SAUDI ARABIAN COMMERCIAL BANKS’ MARKET-RISK SENSITIVITY: BACKGROUND

The Kingdom of Saudi Arabia (KSA) boasts a globally important economy, the twentieth biggest economy by GDP in the world. It ranks seventeenth in the World Economic Forum (WEF) Global Competitiveness Index. SAMA’s net foreign assets of USD 555bn. are the third biggest in the world (Aserkoff, Kern, & Dixit, 2012). The Saudi stock market (Tadawul) is the only stock exchange in KSA. It is supervised by the Capital Market Authority. The Market is actively traded by domestic retail investors. Domestic institutions are a small part of the overall market. The Market has also been open to the Gulf Cooperation Council (GCC) nationals since 2007. Foreign investors, who are only permitted to invest in structured products, in volume terms, represent an extremely small percentage of trade. The Kingdom’s oil wealth and on going current account surpluses mean that foreign investors are not necessary to finance investment. The accounting rules are still based on Saudi GAAP. further
Petrochemical is the major sector that makes-up the TASI indexwhich composes of approximately 37% of the TASI’s market capitalization. While this sector is fully exposed to the global economy, most of the remaining sectors are more domestically focused, including the larger sectors such as Banking 24%, Telecoms 9%, Cement 5%, Energy & Utilities 5% and Agriculture/Food 4%(Tadawul., 2011). At the end of 2008, the TASI closed at 4,802.99 points compared to 11,038 points at the end of 2007, a decrease of 56%. As a result of the GFC, most of the world financial markets indices declined by more than 30% in 2008 and the Saudi stock marketwas no exception (Saudi Arabia Monetary Authority, 2010). TASI is composed of 15 sectors as listed in Table 1. This Saudi Stock Market is characterized by a high level of shareholder concentration with a considerable number of companies’ shares being held by government, families, and just a few owners. Table 1 lists the total issued shares and free-floating shares for each sector of the Saudi Stock Market at the end of 2011. Of the 40.7 billion issued shares, there were only 17 billion free-floating shares available for trade, or 42% of the issued shares. The banking sector has the highest number of issued shares and free floated shares. The percentage of free floated shares for the banking sector is 29 percent. This high percentage of free floated shares for the banking sector provided data resource to measure systematic risk for the banking sector in the Saudi Stock Market.
As of the third quarter of 2011, the Saudi stock market ranked first in the Arab world with capital of USD 324 billion or 37% of the total market capitalization of Arab stock markets and ranked fourth with respect to the number of listed companies (148 companies). It was also one of the most liquid markets in the Arab world with a daily average value traded of USD 872 million representing 65% of the total daily average value traded of Arab world(Arab Monetary Fund, 2011). The total number of listed companies in TASI jumped from 111 in 2007 to 150 in 2011, representing an addition of 39 new companies or a 35% increase in only four years.

Table-1.The TASI, by sector, 2011

Sector Number of Companies IssuedShares Free Floated Shares Percentage of Issued shares
Banks & Financial Services 11 9,203.96 4,890.62 53
Petrochemical Industries 14 8,941.09 3,815.80 43
Real Estate Development 8 3,733.52 1,869.14 50
Telecommunication & 5 4,240.00 1,413.36 33
Information Technology
Cement 10 1,106.90 831.44 75
Energy & Utilities 2 4,241.59 766.40 18
Agriculture & Food Industries 15 1,123.01 744.01 66
Industrial Investment 13 1,422.40 612.09 43
Building & Construction 15 758.30 511.45 67
Multi-Investment 7 4,022.47 419.19 10
Insurance 31 833.17 375.19 45
Transport 4 476.30 338.85 71
Retail 10 351.50 249.64 71
Media and Publishing 3 155.00 88.96 57
Hotel & Tourism 2 79.16 45.90 58
TOTAL 150 40,688.36 16,972.04 42

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