Bank Required Return = Risk Free Rate + Beta (Market Return – Bank Return)
The risk free rate in this paper is proxied by the Saudi Inter Bank Offering Rate (SIBOR) for three months of the same period and was obtained from Reuters.The market return is the TASI Index return. The calculated bank’s required returns can then be compared with the bank’s actual returns to derive the bank’s alpha coefficient. A positive alpha indicates a bank that has outperformed (a bank that is undervalued by the market) according to the CAPM. This in turn signals an opportunity for investors to buy. Conversely a negative alpha indicates a bank that has underperformed (a bank that is overvalued by the market).
The results provide an interesting story. When relying on a static beta value to calculate required returns, every bank in the TASI throughout the four year period is overvalued. But closer scrutiny, using the rolling beta regression technique, enables the CAPM to more accurately capture valuation swings caused by market-moving events over time.
With the onset of the global financial crisis (Cycle 1), all banks in the TASI returned negative alphas implying the market has incorrectly overvalued these sectors. As the global economy recovered in Cycle 2, many banks generated positive alpha values in a period of massive quantitative easing, much of which found its way into commodities fuelling the resurgence in world oil prices. These banks generated returns that exceeded the required returns determined by the CAPM calculations.Despite the Arab Spring and global uncertainty in 2011 (Cycle 3) results show an increasing number of banks becoming undervalued. This suggests investment opportunities are re-emerging in the TASI – a very different story to the one being told when applying the static beta value analysis.

This paper analyses the sensitivity of 11 bank risk-return relationships in the TASI over the period 2008-2011. Analysis found that using the traditional linear beta value alone without consideration to daily market moving eventsoverlooks sector-market relationship signals and lead to spurious information. The policy implication suggests that investors should not rely on the single linear beta value as a sole guiding investment tool. The contribution of this paper provides a more refined technique, a rolling beta, to accurately capture daily valuation swings caused by market-moving events over time. Alpha values were calculated using the CAPM enabling more dynamic risk-return valuations to emerge. These valuations identified three key phases of varying bank stock market activity and bank sector market valuations, previously unrecognized when using the single linear beta value.These results suggest that in general, despite the relative instability within and between Saudi banks during the turbulent GFC, the contribution of SAMA strict regulations(and the banks themselves) ensureda less tempestuous performance within the Saudi banking sector overall compared to the devastating impact that shook, and continues to shake, the banking sectors of the industrialized countries today. In addition, this analysis surprisingly reveals thatinvestment opportunities are presently re-emerging in the Saudi banks contrary to present global banking happenings.

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