Financial Services in Saudi Arabia: Al Bilad, Al Jazira and Al Rajhi Financial Ratios Analysis

Introduction

This project analyses the bank and financial sector in Saudi Arabia. It aims at advising a prospective investor on the best stock to invest in. The selected bank for analysis are Al Bilad, Al Jazira and Al Rajhi which are all public owned companies and their shares are listed on the Saudi stock exchange (Tadawul). The analysis will look at the financial ratios and the financial records of these companies in the same financial period and their performance both in the financial statements and their share performance in the stock market.

The research project looks at the factors that influence investment decisions in consideration of the selected three banks in the Saudi’s TADAWUL exchange. It seeks to determine factors that influence the investors in choosing efficiently and effectively their investments decisions to get maximum returns on investments. From doing this project I will discover lots of facts and get answers for the questions that it’s in my mind regarding these investors and the investment market and I will be able to advice a prospective investor on the best option to take from these three banks financial records and reports.

The main scope of this project will be an in depth look at the past, current and future trends in the financial market and to analyse these trends to enable prudent and reliable decision making and advisory measures to recommend to the prospective investors.

The project will be basically composed of the following objectives:

1. To identify the financial and economic factors behind these investment and stock trend in the market.
2. To identify ways in which the stocks of the respective bank have been fluctuating and the reasons behind it.
3. To find out how management of these banks influences the investment decisions of the investors in the market.
4. To investigate the relationship between the past, present and future environments and its influence on the decisions of investments in the market.
5. To investigate relationships between the share price and the financial performance of the banks with major emphasis on the comparison and distinctions in these trends.
6. Establish an effective and reliable investment appraisal and give recommendations on the best stock to invest in.
7. Factors fuelling this kind of situation in the Saudi Arabian stock market in the current world.
8. Assess the major challenges the investors are likely to face in the trade and how they can be avoided if not solved.
9. Advice accordingly on the stocks analysis report after the valuation measures have been conducted.

After all this analysis I will be in a position to advice my client on the trends of the three stocks and then narrow down to the best stock for maximum return on investment in the stock market.

Overview of the Financial sector in Saudi Arabia

The tawadul is a Saudi name for the Saudi Arabia stock exchange with the following parameters (Tawadul):

The project will evaluate three banks namely, Al Bilad Bank, Aljazira Bank and Alrajhi Bank which are registered and incorporated as public limited companies in Saudi Arabia. The financial sector in Saudi Arabia is quite complex due to large investments in the capital and the money markets. The financial sector constituted 11.82% of the value traded of 149,134,586,016.02 for the year that ended 31 December 2009. This makes it the 3^rd largest sector in the market after petrochemical industries with 23.73 % and insurance with 15.88% (Tawadul).

The banking sector in Saudi Arabia is composed of many banks among them being:

• Al jazira bank.
• Arab national bank.
• Al rajhi banking and investment corp.
• Riyadh bank
• Saudi America bank.
• Saudi British bank.
• Saudi Cairo bank.
• Saudi French bank.
• Saudi Hollandi bank.
• Saudi investment bank.
• The national commercial bank.
• United Saudi commercial bank etc.

All the banks in the Saudi Arabia are compliance with the shariah authority and all their activities are subject to approval from and control from the authority. The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the Bank’s annual consolidated financials statements for the year ended December 31, 2009, except for the amendments to existing standards and interpretation mentioned below, which the banks adopts (Tadawul). This gives a level playing ground for the comparison since the reporting standards are harmonised and thus will give a reliable comparison.

This project will be analyzing the financial statements of Bank Al Bilad, Bank Al Jazira and Bank Al Rajhi. First we have to know the market composition and the products these different banks provide to their clients:

Al Bilad Bank

It is a joint stock company established by a royal decree and with a capitalization of 3 billion Saudi riyals. It offers the following services; business finance products, retail banking products and investment products (Bank Al bilad). Bank Al Bilad (the “Bank”), a Saudi Joint Stock Company, was formed and licensed pursuant to Royal Decree No. M/48 dated 21 Ramadan 1425H (corresponding to November 4, 2004), in accordance with the Counsel of Ministers‟ resolution No. 258 dated 18 Ramadan 1425 H (Al Bilad bank)

Aljazira Bank

This bank provides personal, business and investment banking needs in the Islamic designed products (Bank Aljazira). During 2009, the Bank’s total assets reached SR 30 billion, compared to SR 27.5 billion in 2008, representing an increase of 9% over 2008. Placements with banks and other financial institutions reached SR 7.2 billion, an increase of 85% compared to last year. Finance operations ended the year at SR 15.5 billion, a 2.45% increase over the SR 15.1 billion achieved in 2008, mainly due to a very careful assessment of risk and stringent lending policies. Client deposits have increased by 6% to a total of SR 22.1 billion, compared to SR 20.9 billion in 2008 ( Al Jazira).

