Saudi Banks’ Performance to Compensate for Declining Profits in Other Sectors

Saudi Arabia’s AlJazira Capital, which offers full range of modern investment products and services to the investors, said that a strong performance by banks will compensate for declining profits of telecoms companies while petrochemical players returning to profitability in the first quarter of this year.

In its latest research report, AlJazira expects a 5.2% y-o-y rise in the combined net income of the 51 companies across multiple sectors in the first quarter of 2024.

The combined result of these companies (excluding Aramco) is estimated to increase 5.2% y-o-y to $4.35 billion. The y-o-y growth in earnings would be led by a significant improvement in net profit of MAADEN (+75% y-o-y) and growth in the banking universe (+11.8% y-o-y), further supported by Cement sector growth (+32.8% y-o-y).

The earnings for petrochemicals (-18.5% y-o-y) and Telecom (-11.9% y-o-y) sectors are expected to fall. For the banking sector, growth is likely to be driven by Net Interest Margin (NIM) as well as balance sheet expansions.

“MAADEN is expected to benefit from an increase in gold prices and the start of commercial production at two new gold mines, partially offset by a sharp decline in ammonia prices while the cement sector earnings would benefit from higher selling prices, while the impact of feedstock price hikes will be limited this quarter,” AlJazira said.

On the other hand, the y-o-y decline in Telecom sector earnings would mainly be attributable to higher base in Q1-23 due to one-off gains from the tower deal of Zain KSA.

While most Tadawul-listed firms said that they expect the price hike to hit their cost of production in 1Q 2024, Al Jazira Capital doesn’t forecast the impact of the hike in prices to fully materialise this quarter.

Crude Oil Prices

Crude oil prices bounced back in Q1-24, rising 13.6% from Q4-23 end. On a y-o-y basis, oil gained 9.7% y-o-y. The prices were supported by an improved demand outlook amid signs of strength in the US and China economy.

Additionally, extension of voluntary cuts by Saudi Arabia and Russia until the end of Q2-24 is likely to keep the supply tight. Ongoing conflicts in the Middle East kept the supply disruption concerns alive. The crude oil prices fell to a low of $75.9 per barrel and remained under pressure due to anticipated delay in interest rate cuts and weak demand outlook in February. However, oil gained momentum in March as the demand outlook improved, ending the quarter at high of $87.5 per barrel.

The companies saw higher production due to stronger consumer demand and a tourism boost. The industrial production index declined 8.8% in January led by weakness in mining and quarrying. Total deposits increased 10% y-o-y, while demand deposits grew around 3% y-o-y in February.

Consumer spending increased 16% y-o-y, as the value of POS transactions surged 20% in February. Inflation increased 1.8% in February from 1.6% in January primarily driven by increases in housing rents but remained at comfortable levels. On an M/M basis, consumer prices were up 0.2% in February and 0.3% in January.

Saudi equity market (Tasi) moved up in the first quarter of the year by 3.63% and by 5.5% YTD (as of April 03, 2024). Media sector with an increase of 30.1% YTD was the top gainer among TASI’s sectors, followed by Utilities (+29.4% YTD).

On the other hand, Energy (-7.7%) and Communications and Professional services (-4%) led the laggards during the same period. There was some shifting from small and mid-caps stock to blue chips such as petrochemicals and banks was seen in recently, AlJazira said.