Saudi banks remain buoyant, but low oil price threat looms
Now Reading
Saudi banks remain buoyant, but low oil price threat looms

Saudi banks remain buoyant, but low oil price threat looms

Local lenders focussing on local markets have better equipped the Saudi banking sector to withstand global volatility, but it may yet be tested


In recent years Saudi Arabia’s banking sector has managed to chart a slow and steady course through often choppy international waters. The industry sat safe in the knowledge it was less exposed to the market volatil­ity that has impacted many of its peers elsewhere. But that was then. The rules of the game may be in the process of changing as the 16-month long (and counting) slump in oil prices shows few signs of reversing any­time soon.

However, a capi­tal adequacy ratio, currently standing at around 17.5 per cent – or more than double the minimum 8 per cent required by the Saudi Ara­bian Monetary Agency – bears ample testimony to the sector’s underlying financial strength.

Meanwhile, its relative insu­lation from international markets can be seen in data showing net foreign assets as a share of total bank assets. These were equiva­lent to just 7.5 per cent in 2014 – at SAR 159.3bn ($42.5bn) – despite net foreign assets having witnessed average annual growth of 8.6 per cent during the 2009 to 2014 period.

Banks’ investments abroad constituted the major component of foreign assets with foreign asset portfolios (64 per cent of the total) dominating, according to SAMA.

March 2015 data from Aljazira Capital suggested the kingdom’s banking sector – made up of 12 domestically licensed banks and 12 licensed foreign bank branches – saw its deposit book grow by 12 per cent year on year in 2014 to SAR 1.575 trillion ($420bn).

Credit growth, meanwhile, was slightly lower at 11.6 per cent year-on- year, while advances to deposit ratio decreased slightly from 79.9 per cent to 79.4 per cent.

Despite these relatively robust numbers, the kingdom’s banks are still plugged into international markets and not immune to volatility elsewhere.

Yet given the low general level of non-performing loans in the industry – even if the figures have been increasing of late in certain sectors – it remains, unsurprisingly, one of the most profitable banking sectors among the Group of Twenty states.

Local banks focusing on local markets – domestic credit activ­ity accounting for approximately 60 per cent of the total value of Saudi banks in 2014 – have laid much of the groundwork. This in turn has better equipped them to withstand external shocks.

But turbulent waters may lay ahead – especially the govern­ment’s need to finance a fiscal deficit in response to plummet­ing oil prices.

Also on the radar is the accu­mulation of debt by companies in the kingdom’s telecommuni­cations and transport sectors.

Aljazira Capital noted, for example, that while the non-performing loans ratio appeared to have stabilised – standing at 1.32 per cent in Q3 2014, com­pared to 1.31 per cent towards the end of 2013 – around SAR 43bn ($11.5bn) had been allocated to the telecommunications and transport sectors.

It added that in the telecom­munications sector Mobily and Zain both faced cash flow issues (they still do). Especially Zain, which on an operational level has been generating losses.

Zain owes almost SAR 2.25bn ($600m) to local banks, while Mobily’s debt burden to local banks was almost SAR 14bn ($3.73bn). The firm subsequently having to be reclassify them from long to short term loans (after its 2014 results), due to breaching a number of covenants.

At the macro level, mean­while, an emerging issue is how the government finances its budget deficit and what rami­fications this may have for the banking sector as a whole.

If Augusts’ SAR 20bn ($5.33bn) sale of bonds to local banks was easily digested by the markets (it was only the second sovereign bond issue since 2007), the unanswered question remains how many more of these issues are in the pipeline and what it will mean.

The banks have reportedly been informed that bonds will finance a maximum 40 per cent of the deficit; the rest coming from a drawdown of fiscal reserves. Yet uncertainty remains as to when the government will be coming back to the market and what its borrowing requirements will actually end up being.

Bankers are said to scram­bling to hedge against the risk of a liquidity crunch a year or two from now, especially given there is little likelihood of oil prices staging a significant recovery.

