Banking stocks continue to dominate the universe of listed companies in the Gulf Cooperation Council (GCC) countries in terms of value, in part due to financial institutions’ role in recycling a considerable portion of these countries’ oil wealth and liquidity, Moody’s Investors Service said in a new Special Comment.
This dominance could decline going forward with a growing number of more diverse companies obtaining stock market listings, although this is dependent on certain market, regulatory and institutional developments taking place, the rating agency commented.
“Apart from financial institutions, the key sectors in the GCC are the hydrocarbon and infrastructure sectors — which are dominated by government shareholders, either directly or indirectly, with limited privatisation to date — and the trade and property sectors — which are mostly dominated by a large number of typically family-controlled small companies, reluctant to cede controlling power through listings. This situation — combined with banks’ rapid growth in size and burgeoning need for capital in the context of growing oil wealth and liquidity — explains why banks account for around one-third of stock market capitalisation in the GCC, though a smaller proportion in terms of numbers of listed entities,” said Anouar Hassoune, a Moody’s Vice-President/Senior Credit Officer and author of the report.
Moody’s would expect the structural economic drivers characterising the GCC region to ultimately lead to a growing number of more diverse companies being listed, which would reduce banks’ dominance among listed firms. Key trends include the expressed intention of some privately owned companies to list shares to further institutionalise their businesses and governments’ renewed interest in privatisation for various reasons.
However, this is dependent on certain market, regulatory and institutional developments taking place. Firstly, markets would need to be less volatile, and therefore more liquid and deeper. Secondly, the legal and regulatory environments need to be strengthened, although this is already under way with the emergence of independent capital market regulators. Finally, research and analysis must be further developed and strengthened.
“The current situation in terms of bank consolidation in the GCC is somewhat of a paradox: at the same time as we are increasingly witnessing appetite for M&A operations among existing players, new entrants are coming into the market in large numbers,” explained Hassoune.
Moody’s report additionally compares the stock market performance of banking shares in the GCC to that of the overall market, concluding that, broadly speaking, bank and non-bank indices are highly correlated over the cycle.
