Global Investment House – Saudi Arabic Economic & Strategic Outlook – Banking Sector – Saudi Arabia’s financial regulator Saudi Arabian Monetary Agency (SAMA) has been active in liberalizing the sector and has licensed a number of GCC/foreign banks to establish their presence in the Saudi market. Gulf International Bank of Bahrain was the first to acquire a license to open a branch in KSA in 2000. A number of licenses for banks from the GCC countries including Emirates Bank International, National Bank of Kuwait and the National Bank of Bahrain followed. The attraction of the Saudi banking sector surpassed the region, as 3 foreign banks namely, Deutsche Bank, JP Morgan Chase, and BNP Paribas were allowed to start operations in the Kingdom, further opening up the financial sector. Moreover, HSBC has been approved to establish an investment banking operation in Saudi Arabia.
The year 2005 marked the entry of a new player Bank Albilad whose IPO generated huge investors’ response and was oversubscribed by more than 5 times as the number of subscribers reached 8.7mn with a total investment of SR7.75bn. Al Bilad public subscription was considered to be the largest, not just in Saudi Arabia, but also in the region.
Changing asset-liability structure…
During the period 2001-2005, total assets of the Saudi commercial banks grew at a CAGR of 12.6% to SR759.1bn by the end of 2005. In 2005, claims on private sector accounted for 57.4% of total assets while foreign assets accounted for 12% of the total assets. However, foreign assets declined at a CAGR of 2.1% during the said period dropping to SR91.4bn in 2005. Claims on private sector, which include credit to private sector and investments in private securities, increased at a CAGR of 23.6%. Other assets increased at a CAGR of 4.5% during the same period.
Consolidated Balance Sheet of Saudi Arabian Banks
(SR mn) 2001 2002 2003 2004 2005
Cash in Vault 3,453 4,892 4,257 4,474 7,201
Current Deposits 197 1,750 847 3,415 2,238
Statutory Deposits 12,599 14,270 15,465 19,090 21,039
Other Deposits 2,874 7,732 6,094 5,056 2,167
Foreign Assets 99,364 95,490 81,082 92,798 91,430
Claims on the Private Sector 187,064 205,829 228,486 313,928 435,926
Other Assets 166,881 178,274 208,976 216,621 199,074
Total Assets 472,431 508,237 545,208 655,382 759,075
(SR mn) 2001 2002 2003 2004 2005
Liabilities
Business and Individual Deposits 126,829 147,029 163,831 199,285 208,041
Official Entities 3,364 2,981 3,747 11,886 11,210
Quasi Monetary 150,932 178,260 188,734 218,983 262,732
Total Deposits 281,125 328,270 356,311 430,154 481,983
Foreign Liabilities 59,614 42,999 40,063 45,748 65,040
Capital & Reserves 43,793 47,298 47,023 68,812 92,220
Other Liabilities 87,899 89,670 101,811 110,669 119,832
Total Liabilities 472,431 508,237 545,208 655,383 759,075
Source: SAMA
On the funding front, total deposits accounted for the largest portion of funding sources, over 60% on average, during the period 2001-2005. Total deposits have increased at a CAGR of 14.4% during the same period, higher than the increase in total assets, which resulted in the increase in its weight as a source of funding. The total deposits in 2005 increased by 12% over the previous year. This was lower than 18% growth shown in 2004 which can be attributed to the movement of the money towards the real estate and stock market which gave fabulous returns in 2005.
Credit Facilities by Sector
The total domestic credit facilities stood at about SR452.5n at the end of 2005, an increase of 36.2% over the previous year. The total domestic credit facilities growth as per CAGR basis for the period 2001-2005 was 24.6%. The increase in the credit facilities has been the result of low interest rates (although increasing) prompting the borrowers to increase their borrowings and invest in their companies and projects. The maximum increase in the credit facilities was seen in the mining & quarrying sector, which increased by 77.4%, from SR3.8bn in 2004 to SR6.7bn in 2005. The other sectors that saw a major increase in the credit facilities were: Agriculture & Fishing (+77.4%), Finance (+67.7%) and Miscellaneous sector (+41.1%). Miscellaneous sector saw the highest increase in credit offtake in absolute terms, recording an increase SR50.4bn in 2005 over the previous year.
