Global Investment House: Saudi Banking Sector

Published July 9th, 2008 - 04:52 GMT

Saudi banking industry consists of 18 banks. With the total banking assets to GDP ratio (Dec. 2007) of 73% in the Kingdom, the top three banks are namely NCB, SAMBA, and Al Rajhi Bank. The three financial institutions namely Al Rajhi Bank, Bank Al Bilad, and Bank AlJazira are entirely Islamic banks. The banking services are largely provided through a network of 1,361 branches (as compared to 1,289 in 2006) and 7,699 ATMs in the country.


The Saudi commercial banks’ total assets posted a 5-year CAGR (2002-07) of 16%, from SR508bn in 2002 to SR1,075bn by the end of 2007. The total assets led by claims on the private sector continued to rise closing at SR1,173bn in 1Q08. During 2007, claims on the private sector accounted for 54% (2006: 55%), while foreign assets contributed 14% (2006: 15%) of the total assets. The claims on private sector, which include credit to private sector and investments in private securities, increased at a 5-year CAGR (2002-07) of 23%.


On the liability side, total deposits posted a 5-year CAGR (2002-07) of 16% (from SR338bn in 2002 to SR718bn in 2007).The total deposits dominated (65%) the funding side of the banks, increasing to SR761bn in 1Q08. The total deposits constituted 67% of the total liabilities & shareholder’s equity in 2007. The capital and reserves of SR136bn as of Dec. 2007 accounted for 13% of the total liabilities & shareholder’s Equity.


Saudi banks, that had consistently shown good financial performance in the past decade and remained amongst the profitable banks in the region, witnessed a decline in 2007. The net profit of banks posting a figure of SR30.2bn (as of end Dec. 2007), showed a 3-year CAGR (2004-07) of 21.5%. However, on YoY basis the profits declined by 14.6% (from SR35.3bn in 2006 to SR30.2bn in 2007). Broadly, the main reason for the lower profitability in 2007 was the significant drop in fee based income due to the market factors (dampened Saudi stock market activity). Riyadh Bank was the only bank showing net income growth of 3.5% (from SR2,909mn in 2006 to SR3,011mn in 2007), while all other banks witnessed a decline in profitability. During the year 2007, although NCB profits declined by 4%, in absolute terms NCB led the banking sector with profits amounting to SR6.0bn.


The Saudi banking sector, with an increase in Gross Loans by 21% (during 2006-07), witnessed somewhat higher rise in NPLs by 29%. This resulted in inching up of NPLs to Gross Loans ratio from 1.65% in 2006 to 1.75% in 2007, which was coherent with the decrease in coverage ratio from 173% in 2006 to 145% in 2007. Having said that, the well provisioned balance sheet of the Saudi banking sector (with the NPL Coverage of above 100%) signals the overall good health quality of the banking assets.


The total domestic credit facilities grew by 20% (from SR497bn in 2006 to SR595bn in 2007). The commerce segment led the credit portfolio, constituting 22% of the total in 1Q08. The highest increase was observed in the credit facilities extended to the transport and communication sectors, which rose by 205% (from SR7bn in 2006 to SR21bn in 2007). Considering the financial sector performance over the last half a decade, the total credit facilities posted a 5-year CAGR (2002-07) of 23%.


The aggregate consumer loans increased by 2% (from SR188bn in 2006 to SR191bn in 2007). The highest annual loan growth of 21% was experienced in credit cards segment. Although consumer lending backed by the increasing wealth status of the individuals and positive demographic situation of the economy offers attractive growth potential, it may not witness historic high growth levels. Real estate financing by the banks recorded a 5-year CAGR (2002-07) of 28%, closing at SR16bn by the end of 2007. The lending to cars & equipment category, amounting to SR37bn in 1Q08, continued to lead the consumer loans segment. This was followed by the facilities extended for real estate financing.

In terms of credit facilities by their maturity period, short term lending stood at SR348bn, and accounted for 58% of the total credit facilities of SR595bn in 2007. The trend continued in 1Q08 as the short term lending was recorded at SR379bn (i.e. 59% of the total). Medium term lending of SR83bn and long term lending of SR164bn in 2007 had a share of 14% and 28%, respectively, in the total credit facilities. Going forward, with the increasing activity in the real estate sector, long term credit facilities are expected to grow at a faster pace as compared to others.

Overall, it is believed that the banking sector in Saudi Arabia, due to the active participation of foreign banks, is becoming increasingly competitive and would need domestic banks to gear up for the market competition. Growth opportunities are abound in the region for players who are willing and prepared to meet the challenges. The market segments that hold attractive growth potential include private and priority banking, small to medium enterprise services, banc-assurance, mortgages, and Islamic banking.


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