In spite of the challenges faced by the banking industry as a result of the economic turmoil, Bank Aljazira was successful during 2009 in diversifying its income sources, enhancing revenues through other income resources, reinforcing liquidity, widening its customer base, reducing risk, and decreasing its dependency on a single source of revenue. Total operating income grew 3% compared to 2008 and net special commission income grew 5.75% as a consequence of the higher level of Shariah compliant finance (2.45%) and material growth in customer deposits (7.85%) partially offset by a material decrease of profit rates during the period.

Fee and commission income reduced from SR 537 to SR 386 million, mainly due to the lower level of local share trading activity and partially offset by higher trade finance and international share trading fees. Trading income was positively influenced by the profit on the sale of equities portfolio by SR 25 million (compared with a loss of SR 46 million in 2008). Operating expenses (before provisions) were reduced by SR 65 million or 8.2%, mainly due to strategic cost management measures taken to improve efficiency. Although the Bank was able to increase profit during 2009 by 55% over 2008, based on its conservative approach to mitigate and manage credit risks and reinforce its balance sheet, the Bank booked provisions for credit losses of SR 412 million, compared to SR 61 million during 2008. Furthermore, the Bank booked SR 5.4 million as an impairment charge for its investment assets. Based on the above, net income decreased to SR 27.5 million, compared to SR 222 million in 2008, while earnings per share decreased from SR 0.74 in 2008 to SR 0.09 in 2009.

Bank Al Rahji

The Bank is principally engaged in Islamic banking business which refers generally to the acceptance of deposits and granting of financing under the principles of Shariah as well as the provision of related financial services. The Bank is a licensed Islamic Bank under the Islamic Banking Act 1983, incorporated and domiciled in Malaysia. The registered office of the Bank is located at the Ground Floor, East Block, Wisma Selangor Dredging, 142-B Jalan Ampang, 50450 Kuala Lumpur. The holding company of the Bank is Al Rajhi Banking and Investment Corporation, Saudi Joint StockCompany, a public limited liability company, incorporated in Riyadh on 29 June 1987. The registered office is located at PO Box 28, Riyadh 11411, Kingdom of Saudi Arabia. As at 31 December 2009, the Bank has 19 branches and the numbers of full time employees in the Bank at the end of the financial year were 357 (Al Rajhi bank).

Industry Analysis

Growth trends In the market

The market is very active especially in the buying and selling of stock, debentures and other securities which are exchanging hands among the members of the public. Generally the interests are prohibited due to the fact that they favour these banks mostly and most of the investment is made by joint partnerships in trade and investment (Tadawul).

This sector has performed as follows during this recent past:

The Saudi market is experiencing a high rate of growth and investment especially in the financial and industrial sector. The past year the value grew by 28.25% in the total market composition with an 11.82% in the financial sector (Tawadul). The Tadawul is expected to maintain the steady growth especially in the banks and financial sectors with an increased favorable condition of investment for both internal and external investors. Many firms are also choosing this market as a source for their financing for both the short term and the long term financing and thus the stocks in this sector are the best to invest in.

The movement of stock indices is highly sensitive to the changes in fundamentals of the economy and to the changes in expectations about future prospects. It is assumed that domestic economic fundamentals play determining role in the performance of stock market. The stock exchange has been implementing the calculation methodology of all indices to free flow basis in the recent past and thus the stock market modification to incorporate other characteristics is in progress. These changes will enable a detailed break up of share trading activity across different investors (Tadawul).

Many exchanges, formerly cooperatives of intermediaries who were both members and owners, have changed their ownership structure to become standard corporations while others, formerly public, have been privatized. Some of them are, in a sense, customer owned or controlled only a few of them, until now, have belonged to shareholders other than financial intermediaries. Since many exchanges are self-regulated, conflicts of interest may arise. For example, a manager of the exchange may not enforce a rule against one of its owners. Thus the governance structure may matter in the process of competition thus government intervention was necessary.

From the beginning of the 1990s in Saudi Arabia, a number of measures have been taken for economic liberalization. At the same time, large number of steps has been taken to strengthen the stock market such as opening of the stock markets to international investors, regulatory power of capital markets, trading in derivatives, etc. These measures were designed too basically set an enabling environment to traders from both the internal and the external sources. Since this is the second largest sector in the economy it couldn’t be ignored since for sustainable growth the necessary measures have to be taken in the Tadawul.

