Mortgage growth in Saudi Arabia is likely to be strong having already clocked more than 50% of 2019 disbursements in the first four months of 2020, a report said.
Even during the curfew months of April and May, the mortgage lending data of SR7.5 billion ($2 billion) has been encouraging, added the new study from Al Rajhi Capital, a leading financial services provider in the kingdom.
“Though we expect slower growth for H2 2020, mortgage growth could reach 40+% in 2020 post which we expect much slower growth,” the report said,
Corporate loan growth continues to be driven by refinancing considering the first non-oil real GDP decline in 2020 in at least a decade for KSA. Estimated fiscal deficit at 11% for 2020e implies only a gradual pick up in the pace of large projects, Al Rajhi Capital said.
Yield compression is yet to fully play out given the phased effect between SAIBOR 3m (1.03%) and asset yields. Moreover, currently, SAIBOR’s spread over LIBOR (0.32%) at 70bps is slightly higher than historical spreads.
“We could be going back to the interest rate phase in 2010-2015, where we saw average NIMs at 2.5% as compared to 3.3% in 2019. However, this time there is support through higher mortgage yields. While there could be a decline in mortgage yields of around 1-1.5% from around 6.5%-7.5%, it would take more than a year to see its full effect. Operating expenses are likely to witness a moderate increase in the current environment even as net interest income declines,” the report said.
Cost of risk to increase but likely to be gradual
“During the last oil crash of 2014-15, we saw NPA increasing from 1.2% to around 1.9% in 2019. For the current situation, we expect only a gradual increase. SAMA interest free deposits for liquidity measures are at 1% (SR19 billion) of total loans at the end of Q1 2020 and at SR80 billion (max allocated) could reach 5% of total loans,” the report said.
“However, cost of risk could spike for some smaller banks which grew faster than the rest with lower provisioning. For example, the ratio of sum of provisions in the last decade to the net change in loans remains the lowest at 4% for small banks vs. overall average 9% implying there may be more provisioning to come.
“Banks with exposure to real estate, Mecca region are likely to be worst hit in the current scenario. We expect operating income to decline 1% and net income to decline 10% in 2020 with smaller and most corporate banks showing the most weakness (~25% y-o-y).
“Based on our estimates, only 5 banks are likely to generate RoE more than CoE in the next 2-3 years. We believe most corporate banks and growth-oriented smaller banks are less attractive in this environment while larger banks and retail exposures may be more preferable,” the Al Rajhi Capital report said.
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