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Middle EastMarch 10 2011

Saudi banks view future with a mixture of caution and optimism

Saudi Arabia's banks largely enjoyed a profitable 2010 and are looking to 2011 with renewed optimism. Though the lessons of the past few years mean that a cautious approach will be adhered to, particularly when the country's mortgaged laws are reformed, the sector's future certainly looks bright.
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Saudi banks view future with a mixture of caution and optimismArab National Bank in Saudi Arabia is becoming more involved in mortgage financing

The performance of the Saudi banking sector, despite the global financial crisis and recent political turmoil in the Middle East and north Africa (MENA), remains sound and profitable. The outlook for 2011 widely viewed is cautiously optimistic, buoyed by strong budget expansion and the government's recent $36bn additional spending stimulus.

Although lending has been slow, with aggregate total credit facilities growing only by 2.7% in 2010 to reach SR761bn ($203bn), according to the latest Saudi Arabian Monetary Agency (SAMA) figures, there are signs of improvement and that banks are becoming more willing to lend. As David Dew, managing director of Saudi British Bank, says: “I think the appetite to lend has resumed and borrowers are more willing to borrow.”

In January, bank lending to the private sector jumped by 0.8% after two monthly declines, according to Saudi Arabian investment bank Jadwa Investment, with lending growth in year-on-year terms at an 18-month high. However, bank credit has struggled since the beginning of the global financial downturn, with loan growth rates slashed to a fifth of what they were at the onset of the crisis. Banks were also affected by the massive defaults relating to the family dispute between Ahmad Hamad Algosaibi and Brothers (AHAB) and the Saad Group, which led them to significantly reassess their approaches to family-owned businesses.

Units of the two family groups are reported to have borrowed at least $15.7bn from more than 80 regional and international institutions, according to documents provided by lenders in 2009. The family dispute remains unresolved and according to a banking report last year from US rating agency Moody’s, and as a result, private sector loan growth in Saudi Arabia has remained muted.

On the up

But the banking mood in the country has changed. While a Bloomberg report in February noted that AHAB may owe $2.4bn to 10 Saudi banks, according to filings by the lenders to Saudi Arabia’s Committee for the Settlement of Banking Disputes, banks have largely taken the heavy provisions related to the defaults. As one Saudi banker notes: “The system has moved on.” Bankers confirm that provisions have been made and the average provisioning coverage is 100%, not as high as provisioning cover in the past at nearer 150%, but higher than 2009’s lowest non-performing loan coverage ratio on record of 89.8%. It is now thought that fundamental issues on provisioning have been largely resolved.

With provisioning levels appearing to have peaked and the recent credit problems behind them, Saudi Arabia's banks are looking at more normalised structures and continued steady profitability. In 2010 the aggregate profits of the 12 banks reached SR27bn, 8% up on the previous year’s SR25bn, according to SAMA. Total assets and total customer deposits also both showed reasonable growth of 4.6% to reach SR1400bn and SR1048bn, respectively.

While not demonstrating remarkable growth in their 2010 results, the aggregate performance of Saudi Arabia's banks was steady and solid, backed by an impressive improvement in the overall Basel capital adequacy ratio to 17.1% at the end of 2010, from 16.6% the previous year. Very few countries in the G-20 or among the emerging markets could match the strength of the Saudi banking sector; the capital-assets ratio for the top 25 banks in The Banker’s Top 1000 World Banks in 2010, calculated using Bank for International Settlements (BIS) definitions, was 15.5% - still below the Saudi performance.

As Moody’s notes in its latest Saudi Arabia report: “The banking sector in Saudi Arabia remains resilient and sound, supported by 1) the government’s fiscal stimulus, which has sustained macroeconomic growth, 2) the banks’ robust financial fundamentals, including strong liquidity and adequate profitability and capitalisation, and 3) a prudent regulatory environment.”

Addressing concerns

But while the Saudi banks are well capitalised and highly liquid, they do face concerns over the fragile global financial environment as well as the political unrest in the MENA region. Saudi banks have no exposure in north Africa but investor sentiment is worrying, with the Saudi stock exchange, Tadawul All Share Index, down 20.3% at one point in early March compared to before the unrest started. Also, the Saudi Arabian banking sector suffers from high credit concentrations and limited geographical diversification. 

Nevertheless, with strong government spending, up at least SR76bn on 2010 figures, bankers are buoyant about the opportunities ahead. Paul Gamble, head of research at Jadwa Investment, expects lending to grow by 9% in 2011, after 5.8% growth in 2010, leading to an overall stronger bank performance in 2011. Robert Eid, CEO of Arab National Bank, believes there will be moderate and healthy growth balanced across both corporate and retail areas.