The exchange rate in Saudi Arabia (Tadawul) is regulated by the capital markets authority which oversees the operations of the stock market. If the demand of the shares is global that means the ownership might change from local to foreign and the capital market has to regulate these moves (Tawadul). The exchange rate will definitely increase or decrease as a result of the demand changes in the market.

Globally the Tadawul will be affected by both the inflows and the outflows of capital in stock. The common external factors influencing the stock return would be stock prices in global economy, the interest rate and the exchange rate. For instance, capital inflows and outflows are not determined by domestic interest rate only but also by changes in the interest rate by major economies in the world.

Nature of industry

Saudi stock market follows a free float methodology in its indices and thus it’s striving to harmonize their practices with the global best practices in the capital markets. The financial industry is the second largest sector in the Tadawul and the economy thus is a very important sector in the Saudi’s economy.

The tawadul faces a demand which is more elastic in nature and in most cases the aggregate demand is very elastic to different factors in the market among them price. The comparison of the current fees per trade in the Tawadul stock exchange with simultaneously optimal price schedules indicated that quantities premiums for the smallest brokers and quantity discount for the largest broker could be applied (Tawadul).

The selection is done on the best performing and prospective stocks in the market with the help of financial analysts in the stock market.

Financial analysis

These ratios are basically based on the past data and their outcomes are prone to judgment due to the difference in the size of the compared firms, accounting practices, company policies etc and thus these ratios are not the final decisions as to the amount and the investment company you want to invest in and thus other factors outside the Tawadul will also be considered for the decision as to invest or not. All the data will be got from the annual financial statements in the last financial year i.e. year that ended 31^st December 2009.

The most important thing to do in the investment selection process is to identify the trend in the growth of the value of the company’s shares and if this trend is identified as first as possible then it will mean that the company will benefit the most.The ratios will be subdivided into the following with consideration of the information evaluated:

Gearing level

Assessing the effect of gearing on the ordinary shares of Al Bilad Bank, Aljazira Bank and Alrajhi Bank in the year 2009 financial statements:

The financial statements of these three banks namely; Al Bilad Bank, Aljazira Bank and Alrajhi Bank showed the above results. The un geared banks show that the banks have no preference shares or debt financing in their account and thus they have avoided the burden of paying the interest on the loans and debt finances. In investing the best company to invest in is a bank which is debt free and thus the most un geared banks will certainly give the highest return on the investment or highest return on capital employed.

Dividend ratios

These ratios basically try to portray the company’s dividend policy and thus its ability to pay reasonable dividends to its shareholders. The ratios in this family include:

Computation and explanation of the following ratios:

Earnings per share (EPS): The earnings per share are basically an outlay of the possible dividends that will be paid to the shareholder if the bank does no retain any earnings in that specific period. In the above analysis the Al Jazira bank had the highest earnings per share with 0.09 followed by Al bilad bank with 0.07 and finally the Al Rajhi bank made a loss in the period and thus it did not have any of those provisions.

The company with the highest earnings per share is the best bank to invest in but a further analysis is needed to determine its dividend payout policies since it could have a lot of returns on the shares but retain a lot of those finances thus no or little dividends paid.

Return on capital employed (ROCE): This ratio shows the returns the companies will give to both the owners and the creditors. In the above analysis the banks had varying returns on the capital employed and the results were as follows. In the analysis the showed that Al Bilad had the highest returns on capital employed with 17.5% followed by Al Rajhi with 10.7% and lastly Al jazira with 0.6%. the financial implication to this result is that the bank with the highest ratio will have a positive impact to the company and will boost its goodwill, since it will take care of the interests of the of all the parties in with the financial stake in the bank and thus the best option is Al Bilad bank.

Return on shareholder’s equity (ROSE): This ratio shows how much a company will make from the use of owners capital or equity. This is the best ratio to use when making investment decisions since it will show how much you can make from the investment you will make in a company and a bank in this case. In the analysis of the financial accounts of the selected three banks the following was revealed of their return on their equity. Al Bilad had the highest returns on share holder’s equity with 1.8 followed by Al Jazira with 0.6 and lastly Al Rajhi which made a loss in that period thus did not make any return on the equity.

In such a scenario the investor should choose the company with the highest return on the shareholders equity for maximum benefit and wealth generation. There is only one bank in the analysis which had a return on the equity invested in the period in question and it should be the best stock to invest in since it shows the company can be able to utilize efficiently the equity and get the best wealth on the capital invested.

