Saudi Arabia’s strong fundamentals mean that bank exposure to the credit crisis has been limited, and the mood among bankers is bullish. Writer Nadine Marroushi.

Some Gulf economies have been feeling the pain of the credit crunch. Both the United Arab Emirates (UAE) and Kuwait governments have created emergency facilities to inject liquidity into a tightening credit market. The mood in Saudi Arabia, however, appears to be less chaotic because its economy is cushioned by high oil price revenues and abundant government liquidity.

But Saudi Arabia has not been immune. So far, the biggest writedown has come from Samba Financial Group, which wrote off SR500m ($133m) as “impairment on investments”. Although the bank has not said what these are, analysts believe they are related to subprime exposure. Other banks allegedly exposed include Arab National Bank, Saudi British Bank, Riyad Bank, Saudi Fransi and National Commercial Bank. Those not exposed include the three Islamic banks, Bank Al-Jazeera, Al-Rajhi Bank and Bank Al-Bilad, as well as Saudi Hollandi Bank.

End of the ripple

The good news, however, is that most ­analysts think this will be the biggest ripple effect Saudi Arabia will experience. According to EFG Hermes’ Saudi banking analyst Murad Ansari: “This year will mark the end of investment-related writedowns. In 2009, it is not expected to put a damper on ­earnings.”

And Paul-Henri Pruvost, credit analyst at rating agency Standard and Poor’s (S&P), says: “To our current knowledge, exposure is limited. Saudi banks appear relatively immune from the current global turmoil.”

In the meantime, credit is tight among local banks and a slowdown in lending is expected. “Lending won’t be as high as it was three or four years ago. Figures in 2007 and the first half of 2008 show that lending resumed its pre-stock-market-boom trends of about 20% growth, which is still significant but not the 35% that we saw during the 2005/06 peak,” says Mr Pruvost.

With the central bank, the Saudi ­Arabian Monetary Agency (SAMA), saying that the loan-to-deposit ratio cannot exceed 85%, the challenge going forward, say analysts, will be for banks to generate enough deposits to keep providing liquidity for loan growth.

Investment banking has also suffered a Wall Street knock-on effect. Analysts had been expecting a boom but this is now looking doubtful. In a bid to curtail inflation – a problem facing every country in the region – SAMA has been tightening lending by banks as well as raising cash reserve requirements. This has hit project financing activities.

HSBC Saudi Arabia’s chief executive Timothy Gray says: “Financing activities, such as syndicated loans and sukuk, have been impacted. We’re still getting issues away, but there have been instances when we could have, but haven’t, brought issues to the market because we didn’t expect there to be enough liquidity for them.” That said, in ­September HSBC raised SR1bn for the Saudi Bin Laden Group, which Mr Gray says was successful because of the quality of the name and its reputation.

According to a recent report by PFC Energy, ‘GCC: Vulnerabilities in the Banking System’, the value of cancelled or postponed real estate projects across the Gulf Co-operation Council region is estimated at more than $50bn due to the credit squeeze.

Room for growth

Despite this gloomy outlook, Saudi banks are considered the strongest in the region. S&P’s Mr Pruvost says: “In the GCC, the Saudi banking system is seen as the strongest in our assessment, and this is linked to improvements in the industry and the strong economic environment.”

Saudi Arabia has the largest economy in the GCC, and its government finances are considered solid, backed by the country’s position as the world’s largest oil producer. At the same time, it is pursuing an aggressive programme to diversify the economy and, according to rating agency Moody’s Investors Service, has announced infrastructure projects of more than $350bn in the next decade.

The Saudi banking system is highly consolidated with 11 local commercial banks dominating the industry and accounting for more than 95% of total banking assets. The three largest banks in terms of market share and total assets as of December 2007 were: Jeddah-based National Commercial Bank (NCB) (19.4%, SR208.7m), Samba (14.4%, SR154.4m), and Al-Rajhi (11.6%, SR124.8).

In recent years, 10 new GCC and international banks have been granted banking licences, but their branch networks are limited so their operations are confined to corporate banking, while retail banking is dominated by Saudi banks. The branch network in general has room for improvement, with S&P estimating that there is one branch for every 20,000 Saudis compared with one for every 6000 in the UAE.

Corporate lending trend

There has generally been a shift towards corporate lending, instead of the riskier retail lending, across all banks in the kingdom. Another move has been the banks’ geographical diversification. Moody’s, in its July 2008 report, said that a weakness of local banks has been their reliance on operations in Saudi Arabia to generate income: “They therefore remain vulnerable to an economy that is still largely dependent on oil.”

But banks are aware of this and intend to branch out. Al-Rajhi has set up a branch in Malaysia and NCB has purchased a 60% stake in a Turkish Islamic bank, Turkiye Finans. Samba has also acquired a 68% stake in Pakistan’s Crescent Commercial Bank.

The development of a mortgage law, expected to be finalised in 12 months, should provide long-term growth. Mortgage loans make up only 1% of the banks’ loan portfolio. says EFG’s Mr Ansari: “Banks are hesitant about going into mortgages because laws regarding property repossessions remain unclear. But it has a big potential as 65% to 70% of Saudis live in rented accommodation. Once credit becomes available, I would expect people to start buying homes.”

Liberalising the Tadawul

The vulnerabilities of the Gulf’s largest stock market, Saudi Arabia’s Tadawul, became apparent when it slumped in 2006. More than 10 million of the country’s 25 million Saudis have bank accounts, so the market is heavily dependent on local retail investors who react as much to sentiment and rumour as to fundamentals.

The Capital Markets Authority (CMA) has been moving steadily to resolve this weakness. It began by gradually allowing other nationals of the GCC states to invest, and more recently announced the permission of swap agreements for foreign fund managers. This is seen as a significant move to bring more institutional investors to the market, and one that investment houses had long been encouraging the CMA to consider.

HSBC was one such lobbyist, and Mr Gray says that at the close of business on August 20 (the last trading day of that week), the CMA unexpectedly announced that swap structures were good to go, subject to the approval of documentation.

“We, and a couple of other houses, were scurrying around for that weekend and during the week to get our approvals, and for them to give us a final review of the swap documents,” says Mr Gray. HSBC is among those licensed to carry out swap agreements, as well as Morgan Stanley and a few other houses.

Prior to this, foreign fund managers could invest through mutual funds but this was not the preferred option because they are paid by their clients to stock pick. The way swap agreements work is that authorised people in Saudi Arabia receive orders from foreign fund managers. In HSBC’s case, they are collected in London and transferred to Saudi Arabia. A swap agreement is then entered into, where HSBC Saudi Arabia is funded for the purchase, buys the shares, holds the shares as principle but passes on the economic benefits to the foreign fund managers. But neither party can vote on the shares.

It has proved very successful. “In the first 16 trading days, we executed $275m of swaps for fund managers in the US and UK and this will increase over time,” says Mr Gray. He adds that the interest in stocks has been wide-ranging in both large and medium-sized companies that have good growth prospects and sectors such as financial, petrochemicals, real estate, retail businesses and ­telecoms.

A number of local bankers have said that the inevitable next step is for the CMA to allow direct foreign investment, but Mr Gray says it will take time.

“The CMA has to get comfortable before it allows direct foreign investment, and swap agreements are a way for them to monitor it. The CMA’s biggest concern is that the mass of retail investors do not get hurt by fast money coming in and then bailing out. It is a ­cautious approach,” he says.


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