Kuwait engineering consultancy p.8 DEWA commissions 400/132 kV substation at Maktoum Solar Park Farah Nahlawi (961-1) 959747 [email protected] Markets In Brief __________________________________________________________________________ Zeina Labban p.9 SHY PRICE DECLINES IN REGIONAL EQUITIES, TWO-WAY FLOWS IN BOND MARKETS (961-1) 952426 MENA equity markets registered shy price retreats this week, as reflected by a 0.3% decline in the S&P Pan [email protected] Arab Composite index, mainly pressured by falling oil prices on concerns over sustained drops in global oil demand and due to some unfavorable company-specific factors. The heavyweight Saudi Tadawul and the Michele Sakha Egyptian Exchange topped the losers’ list this week, while the UAE equity markets and the Qatar Exchange (961-1) 977102 posted price gains. In parallel, regional bond markets saw mixed price movements. Some regional papers [email protected] traced a downward trajectory, mainly tracking US Treasuries move, while some others registered price gains, on concerns that stalled vaccination efforts in some parts of the world would deter a global economic recovery. MENAMENA MARKETS: MARKETS: WEEK WEEK OF OCTOBER OF MARCH 11 14 - OCTOBER- MARCH 20, 17, 2021 2020 Stock market weekly trend Bond market weekly trend Weekly stock price performance -0.3% Weekly Z-spread based bond index -1.7% ⬇ ⬆ Stock market year-to-date trend Bond market year-to-date trend YTD stock price performance +8.0% YTD Z-spread based bond index -0.5% ⬆ ⬆ Week 12 March 14 - March 20, 2021 1 Bank Audi sal - Group Research Department - Bank Audi Plaza - Bab Idriss - PO Box 11-2560 - Lebanon - Tel: 961 1 994 000 - email: [email protected] MARCH 14 - MARCH 20, 2021 WEEK 12 ECONOMY ______________________________________________________________________________ S&P SEES LONG-LASTING ADVERSE EFFECTS FROM THE 2020 SHOCK ON GCC BANKING SECTORS A new report by Standard & Poor’s on GCC banks was issued this week. S&P sees long-lasting adverse effects from the 2020 shock on GCC economies and banking sectors. Saudi and Qatar's banking sectors will be less impacted than those in the United Arab Emirates (UAE), Oman, and Bahrain, while in Kuwait the story will depend on the evolution of the fiscal impasse. S&P expects muted lending growth in all GCC countries except Qatar and Saudi Arabia. In Saudi, mortgage lending continues to expand due to the authorities’ objective of increasing home ownership, while in Qatar government projects are boosting growth. Demand from corporates will likely improve only slightly, with some deferred 2020 capital expenditure and debt refinancing potentially occurring this year. S&P expects a deterioration of asset quality across the board, with nonperforming loans increasing. This will not be helped by the lifting of regulatory forbearance measures, although S&P expects it to be progressive. S&P thinks that the measures implemented by most central banks in the region are supportive of liquidity but do not remove or reduce credit risk from the balance sheet of banks (yet). With respect to assets quality, S&P says that Stage 2 loans have increased slightly because regulators asked banks not to reclassify loans unless there are evident viability issues. A significant number of loans were classified as Group 1 and 2 in the UAE, which means that some migration may happen in the next 12 months. Regarding profitability, some banks will post losses in 2021. Banks suffered a triple shock to profitability in 2020 from lower lending growth, lower-for-longer interest rates, and higher cost of risk. Cost of risk will remain elevated following a jump of 60% in 2020 as banks set aside provisions in preparation for more stress. GCC banks' capitalization will continue to support their creditworthiness in 2021 as per S&P. Banks stepped up Additional Tier 1 issuances (both conventional and Islamic) in 2020 to benefit from supportive market conditions and this should continue in 2021. S&P sees funding as a relative strength for most GCC banking systems. Qatar is an exception, where the banking system still carries significant net external debt. About one-quarter of banks' assets are in liquid forms. THE TOP 45 GCC BANKS’ PROFITABILITY TOOK A HIT ROA (left scale) Cost of risk (left scale) Margin (left scale) Cost/income (right scale) 3.0 41 2.5 40 2.0 39 % 1.5 38 % 1.0 37 0.5 36 0.0 35 2014 2015 2016 2017 2018 2019 2020 ROA: Return on assets. Source: S&P Global Market Intelligence. Week 12 March 14 - March 20, 2021 2 MARCH 14 - MARCH 20, 2021 WEEK 12 Finally, a second wave of mergers and acquisitions (M&A) could begin when the full impact of the weaker operating environment on banks becomes visible. The first wave of M&A was driven by shareholders' desire to reorganize their assets, including the upcoming merger between The National Commercial Bank and Samba Financial Group. The second wave will be more opportunistic and spurred by economic rationale. The operating environment might push some banks to find a stronger shareholder or join forces with peers to enhance their resilience. This might involve consolidation across the different GCC countries or the different emirates in the UAE, for example. However, it would require more aggressive moves by management than seen previously as per S&P. _____________________________________________________________________________ INFLATION IN SAUDI ARABIA SET TO RISE AGAIN OVER THE NEXT FEW MONTHS, AS PER CAPITAL ECONOMICS Inflation in Saudi Arabia was at 5.2% in February, the lowest since the Kingdom increased VAT in July to 15% to tide over the coronavirus crises and low oil prices. However, inflation in the Kingdom is likely to rise again in the next few months, according to London- based Capital Economics. While it is likely to rise again over the next few months, Capital Economics expects it to fall sharply to 1.5%-2.0% from July as the effects of last year’s VAT hike drop out of the annual price comparison, Capital Economics said in a report. The breakdown of the data showed that food inflation continued to ease. After peaking at 14.3% year-on-year in July, food inflation has steadily dropped back and stood at 11.2% year-on-year in February. There was also a sharp decline in housing and utilities inflation last month as rents declined at an even faster pace. However, transport inflation went up as Aramco raised local fuel prices due to higher oil prices. There were also increases in recreation and culture inflation and restaurant and hotels inflation. Capital Economics expects the headline rate to rise over the next few months largely due to the unfavorable base effects created by last year’s collapse in oil prices. But the headline rate will drop sharply from July as the effects of last year’s VAT hike drop out of the annual price comparison. As the Kingdom slashed its oil output and COVID-19 took a toll on businesses, Saudi's economy contracted by 3.9% in Q4 2020 compared to the same period in 2019. Since January 2017, the world's largest oil exporter has been curbing output to support oil prices.