Return on assets: Return on assets show or measures the efficiency with which a company uses its assets to generate sufficient profits. In the analysis of the financial accounts of the selected three banks the following was revealed of their return on their assets. Al Bilad had the highest returns on its assets with 0.2 followed by Al Jazira with 0.1 and lastly Al Rajhi which made a loss in that period thus did not make any return on the assets.

In such a case the investor should invest in Al Bilad bank since it has the highest return on its assets. This shows that the company can use its assets in a more productive way than the other banks which it’s being compared with.

Earnings yield: This ratio shows the relationship between the shareholders due shares in the profits as a percentage of the market price. If a company has no retention dividend policies then it will be the true return on the share. In the analysis of the financial accounts of the selected three banks the following was revealed of their earnings yield were; Al Jazira had the highest earnings yield with 0.5% followed by Al Bilad with 0.5% and lastly Al Rajhi which made a loss in that period thus did not make any earning yield and thus not expected to give any dividends.

The interpretation for this result is that the higher the earning yields the greater the dividend. This is not the best way to determine the best investment if the dividend policies of a company are not checked. Thus in this case the bank Al Jazira would be the best to invest in if all the banks did not have a retention policy.

Dividend payout ratio: This ratio basically gauges the return on the share from what is actually due to the share i.e. earnings per share. In the analysis of the financial accounts of the selected three banks the following was revealed of their dividend payout ratios were; Al Jazira had the highest earnings yield with 63% and the other banks did not have any dividends, Al Bilad has a 100% retention policythus not giving any dividends on its shares while Al Rajhi which made a loss in that period thus did not make any dividends and thus not expected to give any dividends.

The interpretation for this result is that the higher the dividend payout the greater the dividend. This is one of the best ways to determine the best investment if the dividend policies of a company are not checked. Thus in this case the bank Al Bilad would be the best to invest since it did not have a 100% retention policy and also made a profit.

Dividend yield: The dividend yield is usually compared with the bank rate and particularly those on fixed deposits. In the analysis of the financial accounts of the selected three banks the following was revealed of their dividend payout ratios were; Al Jazira had the highest earnings yield with 0.34% and the other banks did not have any dividends, Al Bilad has a 100% retention policy thus not giving any dividends on its shares while Al Rajhi which made a loss in that period thus did not make any dividends and thus not expected to give any dividends.

The interpretation for this result is that the higher the dividends yield the more viable the investment. Thus in this case the bank Al Bilad would be the best to invest in.

Price earning ratio: This ratio indicates how long the company will take to pay back the original cost of investment in the cases where there is a zero retention policy. In the analysis Al Bilad would take a shorter time with 285.7 as compared with the rest with 186.11 and Al Rajhi if it continues with this trend it will be unable to pay back the original cost of investment and thus the best investment to make is in the bank that will repay this investment in the shortest time possible i.e. Al Bilad bank.

Profitability ratios

These ratios analyses the amounts of return on the investments in a specified period i.e. it measures the profitability. They include:

They are computed as follows:

Gross profit margin: This ratio gauges the efficiency with which a company can generate a given level of profits out of its sales activities. In the analysis above the bank with the highest gross profit margin is Al Bilad with 58.8% followed by al Jazira bank with 37.5% while Al Rajhi bank made a loss in that financial year.

The best bank to invest in is Al Bilad bank since it has the highest gross profit margin since this shows it has an efficient internal control system of cost controls and can market and sell its products in time.

Net profit margin: This ratio measures the efficiency in which the company turns each coin invested in sales into net profit. In the analysis of Al Birad, Al Jazira and Al Rajhi banks it showed that Al Bilad bank made the highest net profit margin with 19% as compared to Al Jazira with 2.4% and Al Rajhi with a loss.

The interpretation of this is that Al Bilad bank is the best bank to invest in since it shows that it has a lot of control on its costs, it has an efficient management of resources and can make or generate profits from the resources committed to it better than the other banks in the analysis.

Operating ratio: This ratio identifies the portion of sales that was allocated to the costs. In the analysis of Al Birad, Al Jazira and Al Rajhi banks it showed that Al Bilad bank made the highest operating ratio with 80.9% as compared to Al Jazira with 62.5%% and Al Rajhi with 66.7%.

The interpretation of this is that Al Bilad has the highest operating ratio since it balance sheet has a lot of expenses as compared to the other two and thus the best bank to invest in is the one with the lowest operating ratio in this case Al Jazira bank.

