Saudi Arabia 2016 | FINANCE | REVIEW: BANKING

Like the broader real economy, the Kingdom of Saudi Arabia's banking system has been hunkering down for the new global climate of low oil prices, principally by diversifying its sources of revenue.

The Saudi banking sector is greatly concentrated, such that more than a 90% market share is retained by 12 banks. Nonetheless, as in any other nation, it reacts to wider circumstances. Official data reveals that in June 2016, assets at the SAMA (the Saudi Arabian Central Bank, and also its watchdog) slid $11 billion MoM to $562 billion, down 15.9% YoY, having peaked at $737 billion in August 2014. This occurred as the government drew down its reserves in light of the budget deficit sparked by low oil prices. The IMF sees the banking system weathering hydrocarbon turbulence, but advises SAMA to scrutinize credit quality and bolster the macro-prudential framework, as well as strengthen its liquidity forecasting and management frameworks.

Turning to the banking sector proper, in contrast to better years, where Saudi banks had accumulated vast deposits from huge government oil revenues, lower oil prices oblige lenders to acclimatize to tighter liquidity, as government revenue once placed as deposits with banks tend to the budget deficit. As gauged by the total assets of banks in the country, sector activity rose 3.6% in 2015 and by a slender 0.2% in year-to-April 2016. Funding saw a deceleration in the first four months of 2016 on notably weaker deposit inflows to banks, rising just 1.9% in 2015 and 0.4% year-to-April 2016 to $426.2 billion. Deposits, however, represented around 72% of total balance sheets at end-April 2016.

Alarm bells for the banking sector had, of course, begun ringing once it became clear that the initial collapse of oil prices was not a flash in the pan. But before we address that, it is worth stressing the Kingdom's well-rooted banking landscape, where robust barriers to licensing make consolidation a dim prospect. In actual fact, the banking universe is able to withstand the headwinds from hydrocarbons as its exposure to them today accounts for under 4% of total loans. Meanwhile, asset quality strength prevails, as the sector's ratio of nonperforming loans, at 1.3%, is the region's lowest, in diametric opposition to the nation's status as the largest oil producer. According to finance minister Ibrahim bin Abdulaziz al-Assaf, “Banks will continue to remain exposed to event risks stemming from persistently high singl

e-party exposures—although we estimate that around 10% to 25% of banks' top 20 loans are either to the government or wider public sector." In 2014, domestic credit to the private sector in Saudi Arabia as a percentage of GDP was at 44.9%, albeit down YoY from 45.9%.

In March 2013 the mortgage banking law was ratified in response to the growing population's demand for home ownership. Aside from a framework for banks and other entities to become financers to this segment, it introduced a maximum loan-to-value ratio of 70%. The sector has trodden carefully in the first instance to assess how, and to what extent, foreclosures might need to be addressed as the economy bumps along. Note too, that the sector's capital adequacy ratio of between 17% and 18% more than doubles the 8% stipulated by SAMA. In terms of banking-sector profitability, while net profits had risen 12.5% in 2014, the number halved to 6.3% in 2015 and 1.8% in the first four months of this year.

Saudi banks also remain harried by the steady withdrawal from the market of the Saudi Government Development Bonds that had financed the deficits of the 1990s, and that had kept state budgets flush. Local banks have had to turn to such alternatives as short-term Saudi treasury bills, issued weekly at lower rates. Meanwhile, the Islamic contingent of the banking system has pursued mutajara transactions (a sharia-compliant exchange based on credit) with SAMA instead of reverse repos and treasury bills. SMEs, too, retain sector interest.


A warning shot crossed the sector's bows in March 2016, as Moody's downgraded Saudi Arabia's banking system from “stable" to “negative," predictably citing anemic oil prices. Note that the Kingdom's credit rating had earlier been pruned two notches to A- by Standard & Poor's. Moody's expectation is for real growth deceleration to 1.5% for 2016 and 2% for 2017 (a figure echoed by the IMF), thus notably below the 3.4% of 2015, with average oil prices of $33/bbl and $38/bbl in 2016 and in 2017, respectively. The expectation, too, is for loan growth to slip to between 3 and 5% percent this year, from 8% in 2015, and the 12% of 2014. That said, overall sectoral profitability is somewhat cushioned by, among other factors, the prevailing low cost of funding and zero corporate tax rate regime.

