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Middle EastMay 4 2009

Cushioned from the crisis

Mohammed Al-Jasser, new governor of the Saudi Arabian Monetary Agency (SAMA)Conservatism and pro-active regulation has protected Saudi Arabian banks from toxic assets and they are now in a position to fund many of the infrastructure projects which may help keep the Kingdom afloat during the slowdown. Writer Stephen Timewell
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Cushioned from the crisis

While late last year, some people felt that Saudi banks could avoid the havoc being wreaked on financial systems across the globe, the results in the fourth quarter told a different story, with 10 of the 12 Saudi banks posting significant quarterly declines and three posting losses. Nevertheless, unlike most banking sectors worldwide, all of the Saudi banks showed annual profits in 2008, with six increasing profits and the annual aggregate net income down just 12% to SR26.5bn ($7.1bn), a relatively strong performance in global terms. The aggregate return on equity for 2008 was a very creditable 20.5%, down on the 29.7% return achieved in 2007 but well ahead of most banking sectors in the G-20 countries.

"Banks have not been materially impacted by outside events," says Dr Abdulrahman Al-Hamidy, deputy governor of the Saudi Arabian Monetary Agency (SAMA, the central bank). He adds that pro-active regulation and guidelines had protected banks from going into toxic assets and SAMA's close supervision helped to keep banks ahead of the curve.

He admits, however, that Saudi Arabia, with 12 banks, has a manageable banking system, compared with much larger and more complex sectors such as the UK, and hence the ability to implement regulation is stronger. Also, in relative terms Saudi Arabia is not heavily banked. Bankers explain that the ratio of bank assets to gross domestic product in the Kingdom is just half that of the United Arab Emirates, which gives Saudi banks a lot of potential to grow.

On track

SAMA and the government have made considerable efforts to stabilise the banking sector and keep the banks on track. "SAMA has done a good job," says Abdullah Sulaiman Al Rajhi, chief executive of Al Rajhi Bank, referring to SAMA's reduction of reserve requirements from 13% to 7% at the end of the third quarter last year, which provided more funding in the system and greater comfort for banks.

In further liquidity measures, Samba's chief economist, Howard Handy, says: "Interest rates have been cut, $2bn to $3bn has been injected into the banking system in the form of dollar deposits, and all bank deposits have been guaranteed. SAMA is also understood to be offering unlimited US dollar swap facilities, and the government extended $2.7bn in credit to low-income citizens having difficulty accessing loans."

Liquidity and lending

"Banks have liquidity and are lending," says Mr Al Rajhi. SAMA's Mr Al-Hamidy agrees: "Banks are liquid and whatever projects are in the pipeline, banks would be able to finance." The key issue, however, is that the big spending by the government in the structured finance and project finance areas needs private finance and much of this is no longer coming because the big international bank providers have problems with the ­ global crisis.

For Mr Al Rajhi, the withdrawal of the international banks represents a challenge for local banks to expand into new sectors, such as petrochemicals. "Local banks now have the opportunities to provide finance in structured and project finance areas," he says.

Can the locals pick up the slack left by the international banks? Bankers perceive opportunities and the government is keen to make progress on its reforms in many areas, from transport to education. However, many projects were agreed last year when both construction costs and financing costs were high. Prices for construction materials have now fallen and so many projects are in a state of flux, with costs being renegotiated. Given the core conservatism of the banks, it is not clear how quickly or how willing the local banks will be to rise to the occasion and expand into these relatively new areas.

According to Tim Gray, chief executive of HSBC Saudi Arabia, which has been a major player in these markets, financing has been slow, with the syndicated loan market significantly down and no major syndications expected in 2009. He believes that project finance will be constrained this year and next, with his project finance team shifting its focus to infrastructure. Given the large amount of cash available he identifies good potential in the mergers and acquisition sector, both in the region and globally.

Besides the opportunities available in wholesale as well as retail, the overall Saudi banking sector is considered to be in solid shape. The banks are well capitalised, with the aggregate capital adequacy ratio (Tier 1 and Tier 2) at a healthy 16% in 2008, down on the 20.8% in 2007 but well above most banks worldwide. And Saudi banks have provisioning of 153% of non-performing loans at the end of 2008, a very comfortable cushion. In line with conservative SAMA policy of maintaining a net loan-to-deposit ratio of 85%, in 2008 the Saudi banks posted a ratio of 80.7%, well within acceptable limits.

Although the country's biggest bank, Jeddah-based National Commercial Bank (NCB), posted a huge SR2.5bn loss in the fourth quarter of 2008 and profits were down 66% year on year (attributable to the provisions for its investment portfolio, the revaluation of goodwill, and the losses from its portfolio of hedge funds), the bank still managed profits of SR2bn. Also, NCB recorded robust growth for core activities, such as lending. With few banks having large foreign exposures, further major losses are not expected, leaving the banks well capitalised, liquid and capable of grasping the potential opportunities.

Worst over?

"The worst is now behind the banking sector and we think that earnings will grow slightly this year," said Jadwa Investment's chief economist Brad Bourland in a mid-March report. "While banks are currently cautious about lending, there is sufficient momentum for bank lending to pick up during the year." He warned, however: "Lower lending rates (interest is not paid on the bulk of deposits), a further decline in brokerage revenues and greater competition from investment companies will put pressure on margins."

Meanwhile, individual institutions are increasing capital to provide for future expansion and compete against new banks in the market such as the giant Alinma Bank and Bank AlBilad. Last July, Riyad Bank, the country's fourth largest bank, raised SR13.1bn through a rights issue which boosted its paid-up capital by 140% to SR15bn.