Trading / activity ratios

These ratios show or measure the speed in which a company’s assets are being turned over into sales and thus profits. They include:

They include:

Inventory turnover ratio: The inventory turnover ratio measures the speed in which the company turns its receivables into sales thus profits. The analysis shows that Al Bilad bank has highest inventory turnover of 1.81as compared to Al Jazira and Al Rajhi with 0.69 and 1.21 repectively.

The interpretation of this result is that the bank with the highest ratio is the best managed in terms of stock turnover and the one with the least is the poorly managed thus the best bank is Al Bilad bank.

Fixed asset ratio: This ratio indicate what percentage of the capital employed is in form of fixed assets. The higher the ratio the higher the investment in the fixed assets thus a positive move in the creditor’s perspective. In the analysis of Al Birad, Al Jazira and Al Rajhi banks it showed that Al Bilad bank made the least fixed asset ratio with 602.8% as compared to Al Jazira with 638.6%% and Al Rajhi with 799.9%.

The interpretation of this is that Al Bilad has the least fixed ratio since it balance sheet has a less investment in fixed assets from capital employed as compared to the other two and thus the best bank to invest in is the one with the lowest fixed asset ratio in this case Al Jazira. This is because the bank has a policy of 100% retention and thus the majority of the fixed assets are from its own returns.

Total asset turnover: In the analysis of Al Birad, Al Jazira and Al Rajhi banks it showed that Al Bilad bank made the least total asset turnover with 0.2 as compared to Al Jazira with 0.4 and Al Rajhi with 0.4.

The interpretation of this is that Al Bilad has the least total asset turnover and thus the best to invest in is either Al Jazira or alrajhi.

Capital employed turnover ratio: This ratio basically gauges the return on the capital employed. In the analysis of the financial accounts of the selected three banks the following was revealed of their dividend payout ratios were; Al Rajhi had the highest capital employed turnover ratio with 0.3 and the other banks had 0.25 and 0.09 respectively.

The interpretation for this result is that the higher the capital employed ratio the greater the ability to generate sales from all financial commitments by different parties. This is one of the best and important ways to determine the best investment. Thus in this case the bank Al Rajhi would be the best to invest.

Valuation

The main basis for the valuation is the earnings per share basically it’s the best indicator of the profitability of the investment and is the best way to use to focus on the economic trend of the companies. Considering these three banks the earnings per share differ in a little way as seen below:

With the above information the bank Al Bilad is the most profitable to invest in. it has the highest earnings per share which translates to higher dividends to the shareholders. For a prospective investor this is the best stock to invest in at this point in time. The company also performed well in a look at the other ratios in which it had the highest total turnover showing that it has a very efficiency and effective management systems in the compared companies.

My analysis of the ratios indicates that the past period the bank Al Bilad’s stock performed well. Since in all the ratios it had a positive I would recommend it as the best stock in my analysis.

Recommendations

As a financial analyst I can give the following recommendations:

1. The most important thing to do in the investment selection process is to identify the trend in the growth of the value of the company’s shares and if this trend is identified as first as possible then it will mean that the company will benefit the most.
2. It is important to keep the costs low for an investor to gain a lot and to be slightly hit by any event and thus is advisable to diversify the stock and share holding in the different sectors in the economy.
3. The profits of a company are well enjoyed and higher not when in the form of dividends but in for of share appreciation and this margin is usually higher than the dividend paid and thus the focus should be more on the performance of the companies management in terms of wealth creation and not on the dividends paid.
4. There is always a risk in any investment portfolio and thus it is important for the company to basically mange the risks that might come their way and also for the investor this is usually a gain loose game and thus the aim is to reduce the chances of loosing at all times.

The future could be one where regulated exchanges are only order driven, as quote-driven systems could be replaced by each dealer trading directly on its own account with some information disseminators putting them together (maybe with software or the Internet). The argument is that the present electronic communication technology allows an individual or a firm not in financial intermediation to participate in the exchange on almost equal footing as a broker. One expects that the regulations will be liberalized in the face of technological change. Rating agencies may produce listing services in the sense that they may rate firms independent of their listing and exchanges or ATS could then decide what could be traded in them.

These ratios are basically based on the past data and their outcomes are prone to judgment due to the difference in the size of the compared firms, accounting practices, company policies etc and thus these ratios are not the final decisions as to the amount and the investment company you want to invest in and thus other factors outside the Tawadul will also be considered for the decision as to invest or not.

Works cited

Alrajhi bank. Corporate information. 2010. Web.

Alrajhi bank. Financial Reports. 2010. Web.

Bank Al Birad. Investment Services. 2010. Web.

Bank Aljazira. Home. 2010. Web.

Tadawul. Saudi Stock exchange (Tadawul). 2010. Web.