Big profits in a strong economy… another Saudi success story

If banking in Saudi Arabia was seen as a positive story two years ago, with record profits and growth, the picture today is even rosier, bankers believe, on the back of the country’s strong macroeconomics, healthy oil exports and impressive progress in key areas such as transport and infrastructure.  

While banks in the West still struggle with the impact of the financial crisis, Saudi Arabia’s 12 commercial banks keep moving to ever greater heights with aggregate net profits in 2013 rising another 7% to reach a record SR37.8bn ($10.1bn). This was in excess of the previous record profit of SR34.6bn in 2006 and follows strong profit growth of 8.4% in 2012 and even stronger growth of 18.3% in 2011.

Economic growth slowed to 3.8% in 2013 from 5.8% in 2012 as oil output, which accounts for nearly half of the country's overall gross domestic product, fell after a strong increase in 2012. But government budget spending rose by 6% in 2012 and by the same rate in 2013 after a jump of more than 26% in 2011.

Driving growth

The rise in public spending has provided a strong stimulus for private sector growth. In his annual news conference in March, Dr Fahad Al-Mubarak, the Saudi central bank governor, said: “We see that the private sector will be the main growth driver this year. Government investments continue to be the main driver for private sector growth, so I am optimistic. I do not see high risks in specific areas.” The governor believes the Saudi economy can achieve growth of 4.4% in 2014, in line with a forecast by the International Monetary Fund.

Banks have been reacting to the strong government stimulus and pushing up lending. According to figures from the regulator, Saudi Arabian Monetary Agency (SAMA), the banks increased lending in 2013 by 12.8% with aggregate loans reaching SR1155bn. Along with this solid lending growth, which followed a 16.5% increase in 2012, the total aggregate assets of banks rose by 9.5% in 2012 to SR1927bn, while customer deposits rose 10.8% to SR1496bn.

Examining this growth in bank lending, Dr Said Al-Shaikh, chief economist at National Commercial Bank (NCB), believes the largest shares of this growth can be attributed to miscellaneous consumer loans, commerce and manufacturing rising by 16.4%, 14% and 10.8%, respectively, in 2013. He notes the total amount of fresh lending amounted to SR115.9bn in 2013, a further stimulus for private sector growth.

David Dew, managing director of the Saudi British Bank (SABB), says: “We are seeing this positive growth on the back of significant government expenditure and healthy oil export revenues. The government revenues are being spent wisely on infrastructure and in the key areas of power, water, transport, health and education.” He notes the significant rail developments taking place, such as the Saudi Landbridge linking Riyadh to Jeddah and connecting the Persian Gulf with the Red Sea; the North-South Railway; and the Haramain High Speed Rail Project linking Mecca, Medina and Jeddah.

Infrastructure optimism

Bankers are also optimistic about other big projects such as King Abdullah Economic City, which features a new port 100 kilometres north-west of Jeddah. Located next to the King Abdullah University of Science and Technology, this education project has the aim of rekindling science in the Islamic world and focuses exclusively on graduate education and research. SABB, which won The Banker’s Bank of the Year Award in Saudi Arabia in 2013, has established a major branch in the economic city.

Bankers talk about the $100bn-plus in government spending driving projects and expansion in the private sector. NCB’s Mr Al-Shaikh says: “Out of the SR855bn in budgeted expenditures for 2014, total capital expenditure represents approximately 29%, including both greenfield and ongoing projects from previous years.” He highlights the 25% spent on education and manpower with SR210bn going on 465 new schools. He also singles out 8% of the budget or SR68bn spent on transportation and infrastructure, especially on expansion of ports, railways and postal services.

Dr Bernd van Linder, chief executive of Saudi Hollandi Bank, points to Saudi Arabia’s high level of capital investment, strong demographics, the high number of young people and a growing middle class as key factors in the country’s strong banking story. “The Saudi economy is one of the best in the 
world and the Saudi banking environment may well be the best in the world,” he says.

Although well aware of the political crises facing the Middle East and north Africa region, such as civil war in Syria, political instability in Egypt, and disputes with Iran and Qatar, bankers suggest that they have little influence, if any, over these issues and prefer to just get on with dealing with the huge economic opportunities at hand. As one chief executive explains: “None of the politics overshadows the positive business story. We are focusing on the economy and business issues; we are not concerned about political issues.”

Small worries

So what are banks concerned about? Both government and banks are worried that there is not enough lending to small and medium-sized enterprises (SMEs), and there is now regulatory pressure to boost SME lending. While SMEs are important in the creation of employment, bankers admit that lending to this sector is a challenge and while such lending may be growing, it could grow faster.

Saudi Hollandi’s Mr van Linder says SME lending is extremely low and represents only 2% of total lending across the Saudi banking sector. “We want to be big in SME banking; we believe in it strongly," he says. "We believe it will create jobs and help the economy, and we believe [Saudi Hollandi Bank] can do well as our size should be less of an impediment in SME banking.”

NCB’s semi-annual sector review, published in March this year, said: “The SME market continues to steadily expand, aided by healthier bank and government lending appetites.” In 2012 the number of guarantees under its Kafala SME loan guarantee programme rose by 38.5% to 1670 and NCB expects the number of government guarantees to reach 4389 in 2014 and 7660 in 2015 when the number of SMEs is expected to reach 444,475, more than double the number in 2010. NCB estimates that the number of jobs provided by SMEs will reach 1.9 million in 2015, well above its level of 1.03 million in 2010, and the government is counting on SMEs to provide strong employment growth.