Moody's also cited an estimated 14% decline in state spending over 2016 from the stratospheric levels made possible while oil prices were at above $100/bbl. The agency estimates that around 10-25% of banks' top 20 loans are either to the government, or wider public sector. Yet, the wholesale industrial diversification envisaged in the national Vision 2030 has an estimated price tag of $4 trillion, which tends to mute this argument somewhat. In pursuit of GDP growth, around $400 billion of projects are earmarked for the coming years, and Fitch analysts argue that even if the government were to opt for a modest deficit, rather than tapping the nation's estimated $750 billion of reserves, local banks would reap the resulting financing opportunities. The Kingdom's largest financial institution, National Commercial Bank (NCB), will be a vital component in these developments through its financing of private sector activities across the industrial matrix in pursuit of that all-essential diversification.


According to Islamic Finance, the sharia-compliant finance industry, as measured by hard assets held by participating institutions, is estimated at between $1.88 trillion and $2.1 trillion, with an estimated growth to $3.4 trillion by end-2018. The stellar rise of this banking model in Saudi Arabia has underpinned overall global performance. The Kingdom's participation banking assets posted a 20% CAGR for 2010-14 compared to a respective 4% CAGR for their conventional counterparts. Notably, as of 2014 the banking sector of Saudi Arabia was the first to gain a majority penetration of the overall sector at 51.2%, up from 38% back in 2010. Participation banking assets of $291 billion had supplanted conventional banking assets of $255 billion to achieve this. The Kingdom's largest listed lender, NCB, is a major force in participation banking. Its sharia-compliant finance in 2015 reached 82% of the total financing portfolio. Operating income generated from sharia-compliant transactions climbed to 77%, and its entire network of retail branches provides exclusively sharia-compliant products and services.


The first half 2016 performance of Saudi Arabia's banks revealed telling pressure on profitability, arising from challenging funding costs and tighter liquidity on shrunken deposits. NCB posted the largest profit of SAR5.06 billion on YoY growth of 2%. In 2015 NCB saw a 5% rise in net income to SAR9.1 billion, marking a historic high, up from SAR8.7 billion the year before. It went on to post a 3.2% higher 2Q2016 net profit of SAR2.44 billion. Closely working with the government, its deposits shed 12.8% YoY to SAR314.7 billion. Loans and advances of SAR264.7 billion had risen 13% YoY. Yet its growth has also been contingent upon the ability to best diversify its income sources.

As recently as August 2016 the government announced plans to establish a $1.1 billion fund to foster the growth of its venture capital industry, and to prop up SMEs. In conversation with TBY, NCB's Chief Economist, Dr. Said Al Shaikh, explained the institution's focus on Saudi SMEs, which he argues had been underrepresented by the banking sector. “We are focusing on our SMEs because, even in downward cycles, they still continue to grow. They are less affected by major economic changes such as falling oil revenues and government budgets, and largely deal with some of the services and commodities that are generated by population demand and are influenced by demographic factors." Touching on a current challenge to the sector, he added, “In addition, they also provide enough liquidity for the banking system, because they are holding cash that will strengthen our depository base." Further afield, while seeking to grow its Turkey operations—it is a majority stakeholder in Türkiye Finans—the bank is also pursuing plans for overseas expansion to markets such as Malaysia, Indonesia, and Egypt.

Elsewhere, by YoY growth, Al-Rajhi Bank led the field with its 17.6% first-half growth in net profits at SAR4.06 billion from SAR3.46 billion. In contrast, among those on a downtrend was Samba Financial Group (SFG), whose profits fell 1.4% YoY to SAR2.57 billion in 1H2016 from SR2.61 billion. Saudi Hollandi Bank (SHB) and Arab National Bank (ANB) both saw a net profit fall of 2.4% YoY for the first half. The former institution has a rather special history in Saudi Arabia, which Managing Director Dr. Bernd van Linder gave details of in a TBY interview. “We were the first bank in the Kingdom, established in 1926, so we are clearly grounded in, and an integral part of, the development of the Kingdom. For about 30 years, we were the only bank in Saudi Arabia, and for part of that time we acted as the Central Bank. We were also the first Saudi bank to facilitate a transaction with Aramco." And meanwhile, other 1H2016 net profit realizations included a 0.9% YoY rise for Riyad Bank to SAR2.32 billion, a 1.8% rise for Saudi British Bank (SABB) to SAR2.29 billion and a stronger 3% YoY rise at Banque Saudi Fransi (BSF) to SAR2.12 billion.

The banking sector is comfortably remote from exposure to the travails of oil, and will continue to enjoy some comfort from state investments as the government's ambitious project to broaden the real economy by 2030 takes shape.