Bankers are also encouraged by the good prospects in lending to small and medium-sized enterprises (SMEs). SAMA vice-governor Abdulrahman Al-Hamidy believes SMEs are the growth area of the future, and big banks - such as Riyad Bank and National Commercial Bank (NCB) - are investing heavily in this sector. A loan guarantee scheme managed by the Saudi Industrial Development Fund is expected to not only help banks diversify their lending into SMEs, but also help to develop employment and opportunities in this much-needed sector. Abdulkareem Abu Alnasr, CEO of NCB, believes his bank has the scale and ability to play a major role in SME finance, just as it has done in its expansion in project finance in recent years.

Saudi Arabia banking stats

Housing reform

Opportunities are also emerging in the housing sector, as the long-awaited mortgage law edges closer, the Saudi government makes stronger calls for housing projects to be accelerated, and capital is injected into the Real Estate Development Fund to speed up its lending process. More housing units are desperately needed, but such long-term finance is new to the country and calamities elsewhere, particularly in the US, have made the authorities careful not only to get the funding arrangements right but also to create the correct balance between affordability and matching the huge demand.

Although there is strong appetite for housing, the lack of hedging mechanisms make long-term financing difficult - and the lack of a mortgage law is only part of the problem of developing this sector.

Nevertheless, banks are becoming more involved in housing finance and Arab National Bank (ANB) has a 40% stake in Saudi Home Loans (SHL), the country’s largest residential lender. The rest of SHL is owned by Saudi Arabia's largest development company Dar Al-Arkan (55%), and the World Bank’s International Finance Corporation (5%). SHL CEO Scott Ferguson acknowledges the strong social need for more housing finance in Saudi Arabia, but he is also well aware of the complexities of unlocking the opportunities and unlocking the supply chain.

KAFD's mixed reviews

Meanwhile, as the capital markets look set for major expansion this year and the SAMA governor Mohammad Al-Jasser encourages the growth of sukuk (see the interview in this report), one major project, the creation of the King Abdullah Financial District (KAFD), is receiving mixed reviews. The KAFD, with 280,000 square metres of office space under construction, has been described by some as a “grey elephant” with its huge building space being seen as excessive and unlikely to be immediately filled. Others, such as Brad Bourland, chief economist at Jadwa Investment, are more bullish. He says: “KAFD will succeed, people will go there in two years and it will become a financial hub.”

Samba chairman Eisa Al Eisa is positive on KAFD, with Samba being the first bank to sign up to relocating in the district. In addition, the Saudi stock exchange plans to move there, as do many of the country's more than 100 investment houses, 30 insurance companies and 37 brokerages now licensed, but ANB, for example, is building its new headquarters next to its existing location in Riyadh. Whether the KAFD will be a success remains to be seen. 

WOMEN IN BANKING 

Women represent the changing face of Saudi banking. With the government emphasis on increasing tertiary education for women and the growth of women's branches in all banks’ networks, the role of women in Saudi Arabian banking is increasing significantly and will continue to do so.

Riyad Bank CEO Talal Al Qudaibi says: “Women are more productive and are doing well across all areas.” Riyad employs 900 women, 19% of its work force, the highest among Saudi Arabia's banks, compared to the average at most banks, where women account for about 10% of the staff. At Saudi Arabian Monetary Agency, the Sadad payment system, which is linked to all the country's major banks and has experienced great success as its premier bill payment system, 70% of the operation is staffed by women in all areas from IT to finance.

At Arab National Bank, Olfat Miro is head of the bank’s 12 women's branches in the western region of the country. Ms Olfat manages 50 retail staff in the region, which has seen massive growth in the number of women's branches in the past three to four years. She says that everything in her branches is done by women for women, and 22,000 new accounts were opened in her region in 2010, with two more new women's branches planned for this year.

The role of women in banking and women’s branches in Saudi Arabia is accelerating and becoming much more visible.

Al Rahji remains profitable

Looking at the individual bank performances in 2010, the most profitable bank in the country for the sixth year in succession was Al Rajhi Bank, with net income of SR6771, marginally up on the two previous years. An Islamic bank with the largest customer base in Saudi Arabia and a large network of 466 branches and 2750 ATMs, Al Rajhi expanded its assets by 8.3% to SR184.8bn in 2010, managing to maintain its high profit levels while keeping an impressively low expense-to-revenue ratio of 26%, reportedly the lowest among Saudi banks.

While maintaining strong retail growth with 29 more branches and almost 3000 new point-of-sale terminals in 2010, Al Rajhi expanded its international presence with a branch in Kuwait and a licence to open a sharia-compliant bank in Jordan in 2011. This is in addition to its strong existing network of 20 branches in Malaysia, boasting five branches in each of the country's four key states. The bank’s aim to deliver best-in-class sharia-compliant financial services continues to be achieved with strong profitability; return on assets averaged 3.7% in 2010.

