Cautious optimism is the word of the day in the Saudi banking sector as the gains of mid-decade failed to recur in the wake of a bearish first quarter 2006 at the Riyadh-based Tadawul (stock exchange). The remarkable fall in brokerage and asset management fees, which had seen record profitability over the previous three years, proved a serious concern for the industry. A Fitch Ratings report based on an analysis of ten major commercial banks in Saudi Arabia suggests that on average the banks recorded a year on year decline in profit, the first in recent years. New regulatory curbs on lending, and the global credit crunch resulting from the US subprime crisis fallout, also had negative impacts on the sector.
Competition from new entrants to the industry proved another challenge for Saudi banks. According to Zawya Dow Jones, there are now six foreign banking institutions in the kingdom and this number is expected to rise. Saudi banks have duly raised capital to help fend off the burgeoning threat as the region prepares for a wave of mergers and acquisitions. Global Investment House has suggested that the “banking sector in the country is on the threshold of a new era, where foreign banks are likely to give a tough time to local banks.” Capital has been raised by a handful of banks to date, including Samba Financial Group, which has upped its capital 50% from $1.6 billion to $2.4 billion. Al Rajhi Bank will increase its capital from $3.6 billion to $4 billion, Arab National bank has gone up 43% to $1.7 billion, and Saudi Investment Bank has added $200 million to its $1 billion cash base. Riyadh Bank and others are expected to follow suit as well.
The capital boosts also help facilitate Basel II, which was implemented in January. The new rules should help stakeholders better understand risks taken by banks, said one expert. Basel II compliance is expected to have a moderately negative affect on year-end capital ratios for Saudi banks.
Effects of oil and inflation
Despite the poor performance in asset management fees and the challenges of raising capital, banks in Saudi Arabia did show consistent improvement in their core revenues. Loan volumes grew quickly due to record high oil prices and effervescent economic conditions. Bank assets grew by 25% in 2007, however, inflationary pressures on wages and rising loan provisions cut operating profitability.
Slow growth in consumer lending, due to new regulatory constraints, was also an issue. It is suggested that the new constraints were aimed at slowing the practice of borrowing money to invest in the overheated Saudi stock market. The slowdown was, however, offset by accelerated growth in private sector corporate credit. High regional liquidity pushed up consumer deposits and funding asset growth. In a further boon to the industry, 43% of these deposits are non-interest bearing, which has proven to be an excellent source of low cost funding for Saudi banks. Fitch Ratings believes that “the asset quality is sound.” But write-offs and retail loan provisions are climbing in an early indication of segment deterioration.
On the upside, US subprime woes and structured credit risk pose little risk to the industry. Saudi banks have modest exposure to CDOs and SIVs, according to regional bankers. Write-downs from the incident are mostly taken care off and have had little impact on profitability. However, residual fall-out has prompted some delay in new debt issues as spreads widen due the global credit crunch. Furthermore, large maturity gaps and concentrations in funding remain.
Net profit of top 10 Saudi banks ($ million)
Top ten banks by total assets
The Saudi banking sector had total assets estimated at $290 billion in 2007 after a 16% year-on-year drop in total net income. The majority of this vast sum is shared between the top ten local, commercial banks by total assets. Largest among them is the National Commercial Bank (Al-Ahli) with $55.6 billion in total assets. The bank saw its profits drop from $1.67 billion in 2006 to $1.60 billion in 2007, although this was still stronger than its 2005 profits recorded at $1.32 billion. Established in 1953, National Commercial Bank is the oldest bank in Saudi Arabia.
Second on the list of total asset value is Samba Financial Group with $41 billion. The group saw its 2007 profits down to $1.28 billion after earning $1.38 billion in 2006. Samba, formerly known as Saudi American Bank, has a strong presence in Pakistan as well. It was established in 1980 when Citibank’s branches in Riyadh and Jeddah were taken over by Saudi investors in a partial nationalization scheme that required banks in the country to be 60% owned by Saudi nationals.
Al Rajhi Bank, despite its third place rank with $33 billion in assets, was the most profitable bank in the line-up for 2007. Although it lost ground from 2006, the bank was still able to turn a whopping $1.72 billion in profit for the year. This is ostensibly due to its prominent position in Islamic banking, which has recently experienced massive growth.
The only bank on our list of top ten to actually record a year-on-year rise in profit is Riyad Bank, which saw profits climb from $776 million in 2006 to $803 million in 2007. The bank sports total assets of $32 billion and is entirely Islamic, another nod to the success of the sharia-compliant finance industry in an otherwise sluggish year. The non-interest bearing nature of Islamic finance provides an excellent source of cheap funding for banks.
Middle of the list at number five is Banque Saudi Fransi with total assets of $22 billion. Net profits fell from $802 million in 2006 to $723 million in 2007. The bank was established in 1977 and is affiliated with Calyon of France. Next up is SABB (formerly known as the Saudi British Bank), which counts $26 billion among its total assets. This affiliate of HSBC was established in 1978 and saw profits drop from $811 million in 2006 to $695 million in 2007.
Number seven on the list with $25 billion in assets is the Arab National Bank, founded in 1979, with profits declining from $668 million in 2006 to $656 million in 2007. It should be noted, however, that both of these figures are significantly better than the bank’s 2005 net profit of $487 million.
Next is Saudi Hollandi Bank with $13 billion in total assets. This bank came in last on our list in terms of profits with its 2007 earnings of $117 million, well behind its 2006 take of $254 million. According to Fitch Ratings, the drop in profits was “due to higher impairment charges taken on its corporate book.”
Saudi Investment Bank has $12 billion in assets. The bank’s net profits fell by more than half, from $535 million in 2006 to $219 million in 2007. The first quarter of 2008 has shown no respite from this trend with a further 16% year-on-year drop in profits.
The final bank on our top ten is Bank Al-Jazira, holding some $5.7 billion in assets. This bank had a poor showing this year as well with profits falling from $526 million in 2006 to $215 million in 2007. Apparently, it was highly dependent on brokerage during the recent boom and this factor lead to the bank’s large drop in profit for 2007.
Total assets held by top 10 Saudi banks ($ billion)
Country Forecast
Forecast According to Zawya Dow Jones, “growth opportunities abound in the region for players who are willing and ready to meet the challenges.” This comes as no surprise considering Saudi Arabia’s real GDP growth is expected to climb from 4% in 2007 to 5% in 2008. Record high global oil prices and private sector investment should encourage private sector corporate lending. This will likely make up for slow consumer lending growth. Furthermore, strong asset growth should drive-up profitability, despite the continuing global credit crunch. Looming risks include growth in credit card holders, real estate lending and consumer NPLs. Increased competition from foreign banks in Saudi is also on the horizon. High liquidity will continue to fuel large customer deposit bases, which means there will be no shortage of funding for the banking industry. In conclusion, the Saudi banking sector suffered a bullish year in 2007 as a result of the 2006 stock market tumble. And although the sector faces noteworthy issues in 2008, high liquidity and the
