Saudi Arabias Shareek program could boost banking says BofA

Past precedents suggest the recently announced “Shareek” program could be a highly beneficial scheme to banks if the terms are right, BofA said in a report on Tuesday.

The plan involves incentives for publicly quoted companies to channel dividend payments into long-term investment in the Saudi economy.

It aims to increase domestic non-central government investments from the SR4 trillion (S$1.1trillion) realized over the 2009-2018 period to SR10 trillion over the next decade — an increase of about 150 percent.

As regional markets digest the implications of the recent announcement on different sectors of the economy, banking has emerged as a potential bright spot.

“Past precedents (COVID-19 schemes) suggest the Shareek program could be a highly beneficial scheme if the terms are right, in our view,” BofA MENA economist Jean-Michel Saliba wrote in the report.

“If banks are asked to reduce dividends to allow greater lending, incentives could include access to low-cost and long-duration deposits (to augment margins), loan guarantees against more risky small and medium-sized enterprises (SME) debt, and potential regulatory concessions,” he said. “We think higher economic growth and increased demand for corporate debt could also be a significant positive for the banking industry.”

BofA also flagged some potential downside risks to the banking sector, especially if lenders were asked to refrain from paying dividends to ensure capital buffers remained strong.

Emerging markets research group Tellimer also said in a recent report that the program may undermine the attraction of very high dividend rates that remain a big appeal for local investors in the market.