SAUDI ARABIA: THE THRIVING BANKING SECTOR

Highly capitalized and boasting healthy margins, Saudi banks are unlikely to feel much fallout from the country’s slowing economy and the impact of low oil prices.

Almost nobody expected oil prices in late 2014 and early 2015 to fall precipitously. But most expect Saudi Arabia’s banks, with combined assets of over 1.6 trillion Saudi riyals—the second-largest asset base in the Gulf region after the UAE—to escape largely unscathed, even if growth in the broader economy slows, which most expect to happen.

David Dew, managing director of the Saudi British Bank (SABB) says the government is committed to maintaining spending. Indeed, if it decides to run a small deficit, rather than using some of the country’s estimated $750 billion of reserves, this could lead to some interesting financing opportunities for local banks.

“The last decade has been one of plenty with high oil prices and significant government spending—particularly on infrastructure—trickling down and improving competitiveness in the non-oil economy. We expect this broad trend to be sustained as positive growth continues,” Dew says.

Jason Tuvey, Saudi banks analyst at Capital Economics in London, generally agrees. Of the three ways Saudi banks could feel an impact—through energy companies’ defaulting on loans, through lower prices’ leading to a wider current-account deficit, forcing devaluation, and by sustained lower oil prices’ impacting on incomes in the wider economy—only the last, he believes poses any real threat. “Banks are generally well-placed to weather a period of lower oil prices, aided by the fact that their exposure to the oil and gas industry is actually quite low, accounting for less than 4% of total loans,” says Tuvey.

Tuvey admits, though, that nonperforming loans—currently the lowest in the region at around 1.3%, according to a report last year by Albilad Capital—could rise slightly, though hardly to a worrisome degree, given the substantial capital buffers of Saudi banks. The sector’s capital adequacy ratio, at around 17% to 18%, is well over double the 8% required by SAMA (the Saudi Arabia Market Authority). The main concern, then, is that “credit may not be as supportive of growth as in recent years,” Tuvey says, although initial signs suggest consumer demand is holding up, boosted by the fact that net debt levels in the kingdom remain low by regional and international standards.

The other factor that is expected to help uphold GDP growth is government projects, particularly in infrastructure: Some $400 billion of projects are planned in the coming years, alongside other ambitious plans (including the building of the $1.3 billion Freedom Tower in Jeddah, which is to be the tallest in the world at one kilometer high). Saudi banks will play a key role in arranging finance for all these.

“The banks typically enjoy sound liquidity and funding, low-cost deposits and healthy margins, which limits excessive competition and price wars. Therefore, it is unlikely that the banks will suffer too much pain in 2015,” says Redmond Ramsdale, Saudi banks analyst at Fitch Ratings. He adds that the high level of concentration in the sector—over 90% of market share is held by just 12 banks—suggests consolidation is unlikely. “The Saudi banking system is a small, concentrated industry…and there are strong barriers to entry (including big barriers to getting a license), so we are unlikely to see a large inflow of foreign banks,” he maintains.

Initial figures for late 2014 confirm the generally bullish mood for Saudi banks, with fourth-quarter profits looking very healthy. Bank Al Bilad’s fourth-quarter income rose 16.5% to 249 million riyals, Saudi Hollandi’s fourth-quarter net income rose by an astonishing 33% to 462 million riyals, and Riyadh Bank saw fourth-quarter income up 3%, or 1 billion riyals.