With significant potential for growth in the country's real estate, retail and capital markets, Saudi Arabian banks, which are already highly liquid and growing in profitability, are making bold projections for their future successes.

While many Western, especially European, banks are struggling, Saudi Arabia's banks are in the midst of an expansionary boom, with further growth predicted as new market areas open up creating more opportunities. But unlike their counterparts in neighbouring Gulf states, Saudi Arabian banks are largely focused on their domestic market. As the largest petroleum exporter in the world, and with a population set to touch 30 million in 2013, there is a much larger domestic market to tap.

While political tensions and uncertainties remain in Syria and Iran, Paul Gamble of Riyadh-based Jadwa Investment has revised his forecast for Saudi Arabia's oil price and output for 2012. This projected upward growth, detailed in an April 2012 report, would lead to record oil revenues and budget and current account surpluses in 2012. Oil revenues – the source of 90% of Saudi Arabia's budget revenues – are now expected to reach a record high of SR1150bn ($307bn) and Jadwa has raised its forecast for Saudi Arabia's real growth rate from 4.5% to 5.1% on the back of these revised figures.

Plans to spend $373bn between 2010 and 2014 on social development and infrastructure projects to advance Saudi Arabia’s overall economic development, 2011's $130bn government stimulus package and good overall performances in the banking sector have raised confidence and expectations and bankers are bullish that bank profits, which hit SR32bn in 2011, will be bettered in 2012.

Bankers are not just encouraged by the strong macroeconomic environment and robust government spending in Saudi Arabia but are also enlivened by growth in the country’s non-oil economy, in areas such as housing. With provisioning down in 2011, profits up 18.5% overall and the average Basel capital ratio at a high 17.4%, banks are in fine structural condition to significantly increase lending again in 2012. This puts them in a position to take advantage of the growing housing market, buoyant project finance market and increased consumer lending.

Moving in

Housing is a major focus for Saudi Arabia's banks. Mortgage loans as a percentage of gross domestic product (GDP) are at a very modest 2%, compared to 17% in the United Arab Emirates, according to a recent report by Jeddah-based National Commercial Bank (NCB). With an estimated shortage of 1 million housing units and the country's Ninth Development Plan expected to develop 250,000 new units per year, this represents a significant area of growth for the country's banks and many are viewing expansion into this area as a priority. 

Although Saudi Arabia's long-awaited mortgage law is still not finalised, and concerns remain over the issue of eviction, banks are moving into this space. With the Saudi government targeting 80% home ownership in the country by 2024 – double the NCB estimate of current home ownership of between 30% and 40% – opportunities are clearly there for banks.

Consumer loans to real estate have increased five-fold among Saudi Arabian banks from SR4.5bn in 2002 to SR23.1bn in 2010, according to NCB. Given that the market has not yet taken off, bankers expect huge growth in the future. In order to enter the market as soon as possible they have found ways to ease concerns over current risk areas, such as eviction. For example, Saudi Hollandi’s managing director, Bernd van Linder, says that his bank mainly lends to government employees, which significantly limits non-repayment risks.

Alinma Bank’s chief executive, Abdulmohsen Al Fares, says that, with a relatively low level of home ownership and with 70% of the local Saudi population under the age of 25, there is a lot of demand to be filled. He adds that new regulations opening up the housing market to foreign ownership, especially from neighbouring countries, adds further growth potential in housing.

There is a growing desire among Saudi investors to participate in Islamic-based mutual funds that are sharia-compliant

Mohamed Ramady

Sukuk growth

Another key growth area for banks is in sukuk, or Islamic bonds. While sukuk sales reached a reported record high of $32.6bn worldwide in 2011, according to Dealogic, Saudi Arabian institutions were well behind their counterparts in Malaysia, which had taken the lead in utilising this growing Islamic financing tool. In 2012, however, Saudi Arabian banks are making an effort to boost their activity in this area.

In January 2012, Saudi Arabia’s General Authority for Civil Aviation took advantage of the large liquidity pool in the country with a SR15bn issuance, which was fully sovereign guaranteed and provided highly useful benchmark pricing. The deal was followed in late March by a $1.75bn sukuk for the Saudi Electricity Company and another $400m sukuk private placement arranged by Saudi British Bank, the local arm of global bank HSBC. These deals indicate the new emphasis being placed on this growing area of the market.

Another area ripe for growth is lending to small and medium-sized enterprises (SMEs). With the Saudi government keen to reduce high unemployment rates and create jobs for its large youth population, SMEs are a government priority and a major focus for all banks. Riyad Bank’s CEO, Talal Al-Qudaibi, believes that SMEs represent a huge lending opportunity. Riyad has built up, with help from the World Bank’s International Finance Corporation (IFC), a 60-person unit focusing on SME finance. Saudi Hollandi has also formed a SME unit with IFC help and Mr van Linder says that SMEs will constitute between 30% and 70% of the new jobs created.  

Growth on all fronts

The newer banks in Saudi Arabia, such as Alinma and AlBilad, are focusing on the retail market. With a population of nearly 30 million being served by 11 commercial banks, this is seen as an area with great potential. Alinma, which has SR15bn of capital, opened 20 branches in 2011, bringing its total number of retail outlets to 72 branches and 430 ATMs. Retail is seen as a genuine growth area for both new and existing banks, and overall customer deposits increased by 11.4% in 2011 to SR1176bn and are expected to grow more in 2012. Banks are focusing on retail products and improving their retail penetration.

Investment banking is also set for growth, says economist Mohamed Ramady in his book The Saudi Arabian Economy: Policies, Achievements and Challenges. “There is a growing desire among Saudi investors to participate in Islamic-based mutual funds that are sharia-compliant and are consistent with the principle of equity participation and risk sharing. For the Saudi economy these type of funds not only improve market liquidity but also provide risk development opportunities in medium to long-term maturity structures,” says Mr Ramady.

Meanwhile, the Saudi market is also benefiting from the fact that many European banks are pulling back from overseas exposures to concentrate on their problems at home. This leaves more opportunities for domestic institutions and is one reason why the Saudi Arabian sukuk market has taken off in 2012. While Saudi Arabia is seen to have relatively low exposures to European lenders it is likely to have even less in the future, allowing more opportunities for local, regional and Asian banks to fill the financing gap in the future.

Cautious overseas progress

Saudi Arabian banks are largely focused on domestic opportunities, but some have also sought to expand abroad. While other Middle Eastern lenders such as National Bank of Kuwait and Emirates NBD have a broad international spread as they have smaller local markets, Saudi banks such as NCB, Al Rajhi Bank and Samba have been more selective in pursuing overseas interests. NCB owns 64.7% of a leading Islamic bank in Turkey called TFKB, Al Rajhi has 18 branches in Malaysia and operations in Kuwait and Jordan, and Samba has 28 branches in Pakistan along with operations in London, Qatar and Dubai.

Looking to the future, Saudi Arabian banks are not only well capitalised and profitable but they also have plenty of opportunities for expansion, especially in the domestic housing, retail and the capital markets. The Saudi economy also has plenty of scope to absorb greater volumes of bank credit. According to Andrew Cunningham at Darien Analytics, Saudi Arabia’s ratio of private sector credit to GDP in 2010 was only 55%. The outlook is therefore extremely strong with Saudi banks well placed to take advantage of all the new and existing potential available.  


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter