Resilient Saudi Banking To Adopt Conservative Credit Cycle, NCB Says
The Saudi domestic banking system has shown resilience in 2009 and remained sound, liquid and profitable despite a slump in net profit growth, the National Commercial Bank (NCB) has said in its 2009 nine-month banking report. Though net profit growth decelerated to -7.3% year-on-year this year, the Saudi banking system has shown marked strength and relatively high profitability in comparison to its global counterparts due to a greater reliance on core banking activities, available liquidity, a lower non-performing loan (NPL) ratio, and little recourse to wholesale funding, said the bank. “The soundness of the Kingdom’s banks relative to many of its peers after the crisis, will help speed up the country’s return to a higher growth trajectory once the global economy settles down and non-oil private consumption and investment regains momentum,” NCB said. The report cited the “prudent and flexible policy-making regime” of the Kingdom’s central bank, the Saudi Arabian Monetary Authority (SAMA), as key to the banking system’s resilience to the global financial downturn, though no banks had to be rescued or nationalized.
However, over the first three quarters the total stock of assets in the report’s covered universe of 11 banks – 96% of system-wide total assets – rose by a record low of only 3.8% year-on-year. The sudden stall in corporate driven private credit growth – the dominant driver of credit growth since 2005, when SAMA issued tighter regulations on consumer loans – is cited as a primary cause for the slowdown, having fallen from a high of 34.9% in August 2008 to 2% by the end of September 2009. Corporate credit is said to have suffered due to the infeasibility of a number of planned projects, declining domestic demand and cautious lending. NCB said that the steep upward credit cycle had run its course, and that micro-level dynamics in the banking sector show evidence that the banking system will adopt a ‘new normal’ credit cycle, “whereby conservatism will be the name of the game,” as banks reassess their current credit portfolios, said NCB. “Indeed, the moderate credit cycle in large part is driven by a slowdown in the non-oil private GDP growth rates for 2009 and 2010, projected at 2.2% and 2.8%, respectively, which is below the historical average of 5.2% posted during 2003-08,” it added.
Saudi banks’ consolidated balance sheet in the third quarter posted a single digit annual growth rate for a second consecutive quarter. “When compared to the all-time high 32.3% and the staggering 30.7% year-on-year growth rates recorded by the end of 2Q08 and 3Q08, respectively, the performance in 3Q09 is a reminder of the moderation theme that will contain any tendency towards an upside trajectory that resembles the consumer and corporate-led credit cycles,” said the bank. The limited growth in the balance sheet was further attributed to growth in cash and balances with SAMA, which contributed 3.2% in the overall 3.8% growth in assets. Investments and net loans contributed -1.7% and 1.3%, respectively, with the contributions of net loans and advances being the smallest on record. Such figures are further evidence that a more balanced approach will be the new credit cycle norm, estimates the bank, adding that “domestic banks will have to strike a balance so to avoid over expansion on the upside or over contraction on the downside, the premises behind taking uncalculated risk or losing market share.”
In the short-term, the bank projects that slowing growth in loan and investment books will continue the trend of sluggish balance sheet growth. Addressing the challenges ahead for the domestic banking system, NCB highlights deterioration in asset quality due to the increase in non-performing loans, which it in part attributes to undisclosed exposures to the debt consolidation of “a few family groups in distress.” It also notes a squeeze in net interest margins due to the higher competition and a low interest rate environment, and a decline in fees from banking services.
Key Parameters Of NCB Coverage Universe
Assets | L/D | NI | G | ROAA | MC | P/B | |
National Commercial Bank | 253.1 | 58.70% | 3.34 | -27.00% | 1.90% | N/A | N/A |
SAMBA Financial Group | 184.1 | 60.50% | 3.71 | 2.60% | 2.70% | 53.6 | 2.7 |
Al Rajhi Bank | 165.4 | 113.70% | 5.3 | 3.90% | 4.30% | 112.1 | 4.1 |
Riyad Bank | 175.7 | 88.80% | 2.12 | 0.40% | 1.70% | 44.9 | 1.7 |
Banque Saudi Fransi | 121.7 | 90.10% | 2.14 | -4.10% | 2.30% | 32.5 | 2.2 |
Arab National Bank | 111.9 | 85.50% | 2.07 | 1.10% | 2.40% | 31.7 | 2.4 |
Saudi British Bank | 123.9 | 88.30% | 2.01 | -11.30% | 2.10% | 39.8 | 3 |
Saudi Hollandi Bank | 63.2 | 82.30% | 0.53 | -42.60% | 1.10% | 11.5 | 2 |
Saudi Investment Bank | 50.6 | 79.50% | 0.64 | 4.50% | 1.60% | 8.4 | 1.2 |
Bank Al Jazira | 29.2 | 70.30% | 0.29 | -6.50% | 1.40% | 6 | 1.3 |
Bank Al Bilad | 17 | 87.10% | 0.05 | -66.50% | 0.40% | 6.7 | 2 |
Notes:
Assets = Total assets in SRbn in 3Q09; L/D = loan to deposit ratio in 3Q09; NI = net income in SRbn in 3Q09; G = Growth in NI in 3Q09; ROAA = Return On Average Assets in 3Q09; MC = Market Capitalization as of 30 September 2009; and P/B = Price/Book as of 30 September 2009.
Sources: Financial statements, Tadawul and NCB.
The slump in year-on-year net profit growth, meanwhile, was largely attributed to high provisioning and the negative contribution of non-asset-based fee income, which fell by double digits to weigh heavily on core operating revenues, it said. But despite lending capacity having reached its limit in 2008, with credit growth exceeding funding base expansions and the loan-to-deposit ratio reaching a high of 86.9%, the critical funding constraint eased markedly in 2009. Such developments promoted a system-wide increase in liquidity, with the ratio of cash in SAMA vaults increasing to 9.9% from 7.1% a year earlier. “This liquidity glut had a positive impact on the SAR interbank market that stabilized around its historical average of 40 bps above the benchmark reverse repo,” NCB said. The bank added that it had maintained its status as the largest bank by asset size, at SR253bn as of September, holding a 19.5% market share. Al Rajhi Bank, meanwhile, remained the Kingdom’s top funding source with a loanbook over SR144bn and an 18.5% market share. The two banks along with Samba Financial Group and Riyad Bank took a 58% market share in loans, deposits and assets, a figure which, based international averages, marks Saudi banking as a relatively oligopolistic sector, NCB said.
Copyright MEES 2010.