While the system has suf­ficient liquidity for lenders to continue bond purchases, they like certainty; something in short supply of at the moment.

The International Mon­etary Fund’s recent economic update for the kingdom takes a more sanguine line, argu­ing the banking sector remains well positioned to weather both lower oil prices and a slowdown in economic growth (forecast at 2.8 per cent this year and 2.4 per cent in 2016).

This year’s fiscal deficit, pro­jected at 19.5 per cent of gross domestic product, is likely to mark the peak. Declines are expected in 2016 and beyond as one-off spending ends and large investment projects are com­pleted. But it will remain high over the medium term. Govern­ment debt, at 1.6 per cent of GDP – as of end-2014 – remains very low, however.

Against this fiscal backdrop the banking sector’s overall fun­damentals have remained robust even though individual perfor­mances have varied. H1 2015 figures compiled by Al-Riyadhnewspaper show total assets of the nation’s listed banks increas­ing to SAR 2.17 trillion ($579bn) from SAR 2.01 trillion ($536bn).

Leading the way, Al-Bilad Bank reported a 19.9 per cent asset increase, though Banque Saudi Fransi reported growth of just 0.9 per cent.

Meanwhile, the value of investments held grew by 1.6 per cent, reaching SAR 504bn ($134.4bn) from SAR 496bn ($132.2bn). Riyad Bank, Saudi Investment Bank, Saudi Brit­ish Bank, the Arab National Bank, Al-Rajhi Bank and Al Inma Bank all reported gains on their portfolios.

By contrast, Bank AlJazira, Banque Saudi Fransi, SAMBA Bank and National Commercial Bank (Al-Ahli) all reported a drop in the value of their investments.

The value of loans provided by the banks rose by 8.7 per cent to SAR 1.32 trillion ($352bn) from SAR 1.22 trillion ($325bn). Deposits increased by 8.2 per cent to SAR 1.69 trillion ($451bn).

SAMA, however, has recently sought to rein in lending by tightening restrictions on cash withdrawals using credit cards, ostensibly to head off potential consumer debt problems.

While bank customers, under an informal industry arrangement, could previously obtain cash advances of up to 50 per cent of their monthly credit card limits – paying large fees in the process – an official ceiling of 30 per cent has now been imposed.

Consumer lending, including credit card use, climbed 8.8 per cent to SAR 322bn ($85.8bn) in 2014, according to SAMA. For the banks, meanwhile, net interest margins stabilised at 3 per cent in 2014, having been on a down trend from the 4.2 per cent seen back in 2007.

The new ceiling follows last year’s publication by SAMA of regulations that include the capping of fees applied to the arranging of loans.

It added at the time that banks were no longer allowed to set their own fee structures and would have to cap their charges at the lesser of 1 per cent or SAR 5,000 ($1,333).

Consumers look set to ben­efit at least, as the regulations not only mean greater trans-parency regarding how much loans will cost but banks will also be compelled to reduce early repayment charges.

The increased focus by the banks on retail as opposed to corporate customers reflects not only the net interest margins available but is also symptomatic of some institutions having had their fingers burned after the global financial crisis.

Yet loan growth is expected to come under pressure and net interest margins may face chal­lenges in the face of competition. As a result, most banks are look­ing for growth from the car loan and mortgage segments in the short-to-medium-term.

Longer term, the credit busi­ness is likely to prove fruitful with an emphasis on product simplicity. This is in line with the conservative nature of the industry itself and the increas­ingly watchful eye of SAMA, as it looks to implement international best practice.

The $64,000 question how­ever is whether the government will seek to maintain its fiscal expenditures and if so, how? It could opt to borrow from local banks although this runs the risk of making fewer funds available for the private sector.

In the meantime, with both global stock markets and oil prices around the world seeing further falls, the banking sector may yet be tested. No matter how well insulated it has been to date.


Scroll To Top