Elsewhere, SAMA is making consumer protection a priority and has established a department to deal with complaints. This department will also work with banks to champion consumer literacy. Consumer finance regulations were introduced in 2005 and regulations have been added this year to clarify what consumers are paying. SAMA has also created an online consumer protection dashboard that will provide “transparency, equity and fairness”.

SAMA is keen to promote financial inclusion and get more people into the banking system; it aims to attract between 5 million to 7 million new customers in the near future. Part of the progress in this area is the recent requirement that the wages of all employees are paid into bank accounts, prohibiting the use of cash.

SAMA also sees new dynamism in consumer loans on the back of regulations in 2005 reducing the terms of consumer loans to a maximum of five years, leading to an almost doubling of consumer loans to SR320bn and a reduction in consumer rates from 10% to 6%. Saudi banks are also keen adopters of internet banking technology. This is no surprise, considering the country’s youthful population (48.4% of the population under 25) and its widespread use of Twitter.

Quality of regulation

Looking at other areas, such as the capital markets, there has been strong improvement in the degree and quality of regulation. According to Yasir Al-Rumayyan, chief executive of Saudi Fransi Capital: “The regulations are really there, market volatility is not an issue, and the market is liquid and deep with foreign investors able to access many areas.”

In terms of listed companies, the number has more than doubled in the past 10 years from 73 to 163 and big additions are expected in the next two years. Meanwhile, initial public offerings (IPOs) declined in 2013 compared with 2012, according to data from NCB, with five issuances valued at SR1.9bn. This is still weak compared with the number of issuances prior to the financial crisis. In 2008 there were more than 25 issuances valued at more than SR35bn, making the Saudi IPO market the second largest in the world. The next 12 months should see some major IPOs emerge, including the 15% IPO of NCB, the country’s biggest bank, later in 2014. NCB’s chief financial officer, Lama Ghazzaoui, says the NCB IPO will be lead managed by HSBC and Gulf International Bank.

Meanwhile, the issuance of sukuk (Islamic bonds) continues to rise globally, reaching $74.2bn in 2013, the second highest in the world over the year, according to a recent NCB report, with 20 issuances worth SR15.2bn, including the General Authority of Civil Aviation issue (SR15bn), the Sadara Chemical Company issue (SR7.5bn) and the Saudi Electricity Company deal (SR3.75bn).

Growing competition

When it comes to banks’ performances in 2013, it is clear that competition is fierce and getting fiercer. While aggregate profits grew 7%, three banks – Al Rajhi Bank, Banque Saudi Fransi and Bank Albilad – all saw net profits fall, by 6%, 20% and 23%, respectively. As the table shows, NCB again led the pack achieving record net profits of SR7989m in 2013, a 21% increase on the previous year.

NCB chairman Mansour bin Saleh Al-Maiman says: “This good growth in NCB’s net income reflects the bank’s ability to optimally deploy its assets. The bank’s strategy to diversify its sources of revenue has resulted in an increase of 2% in fee income from banking services, and 25.6% in income from foreign currency exchange; while gains from sale of investments reached SR646m compared with SR602m in 2012.”

Meanwhile in key ratios, Al Rajhi led on return on equity with 19.9% followed by NCB with 19.5% and SABB with 17.6%. In capital adequacy ratio terms, Alinma Bank led the rankings in 2013 with 28.4%, followed by Al Rajhi (19.6%), and Samba (19.4%). According to SAMA, the average return on equity was 14.34% and the average capital adequacy ratio was 17.9%, both very strong figures by world standards.

Another stellar year

Looking to the future, Saudi banks’ first-quarter profits for 2014 indicate another bumper year. Dr Fahad Al-Turki, head of research at Jadwa Investment, notes that in year-on-year terms, profits for the first two months of 2014 were up by 9%. Following record profits in 2013 he forecasts much the same in 2014 and another record high for this year. SABB’s David Dew is equally bullish. “We expect the broad trends to continue and the outlook is positive,” he says.

Some star performers for the first quarter include Banque Saudi Fransi, whose net profits rose 25.15% on the previous year to SR684m; SABB's profits were up 14% to SR1.08bn; Arab National Bank was up 5% to $181m; and NCB was up 8.7% to SR2.54bn – all robust results. 

Ratings agencies have also looked favourably upon Saudi Arabia with Fitch upgrading the country from AA- to AA recently and Standard & Poor’s expected to follow suit with an upgrade this year. In October 2013, Moody’s also followed the positive trend with a stable outlook for the Saudi Arabian banking sector.

Moody’s noted: “Our outlook for the banking system is stable, as it has been since 2009, reflecting (1) the benign operating environment, driven by high government spending and robust domestic consumption, (2) our expectation of continued low problem loan levels, (3) the banks’ strong loss-absorption capacity in the form of high capital buffers and stable internal capital generation, and (4) the benefits of low-cost deposit-based funding and large liquidity buffers. These favourable elements will be moderated by competitive pressures on lending margins and some corporate-sector weakness, which will constrain further improvements in profitability.”

The performances, recent results and comments suggest that Saudi banks are in for another good year.