Saudi Arabia continued to expand even during the times of hampered global economic growth. The kingdom, reaping benefits from relatively high oil prices, has developed a stronger sovereign muscle to cope well with the repercussions of global economic distress, says a report prepared by Global Investment House.
The research report expects the country to record real GDP growth of 5.5 to 6 percent in 2011.
Saudi banking assets recorded an increase of 4.3 percent year-on-year in 2010, while loans rose by 5.3 percent during the year.
In tune with this, Global research expects Saudi banks to post assets and loan growth of 9.1 percent and 11.9 percent, respectively, in 2011. Saudi’s robust banking system maintains conservative loan to deposit limit of 85 percent; non-performing loan coverage of more than 100 percent; net interest margin at 3.5 percent; capital adequacy ratio above 11 percent; and equity to assets ratio at around 15 percent.
The government’s initiatives for ambitious public spending and low credit penetration are some of the promising factors for the growth of lending institutions. Overall, the Global forecast total assets and loan to record (Compound Annual Growth Rate) CAGR of 10.8 percent and 13.8 percent, respectively.
Gulf Cooperation Council (GCC) banking universe witnessed an aggregate net income increase of 8.8 percent year-on-year in 2010, while the provisions recorded a decline of 11 percent, over the period. Saudi banks posted marginal increase of 1.7 percent year-on-year in 2010.
Saudi banks’ net income increase was mainly driven by the decline in provisions by 11.5 percent year-on-year in 2010. Global Research expects Saudi banks to record net income increase of 17.8 percent year-on-year in 2011 and CAGR of 22.8 percent. It also expects the banks’ return ratios to start improving from 2012.
Having provided adequately for Saad and Algosaibi groups in 2009, provisions saw a decline of seven percent in 2010. This is expected to be the start of the downhill journey from historically high levels. Global expects provisions to decline by 33.1 percent in 2011 and record CAGR of -23 percent.
Additionally, the increase in non-performing loans coverage to 115.4 percent in 2010 is also somewhat comforting for the banks. The Saudi banks in 2009 followed a cautious approach in recording provisions and extending new loans. The sharp rise in non-performing loans ratio to 3.2 percent in 2009, also retreated to 2.7 percent in 2010. The Global expects the NPL ratio to reach 2.2 percent and non-performing loans coverage at 144.6 percent by 2014.
Although the SAIBOR3M indicated marginal upward trend over the last few quarters, Global expect the banks’ spreads to stay around 3.5 percent till 2012.
In the past year, despite the drop in yield on assets, the banks were somewhat able to manage the pressure by being able to match the re-pricing of their liabilities.
Taking cues from the recent global economic developments, especially in United States economy, Global forecast the policy interest rates to have higher chances of marked increase in 2013. The study also expects the banking spreads to start increasing from 2013, and could reach four percent by 2014.
Although the study does not expect an increase in the interest rates before 2013, the market rates could marginally firm up in 2011 based on the expectations of relatively improved lending activity.
Global expects the banks’ net interest income to increase by 7.8 percent year-on-year in 2011 and record CAGR of 15.6 percent. Saudi banks’ loan portfolio seems to be back on the rising path. The loan book of the listed banks after recording an increase of 3.9 percent in 2010, are expected to grow by 12.1 percent in 2011. Furthermore, any debt restructuring deals could provide opportunities for the banks to renegotiate facilities at higher interest rates, thus generating extra interest income for the banks.
With sector loan to deposit ratio currently at around 82 percent, there is ample room for growth till the limit of 85 percent.
The survey expects loans to record CAGR of 13.9 per cent. Customer deposits remain dominated by demand deposits, and it forecasts deposit base to rise by 12.2 percent in 2011 and post CAGR of 12.5 percent.
Healthy equity base
The well capitalised and relatively low leveraged Saudi banks are in a good position to harness future growth opportunities. Saudi banks’ equity to asset ratio consistently above 13.5 percent is expected to reach 14.6 percent by 2014, indicating a higher proportion of the total assets being financed by the equity base.
Saudi banks’ Tier 1 capital ratio above 11 percent in 2010 remains well above the minimum requirement of four percent under Basel II and six percent under Basel III.
As the banks globally took up the challenges of coping with various financial issues, Saudi banks are confident of their strong fundamentals are well placed to even handle any severe credit issues.