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Aug 17 2011

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Saudi Arabia: Financial services report

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Financial services report: Overview

• Saudi Arabia, the Arab world's largest economy, will grow by an average of 5.4% in real terms from 2011-15 as oil prices remain high. The political instability that has stuck much of the rest of the Middle East and brought down governments in Tunisia and Egypt is unlikely to threaten the stability of the ruling Al Saud family in the forecast period.
• The financial services sector, including insurance and business services, accounted for 15.3% of GDP in 2010. In the first quarter of 2011, the contribution of financial services grew by 3.4% year on year and picked up by nearly 8% quarter on quarter.
• Saudi GDP per head is among the highest in the region but considering the large population, expected to reach nearly 32m by 2015, it is lower than some regional peers. Saudi GDP per head (on a purchasing power parity basis) will average US$26,150 in 2011-15, compared with US$42,461 in Kuwait, US$55,845 in the UAE or US$74,910 in Qatar.
• The Saudi Arabian Monetary Agency ( SAMA , the central bank) will maintain the riyal's peg to the US dollar despite downward pressure on the US currency following a downgrade of US sovereign debt in 2011. SAMA may raise rates as a precautionary measure if inflation rises too quickly but in effect surrenders monetary policy to the Federal Reserve (the US central bank).
• Saudi Arabia will record sizeable current-account surpluses in the forecast period, meaning there will be ample reserves to defend the currency. Total foreign reserves, including gold, were US$490bn as of June 2011.
• Four of the Gulf Co-operation Council (GCC) countries (Saudi Arabia, Bahrain, Kuwait, Qatar) are proceeding with plans to set up a single currency in the region. The UAE and Oman pulled out of the project but could rejoin in the medium term. Several technical issues need to be agreed between members and we do not expect a single currency until 2015 at earliest.

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Financial services report: Banks

• There are 23 institutions licensed to carry out banking services in Saudia Arabia, according to SAMA . Of these, 12 are classified as Saudi institutions with the remainder branches of foreign banks. Major domestic players include the National Commercial Bank, Samba Financial Group and Al Rajhi Bank. Several regional banks—Emirates NBD of the UAE and Gulf International Bank of Bahrain—have presence in Saudi Arabia as do several major internatoinal instutitions, including JPMorgan Chase (US) and BNP Paribas (France).
• There are four fully Islamic commercial banks—Al Rajhi, Alinma Bank, Al Jazira Bank and Al Bilad Bank—although other banks offer Islamic products and services. They comply with restrictions in Islamic law, most importantly against the payment or receipt of interest.
• Total assets of the banking system as of June 2011 were SR1,507bn (US$401bn), the vast majority of which were resident assets. Foreign assets only accounted for 13.4% of total assets but these have been rising steadily since 2004. The government is pushing to make the capital, Riyadh, a financial centre but will struggle to compete with more established hubs such as Dubai and Bahrain (although the island kingdom is losing some ground after unrest earlier this year).
• Credit growth has slowed in recent years, and was 5.7% year on year in 2010. This is down from highs of 37.4% and 39.9% in 2004-05. There is a high level of traditional risk aversion among Saudi lenders. A shortage of transparency in the broader corporate sector also limits the banks' willingness to lend.

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• Credit growth will be squeezed in the coming years owing to the availability of direct finance from the state. For example, the Saudi Electricity Company will receive a US$13.6bn, 25-year loan from the government. The government announced a US$130bn spending programme in early 2011 in a bid to combat unrest spilling into Saudi Arabia from other troubled Arab states.
• Consumer finance remains underdeveloped in Saudi Arabia. Total consumer loans outstanding stood at just SR217.5bn at end March 2011, according to SAMA . At this level, they account for just 27.7% of overall Saudi banking claims on the private sector.
• A game changer in the banking landscape would be the approval of a decade-long debated mortgage law. Currently, more than 55% of Saudis rent owing to high land and housing costs. The absence of any clearly defined mortgage regulation has limited the introduction of any home-finance products.
• Banks listed on the Tadawul, the Saudi stock exchange, reported strong second quarter profits in 2011. The aggregate profits of the 12 commercial lenders rose 15.3% year on year. At the end of 2010, only three banks had loan-loss coverage of less than 100%.
• High-profile defaults at two Saudi consortiums—Saad Group and Ahmad Hamad Algosaibi & Brothers—shook the local financial scene in 2009, driving up provisioning at Saudi and regional banks. The fallout from the defaults has been an improvement in credit controls, effectively cutting out name-based lending. Instead, Saudi banks will increasingly scrutinise business plans and secure specific collateral.

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Financial services report: Insurers