Strong oil revenues in Saudi Arabia generally translate into a strong economic performance and good results for the banks. This analysis proved particularly accurate in 2003 as oil revenues – up $20bn over 2002 – provided real GDP growth of 6.4%, a current account surplus of $27bn and strong profit growth at the banks. But oil is not the only factor involved and double digit profit growth at most banks stems from improved diversification of income sources and strong growth in consumer finance.
Combined profits at the 10 Saudi commercial banks rose to SR9.3bn ($2.5bn) for the first nine months of 2003, up 14.3% on the previous year.
While full results for all banks had not been published as The Banker went to press, Fahd Al-Mufarrij, from the Saudi Arabian Monetary Agency (SAMA), says that aggregate bank profits for 2003 were expected to reach SR12.5bn, well up on 2002.
And if the profits in 2003 look good, Mr Al-Mufarrij is also bullish about the prospects and forecasts that aggregate profits could rise by a further 16% to reach SR14.5bn.
Consumer boost
For most banks the growth of consumer spending and the expansion of real estate investment continued to boost income streams. At Saudi British Bank (SBB) profits rose 29.4% to reach SR1.26bn with loans to customers up 27.9% reflecting the strong growth in consumer lending.
Geoff Calvert, managing director of SBB noted: “ Growth in operating revenues has been robust and operating costs have been contained. Capital and liquidity positions remain strong; the credit quality of our loan portfolio remains sound.”
Arab National Bank (ANB) also produced excellent results. Net income for 2003 rose by 31% to SR767m continuing the bank’s strong upward performances of recent years. With fee income up 54%, customer deposits up 20% and funds under management growing by 90% in the past two years to reach an 8.3% market share, ANB continues to improve. Return on equity also is increasing, rising to 19.3% from 16.5% in 2002. Chief executive Nemeh Sabbagh also notes that provisions coverage has reached a comfortable 135% almost double the level of 1999.
Loan growth
For all the banks, the advent of salary assignments to banks has provided a major boost in profitable consumer lending. So far, across the board, delinquency rates have proved to be low and there is still a lot of room for further expansion.
At Riyad Bank, for example, chief executive Talal Al-Qudaibi notes that consumer loans have grown from SR14bn in 2000 to SR60bn in 2003 and that this area has provided a key engine for growth. In mutual funds Mr Al-Qudaibi notes that Riyad grew by 12.2% in the latest quarter consolidating its position in second place behind market leader, National Commercial Bank (NCB). Together both NCB and Riyad account for over 62% of the market with NCB dominant with a 43% share.
Riyad Bank posted net income of SR1.6bn for 2003, 12.4% up on the previous year and another year of steady growth. Saudi Hollandi Bank also produced a good performance with record net profits of SR601m, 8% up on 2002, and a very credible 25% return on equity. Baque Saudi Fransi also produced a solid result with net income up 18%.
While most of the other banks are expected to produce double digit growth the recently renamed Samba Financial Group (formerly Saudi American Bank), the second largest listed bank, showed reduced profits for the second year in a row. Profits were down 22.6% to SR1.4bn ($383m) from SR1.9bn the year before.
Citigroup, which used to have a 40% stake in SAMBA reduced its holding from 23% to 20% last year and withdrew from its management contract of the bank. Citigroup appears to have decided that the political and management risks attached to its relatively small involvement with the bank were not financially viable or in line with its overall strategy. Some observers suggest that Citigroup may sell its remaining stake in the near future.
Markets robust
Overall the banks appear to be unaffected by the domestic terrorist incidents earlier in the year and the general political uncertainties as a result of Iraq. Bankers say the markets have not been damaged at all and customers believe the government will keep matters under control. This situation, which may be at odds with external views of the market, looks set to continue in 2004 with no downturn expected in consumer banking.
While the oil sector may be down this year analysts suggest the private sector will continue to expand. In its latest report, Samba’s Brad Bourland notes: “For 2004, our preliminary forecast is for real GDP decline of 1.5% as a result of the decline in oil sector output by a Samba-estimated 11%. Years of strong GDP growth tend to be followed by years of lower growth, primarily due to oil sector fluctuations, but this should not be read to mean that the economy will be weak in 2004. On the contrary, although it is unlikely to match the exceptional performance of 2003, economic performance will still be strong. We forecast 4% growth in the private sector, in line with the performance of the past few years and an improvement over 2003.”
New goals
Apart from unforeseen circumstances, there is considerable potential for many banks to expand into new areas and increase profitability. Islamic products are increasingly popular and most banks have now developed consumer products that can be offered in either Islamic or traditional banking form. Now these products are available in terms of mortgages or car loans, banks are achieving greater efficiencies. New instruments are also being developed such as Riyad Bank’s Islamic debit card.
The key development in the banking sector is the introduction of the new capital market law (CML) and insurance law and the changes they are likely to bring to the overall financial market.
According to Riyad’s Al-Qudaibi insurance will become a huge business for the banks and, while it may take time, it will be an important market segment. The CML also looks set to provide a booming new market for banks but competition will be tough. With the entrance of new players into the market the established 10 banks will not have it all there own way and while there may be huge opportunities in the investment banking arena the structure of the sector looks set for some radical changes.
Shifting landscape
SAMA has already granted a number of new licences to Gulf banks such as Gulf International Bank, National Bank of Kuwait, National Bank of Bahrain and Emirates Bank International. With more regional banks anticipating opening up in the kingdom and Deutsche and HSBC already preparing to establish large investment banking presences, the landscape is changing fast.
Although it may take time to get all these operations into action, this year should be a foundation year with a lot of further entrants expected once the appointments of the key posts related to the capital markets law are announced. More foreign investment banks and securities houses are expected to want to become part of the new regulated market and this opens up the possibilities for a wide range of alliances and involvements.
In addition, bankers are drawing attention to a large new commercial bank which is expected to be formed in the coming months. For many years a number of well-respected exchange houses have operated outside the official banking sector just as Al Rajhi Investment & Banking Corporation had done before it was established as a bank in 1992. At least four of these finance houses are expected to combine together in the coming months providing a sizeable bank with a considerable branch network.
This prospective institution is likely to come to market with an IPO which, given its background, should prove to be attractive. In another major banking development the largest bank, NCB, is expected begin its partial privatisation process towards the end of this year or the first quarter of 2005. Like the successful Saudi Telecom Company privatisation last year the NCB issue is likely to attract a lot of attention and add strength to the infant capital markets.
Export support
Meanwhile in another financial innovation, Saudi Arabia has moved to establish an export credit guarantee organisation to help the kingdom expand its export capability and add further stimulus to the private sector. Set up under the aegis of the long-established Saudi Fund for Development the new facility has been set up with the cooperation of Coface, France’s experienced export credit agency.
Previously Saudi exporters previously had no such support but, according to Salah Al-Awaji, senior specialist at the Saudi Export Program at the Saudi Fund, new short-term facilities have been developed with the help of Coface and five policies have been issued since the facility became operational late last year.
Mr Al-Awaji believes the link with Coface and the launch of an export credit insurance facility will bring improved structure and transparency. The Saudi policy mirrors the standard Coface policy covering 90% of non-payment risk and political risk. While this development only relates to the non-oil sector and is relatively small in terms of overall trade, it does represent an important new product in the Saudi financial sector and an example of the growing sophistication in this area.
