Banking Special: Robust Performance In Saudi

The banking sector in the Kingdom of Saudi Arabia (KSA) remains in good shape, reflected by robust financial profiles across the twelve domestic banks. The system has easily absorbed isolated domestic problems that have occurred in the past such as the Al Sanea/Algosaibi corporate issue.

KSA banks are well capitalised, liquid and profitable with low levels of non- performing loans and high provisions in place. By domestic assets, the KSA banking sector remains the largest banking market in the GCC.

Results for the Kingdom’s banks in 2011 were sound and the performance in 2012 has shown improvement. For the first half of 2012, the KSA banking sector recorded a good increase in net profit with assets also expanding robustly.

The Saudi economy is growing solidly, buoyed by relatively high oil prices and the Kingdom’s huge production. Oil revenue provided Saudi with a current account surplus of $160 billion, or 14 per cent of GDP in 2011.

Due to the volatility of oil prices, much of the inflow is kept aside for less robust times, and monetisation of too much of the inflow would create an unacceptably high rate of inflation. The unpredictability of foreign exchange inflows generated by oil income is such that the Saudi budget is typically calculated using an average oil price far below current market levels.

The average oil price used is not stated, but best estimates are that the 2012 budget is based on a price between $65/bbl and $70/bbl, suggesting that significant additional revenue is likely again in this year.

The KSA has built up well over $500 billion in foreign-exchange reserves, a stock of cash that allows the central bank, SAMA, to inject some of those funds into the economy, should conditions warrant it.

Surrounded by countries experiencing unrest for economic, political and religious reasons in 2011, the Kingdom announced a series of extra-budgetary moves designed to improve the living conditions of most Saudi citizens. King Abdullah announced a package of benefits totalling SAR135 billion to be distributed in the form of salary rises, bonuses, and housing subsidies.

About two weeks later, the King expanded the original package, and announced a new package estimated to cost an additional SAR250 billion, which involved increases in welfare benefits, bonuses for the army and other public-sector workers, and more funds to build additional housing. The stimulus resulted in a greater than anticipated GDP growth in 2011 of about 6.8 per cent, including an 8.3 per cent rate of growth in the private sector. This boost has flowed into 2012 and the economy continues to expand albeit at a lower rate than seen in 2011. In turn, this is having a positive impact on Saudi banks, with balance sheets growing through increased deposits and loans.

Many Saudi banks are capitalising on increased wealth in the Kingdom as well as opportunities created by large infrastructure projects, both in progress and planned.

The economic stimulus has had a positive effect on the Kingdom’s banks. Loan growth, which continues to trend above 10 per cent, has boosted the size of the banking system’s balance sheet. At the same time, banks have also been affected by the salary rises, which were part of the stimulus package, and most banks operating expenses have increased noticeably. However, these have been absorbed comfortably.

Banks’ performance in 2012 have continued to be positively impacted by significant increases in government expenditures on health care, education, technical and vocational training designed to ease unemployment, and other infrastructure spending.

In addition, earnings have continued to benefit from the on-going effects of the stimulus, as consumer borrowing continues to be robust for both general purposes and for housing.

Demand for housing finance continues to grow, and banks have cautiously stepped up to meet it. The Saudi economy continues to be one of the most stable in the GCC. With a large population and a strong domestic demand base, there has been much less ‘froth’ in the form of either speculative real estate development or stock market bubbles.

KSA’s residential real estate sector has a large backlog of unsatisfied demand and where a sharp increase of governmental funding is imminent. Together with the at last implemented Mortgage Law, banks will provided increased funding for buyers, pushing both asset growth and income further. Strong demand is very much evident in the middle market and affordable housing segments.

Saudi banks face a challenge with the gradual disappearance from the market of Saudi Government Development Bonds (SGDBs). Originally issued to finance the deficits of the 1990s, their existence has been a casualty of the continuing budget surpluses.

For banks, they represent sound, profitable and liquid assets which serve to meet internal liquidity requirements as well as regulatory ratios.

With interest rates at record lows, banks are suffering from the effects of replacing these high-yielding assets with much less profitable ones. However, going forward with forecast credit demand increasing in 2013 and beyond, particularly in the housing area, banks should be able to mitigate the yield impact.

Retail banking business is an area of continuing focus for many Saudi banks, including Samba and Arab National Bank, and institutions are benefitting from a growing market. For most banks, their investment portfolios are falling, channelling funds to loan portfolios. This is aiding banks’ fee and commission income.

National Commercial Bank (NCB), the Kingdom’s biggest bank with a 20 per cent market share of assets, achieved net income for the nine months to September 2012 of SR5,042 million, 12.7 per cent higher for the same period of last year.

The bank achieved an increase of 21 per cent in fee income from banking services. NCB’s total assets grew to reach SR321 billion, an increase of 4.5 per cent from 2011. However, loans grew by a much higher 21 per cent.