Credit Facilities by Sector
(SRmn) 2001 2002 2003 2004 2005
Agriculture & Fishing 2,138 2,530 2,549 3,785 6,716
Manufacturing & Processing 24,659 24,324 26,604 26,519 34,460
Mining & Quarrying 1,206 715 650 1,252 2,275
Electricity, Water and other Utilities 1,220 1,094 1,837 3,273 3,226
Building & Construction 16,746 20,982 21,955 23,057 31,726
Commerce 40,167 42,194 51,886 62,808 83,054
Transport & Communications 9,917 13,555 12,803 13,406 14,382
Finance 6,703 8,862 11,877 33,839 56,747
Services 9,514 9,718 8,839 12,337 15,097
Miscellaneous 64,534 74,724 82,124 122,722 173,146
Govt. & Quasi Govt. 10,817 11,960 25,844 29,138 31,672
TOTAL 187,620 210,657 246,967 332,136 452,501
Source: SAMA
Increased lending to the retail sector…
Miscellaneous sector was the largest sector constituting 38.3% of the total bank credit facilities. A major portion of this sector comprises of individual consumer credit. Banks have been concentrating to get the maximum portion of this sector on account of high growth, high profit margins and low risk. Consumer lending has been witnessing a strong growth backed by the positive demographic situation of the economy. Real Estate financing by the banks recorded a strong growth reaching SR13.6bn at the end of 2005 compared to only SR3.3bn reported at the end of 2001.
Consumer Loans
(SRmn) 2001 2002 2003 2004 2005
Real Estate Financing 3,295 4,506 5,191 8,790 13,656
Cars & Equipment 13,893 25,568 28,859 27,926 29,025
Other 21,259 22,800 39,255 78,590 137,846
Credit Cards 2,222 2,857 2,579 3,295 4,254
Total 40,669 55,730 75,884 118,601 184,782
Source: SAMA
Short-term credit facilities accounted for 55.4% (58% in 2004) of the total credit facilities in 2005. Medium Term and long-term credit facilities accounted for 11.8% and 32.7% respectively of the total facilities respectively. Long term credit facilities reported a strong yearly 53.3% in 2005 which is mainly attributed to long terms loans given to the real estate sector.
Banking Sector Performance
The Saudi banks have shown consistently high financial performance in the past decade. In the region, Saudi banks are one of the most profitable with Return on Assets (RoA) in 2005 ranging between 2.6% and 5.9%. The combined net profit of the 9 listed Saudi banks and NCB reached a whopping US$7.2bn, recording the yearly growth of 61.2% in 2005. The smallest bank in country clocked the highest growth in the net profit which increased by a whopping 365.8% in 2005 albeit on a smaller base. However, the next highest growth rate was reported by one of the largest players in the arena – Al Rajhi Banking & Investment Corp which reported 91.9% growth in net profit which reached SR5.6bn in 2005.
Net Profit of Saudi Banks
(SR mn) 2002 2003 2004 2005
National Commercial Bank (NCB) 2,433.0 3,012.8 3,531.0 5,011.0
Banque Saudi Fransi (BSF) 1,014.2 1,185.2 1,536.0 2,215.6
Al Rajhi Banking and Investment Corporation (ARBIC) 1,413.2 2,038.1 2,936.0 5,633.3
Arab National Bank (ANB) 584.0 766.5 1,167.0 1,827.6
Bank Al Jazira (BJAZ) 59.2 93.5 187.7 874.4
Riyadh Bank (RB) 1,416.4 1,591.7 2,006.0 2,937.3
Saudi American Bank (SAMBA) 1,857.3 1,436.6 2,506.0 4,018.3
Saudi Hollandi Bank (SHB) 555.2 600.9 742.7 1,051.9
Saudi British Bank (SABB) 972.5 1,257.9 1,636.0 2,504.3
The Saudi Investment Bank (SAIB) 380.4 463.9 587.1 1,064.2
Aggregate 10,685.2 12,447.0 16,835.5 27,137.9
Source: Banks Websites and "Global" Research
Saudi banks are expected to benefit from positive economic conditions currently prevailing in the region. This positive economic environment has already increased interest of regional banks as well as large international banks in the Saudi banking sector.