Talal Al-Qudaibi, chief executive of Riyad Bank, explained that the issue allowed the bank to expand its loan portfolio by 43% in 2008. Although Riyad's profits were down 12% to SR2.6bn due to international investments, the bank is rapidly expanding its retail network with 40 new branches opening in the next four months along with 80 new self-service branches by year-end. Given the record budget, Mr Al-Qudaibi identifies growth opportunities in health, education and transport and is especially optimistic about the changes taking place in education. "A sea change in skills is taking place in higher education with huge numbers being educated abroad. This is critical for the success of the economy in the long term."

In profit terms, Al Rajhi Bank remains the biggest by far in the Kingdom, with a 1% increase in net income in 2008 to SR6.6bn. Chief executive Mr Al Rajhi believes the biggest challenge in 2009 is to grow the business in the midst of a global slowdown. "We need to make sure the quality of our portfolio is good but definitely there are opportunities in retail and corporate."

Of the big banks, Samba comes next with a strong performance and net income of SR4.5bn, 8% down on 2007 but nonetheless a very healthy 23.4% return on equity. In 2008, the bank launched Samba Dubai, which made Samba the first Saudi bank to have a full commercial licence in the UAE.

SABB health

SABB leads the middle-order banks showing a solid 12% profit increase in 2008 to SR2.9bn. In March, the influential figure of Khaled Olayan took over as chairman and Richard Groves, the chief operating officer, was appointed managing director. While the bank identifies good opportunities in corporate and retail banking it also acknowledges that there are too many projects to be financed by banks alone.

Both Saudi Fransi Bank and Arab National Bank (ANB) boosted profits in 2008, increasing net income by 4% and 1% to SR2.8bn and SR2.5bn, respectively. ANB's chief executive Dr Robert Eid is optimistic about the recent reforms of King Abdullah and the government's spending plans, and hopes ANB will maintain its strong performance of the past three years in 2009.

In 2008, two new sharia-compliant institutions hit the market: AlInma Bank and Bank AlBilad. Following its huge SR10.5bn initial public offering in April 2008, which attracted 10 million Saudi participants, AlInma was definitely born big. With a large paid-up capital of SR15bn, chief executive Abdulmohsen Al Fares is keen to take advantage of the strong demand for sharia-compliant products and the opportunities in the relatively under-banked market.

"We think the market is growing and there is a strong need for sharia-compliant products and services that existing banks are not meeting," says Mr Al Fares. He adds that there is huge demand for sharia-compliant sukuks (Islamic bonds) and growth in the market is expected this year. Bankers think that AlInma's size will help to develop the local sukuk market, especially with the large project finance opportunities available. Mr Al-Fares believes in close co-operation with other Saudi banks and identifies opportunities in other Gulf Co-operation Council countries.

AlInma, which is 70% owned by the Saudi public and 30% by the government, is still, however, in its formation stage. Mr Al Fares expects retail operations to start in June with 23 branches operational by year-end and 100 branches established in three years. When it builds a deposit base and develops its subsidiary, AlInma Investment, in the coming months, the bank is likely to add real muscle and depth to the domestic market.

Niche focus

Bank AlBilad, which increased net income by 73% in 2008 to SR125m, is a much smaller bank with paid-up capital of just SR3bn. Fifty per cent owned by the families of the country's former moneychangers and 50% by the public, acting chief executive Razi Shafeek Fakih says: "We don't want to replicate what is available, we have a niche focus and want to make strategic relationships."

AlBilad's ambition is to be the market leader in remittances in Saudi Arabia and has formed a prime relationship with Western Union (a major international player in this sector) in the Middle East. With 61 men's branches and 29 women's branches and its 87 specialised remittance centres, known as Injaz, AlBilad is making good progress in its niche strategy.

For investment banking, the traditional market areas have been far from exciting, with syndications and issues virtually non-existent and the stock market languishing in line with international exchanges. Nevertheless, there is an increase in the number of licensed investment companies listed through the Capital Market Authority (CMA), which now number 109 compared with 83 a year ago. And foreigners can now buy Saudi stocks on the Tadawul (stock exchange) through a swap arrangement with local banks.

The CMA is believed to want more international fund managers and investors to enter the market but foreigners still make up far less than 1% of volume. HSBC Saudi Arabia's chief executive Tim Gray perceives foreign investors as an important growth area and he is building an equity research capability that is sorely lacking and will be much needed in years to come when Saudi Arabia is likely to open up to foreign direct investment.

All in all, compared with the rest of the world's institutions, Saudi banks have fared quite well in this credit crunch period. Protected by a strong regulator and a well cushioned economy, profits have not been devastated and banks have performed reasonably well. And in 2009 the outlook is far from pessimistic. As one banker put it: "2009 will be an OK, not a good year."

Taking the lead

Mohammed Al-Jasser was appointed in February by King Abdullah to be the new governor of the Saudi Arabian Monetary Agency (SAMA), the country's central bank, to replace the highly respected outgoing Hamad Al-Sayari, who had been governor since 1983. Saudi finance minister Ibrahim al-Assaf says the appointment will not bring any major changes in SAMA's banking and monetary policies. Saudi British Bank's chief economist John Sfakianakis says: "The change at the helm of SAMA signifies continuity, stability and competence. Mr Al-Sayari's legacy as a prudent and consistent governor, when most in the region and beyond opted for exuberance, has to be noted in the Kingdom's economic history."

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