Banks lift Saudi stock index to a six-year high

Banks led Saudi Arabia's stock index to a new six-year peak as trading volumes increased on Wednesday, while other Gulf markets were subdued as a summer lull deepened.

The Saudi measure rose 0.5 percent to 10,716 points, its highest finish since January 2008. Nearly 270 million shares changed hands, a two-week high: Saudi Arabia has not suffered the summer trading slump of neighbouring bourses.

Eight of the 10 largest stocks advanced. Riyad Bank , which last month reported a 17 percent increase in second-quarter profit, rose 4.5 percent. Lenders SABB and Al Rajhi Bank climbed 3.2 and 0.3 percent respectively.

"One of the most important drivers for a re-rating of the sector is the coming increase in U.S. interest rates," said Fahd Iqbal, head of Middle East research at Credit Suisse. "That will boost Saudi banks' net interest margins."

Saudi Arabia's currency is pegged to the dollar, which means its monetary policy is expected to broadly follow U.S. policy. U.S. rates may start rising next year as the American economy recovers from the global financial crisis.

"A substantial proportion of Saudi banks' deposits are interest-free Islamic deposits, so net interest margins are strongly geared to a rising interest rate environment," said Iqbal.

The Saudi banking index rose 1.0 percent, taking its 2014 gains to 27.5 percent, while the main market index is up 25.5 percent. The main index has gained 9.9 percent since plans were announced late last month for the market to allow direct foreign share ownership next year.

"Saudi's market has already enjoyed a good run-up, and since the announcement was made we haven't changed our forecasts for the market," said Iqbal.

"Our initial expectation was for the market to be constrained by the psychologically important 10,000 level, but since the announcement was made to open the market I expect the top to be around 11,000."