In 2005, the banking sector in Saudi Arabia is concentrated with the top-4 banks accounting for 59.3% of the total assets of the banking sector, as compared to 59.8% reported in the previous year. This sector is dominated by the National Commercial Bank, which accounted for 20.1% of the total assets of the banking sector in 2005. Smaller banks like SAIB increased their market shares from 4.5% in 2004 to 5.5% in 2005.
Comparative Snapshot of Saudi Banks
2005 (SR mn) NCB SAMBA RIBL ALRAJHI BSFR SABB ARNB SHB SAIB BJAZ
Net Income 5,011 4,018 2,937 5,633 2,216 2,504 1,828 1,052 1,064 874
Total Assets 145,789 108,306 80,079 95,038 67,501 65,928 67,492 39,958 39,581 14,169
Net Investments 52,995 34,093 27,240 80,329 17,037 16,373 20,209 10,484 11,276 2,344
Loans & Advances 75,336 62,386 45,606 227 42,979 40,847 38,779 23,777 19,794 6,911
Customer Deposits 104,959 85,240 52,929 73,684 51,093 50,969 48,832 28,565 27,858 10,816
Total Liabilities 124,153 95,400 69,187 81,569 60,316 58,435 61,155 36,287 34,274 11,499
Shareholder's Equity 21,636 12,906 10,891 13,469 7,185 7,493 6,337 3,672 5,307 2,670
Return on Equity 23.2% 31.1% 27.0% 41.8% 30.8% 33.4% 28.8% 28.6% 20.1% 32.7%
Return on Assets 3.44% 3.71% 3.67% 5.93% 3.28% 3.80% 2.71% 2.63% 2.69% 6.17%
Source: "Global" Research & Tadawul website
In terms of profitability, AlRajhi had the highest return on equity of 41.8%, which is not surprising it being an Islamic bank. Among conventional banks, SABB maintained its leadership position in terms of ROE as it reported ROE of 33.4% in 2005. However, the smallest bank, Bank Al Jazira led the Saudi banking sector in terms of ROA, as it reported ROA of 6.17% in 2005.
Saudi banking sector outlook….
Saudi banks are expected to benefit from positive economic conditions currently prevailing in the region. With the oil revenues at its lifetime high and the government focusing its efforts to increase the non-oil sectors’ participation to the country’s economic development and growth, it augurs well for the banks and other private sector players. This positive economic environment has already increased interest of regional banks as well as large international banks in the Saudi banking sector. As such, we are expecting a healthy competition that should encourage Saudi banks to better position themselves amongst the forthcoming competition by developing their operations further as well as providing their clients with enhanced range of products and services. Improved services and the financial market conditions will help in the repatriation of the Saudi wealth invested abroad which will be conducive for the further growth of the Saudi banking sector.
However, the investment income of the banks has reported strong growth in 2005 as the stock market gave fabulous returns which had a strong impact on the profitability and valuations. Although the core earnings growth of the banks remains strong, the increased proportion of the investment income/one time gains makes the future earnings of the banks volatile.
The new developments on the regulatory front will further push the future developments in the Saudi economy. The debt market is also estimated to grow and provide more liquidity to the Saudi banks in terms of corporate bonds. Islamic banking is one of the promising areas for Saudi banks in which we are expecting the competition to be fierce. Most of the Saudi banks have been working hard during the last few years to capture a slice of this low-cost funding source by introducing new products and services to attract deposits of corporate as well as individual clients. Saudi banks are also expanding in providing different types of Islamic Sharia-complaint products to meet the growing demand for such products. Saudi banks are currently offering a wide range of Islamic products ranging from Islamic corporate loans to Islamic consumer loans and even credit cards. The growth of the Islamic investment avenues will act as a strong motivator for the investors to invest their money in these instruments.
We are optimistic about the economic profile of Saudi Arabian economy in the future in view of the comfortable risk profile and attractive investment opportunities that the economy offers. Investment spending and liquidity will remain at high levels, which will be conducive to the growth of the banking sector. We expect the banks to continue investing heavily in their adoption of the new technology platforms and international best practices which should lead to better customer services.
