Shareholder Value Index for Saudi Banks

Abstract

This paper aims to examine the shareholder value efficiency and build a Shareholder Value Index for Saudi banks between 2010 and 2014. Shareholder value efficiency is measured using value based performance metrics and binary logistic regression model was adopted to develop the Shareholder Value Index for Saudi banks. The Shareholder Value Index developed provides the probability of a bank’s competence to create/erode shareholders' wealth. The study finds that Economic Value Added (EVA) is the value-based performance metric that comes closer than any other to capture the true Economic Profit and the market performance (Market Value Added) of banks. Positive EVA of most of the commercial banks denote that they are more Shareholder value efficient than Islamic banks. High Market Value Added (MVA) represents a highly positive outlook of the investors on the Saudi banks' performance. Value creation is significantly linked to high Net Operating Profit After Tax and a low cost of capital. The most significant observation is that not all banks with highest capital employed are the highest value creators. The Shareholder Value Index developed indicate that majority of Saudi banks demonstrate a higher probability of shareholder value creation. Few Islamic banks showed a less probability of wealth creation for the period of study and are predicted to improve the shareholder value creation ability through their aggressive strategy in the future.