NCB keeps on growing

Saudi Arabia’s biggest bank by far in terms of Tier 1 capital and total assets remains Jeddah-based NCB, which in 2010 continued its strong recovery with a 16.9% increase in net profits to SR4724bn, the highest profit growth of all the country's major banks.

Bank CEO Abdulkareem Abu Alnasr says that 2010 was a good year. The bank improved profitability and strengthened its balance sheet, raising NPL loan coverage to an above-average 117%, while average return on assets reaching 1.7%.

After a difficult year in 2008, state-controlled NCB has recovered well and Mr Alnasr notes that while most banks grew their lending at less than 5%, NCB’s lending grew by 12% in 2010, emphasising his bank’s relatively low loan-to-deposit ratio of 53%, compared to the average of about 85%, and hence other banks relatively limited lending capacity. He stresses NCB’s lending ability, especially in project finance, where it is the number one player from the Middle East. He also mentions the opportunities for NCB in the SME sector, adding in reference to other banks: “It is inevitable that due to limited lending capacity banks will tap the capital markets so they can do more.”

In 2011, Mr Alnasr sees ample opportunities for expansion, especially with the bank’s modest loan-to-deposit ratio, the bank’s large 33% share of the mutual funds market and the growth of the financial system through the expanding capital markets, the new housing bank an upcoming mortgage law and the growing retail sector. He is also enthusiastic about NCB’s 65% acquisition in 2008 of Turkiye Finans, one of Turkey’s leading ‘participation’ (or Islamic) banks. Nevertheless, he adds: “We are not in a rush to expand regionally, we believe if we like it we go in and do it."

While Mr Alnasr sees the potential he also is aware of the challenges in Saudi Arabia, especially in creating jobs, building up the SME sector and encouraging entrepreneurial spirit. NCB has spearheaded the launch of Injaz, the localised equivalent of America’s Junior Achievement programme, to cultivate the next generation of young business leaders in the country.  

With more than 2.2 million customers, nearly 300 branches, total assets of SR282bn and more than a 24% share of demand deposits, NCB is not only a major force in Saudi banking  but is back on a strong growth path.

Bubbling under

Samba Financial Group slipped into third place in Saudi Arabia with net profits of SR4.43bn in 2010, down 2.7% on the previous year, but total assets grew 1% to SR187.4bn in 2010 while shareholders’ equity rose by 14% to SR25.6bn. With the bank’s investment portfolio up 18% to SR65bn, its chairman, Mr Al Eisa, says the group’s results reaffirmed the strength of the bank’s performance and its ability to overcome the challenges that the banking sector has faced both globally and regionally.

Riyad Bank, the second largest bank in Saudi Arabia in terms of Tier 1 capital, came in fourth with net profits in 2010 of SR2.82bn, 6.8% down on 2009. While CEO Talal Al Qudaibi notes that the bank’s net interest margin dropped 5% in 2010, fee income rose 16% and he continued the bank’s focus on retail, increasing the branch network to 241 at the end of 2010 from 216 at end 2009 and to 2600 ATMs from 2400. With the bank’s capital adequacy at a solid 16%, Mr Al Qudaibi sees good prospects for 2011, especially in the SME sector and new areas such as mining. He believes the Saudi Arabian mining company, called Ma’aden, involved in exploiting bauxite and phosphate deposits to produce aluminium, could be the next big thing in the country, possibly the next Sabic (Saudi Basic Industries Corporation, one of the world's leading manufacturers of chemicals, fertilizers, plastics and metals).

Among the medium sized-banks, Banque Saudi Fransi saw net profits rise by a credible 13.4% to SR2.8bn, while profits at conservative ANB fell by 19.4% to SR1.9bn and Saudi British Bank lost market share and profits dipped by 7.3% to SR1.88bn. Meanwhile, Saudi Hollandi Bank showed a massive recovery with an 820% increase in profits to SR790m from SR86m the previous year, attributed to lower operating costs.

Of the smaller banks, Alinma Bank, Saudi Arabia’s newest and possibly the most technologically advanced bank, is beginning to make inroads into the market. Launched in June 2009, the total assets reached SR26.7bn at the end of 2010, a significant 54% increase on 2009 assets of SR17.3bn.

Abdulmohsen Al Fares, CEO of Alinma, is encouraged by the impact of the latest technology systems and unique design incorporated into the sharia-compliant operator’s existing network of 41 branches and 220 ATMs. The bank plans to operate more than 100 branches over the next five years. Mr Al Fares is excited by the bank’s high-tech retail monitoring systems and new products, such as its unique education financing offering. With 1100 employees, 18 women's branches and having already completed a SR3.8bn financing for Sabic, Alinma is already ahead of its targets, breaking even in its first full year in 2010 and delivering much more than just early promise.

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