Saudi banks' mortgage potential reaches $133bln

Banks with highest retail market share set to benefit most

Saudi currency, riyal, is seen at a local currency exchange in Manama, Bahrain October 16, 2018. Image used for illustrative purpose

Saudi currency, riyal, is seen at a local currency exchange in Manama, Bahrain October 16, 2018. Image used for illustrative purpose

REUTERS/ Hamad I Mohammed

Saudi Arabia’s size of untapped mortgage potential is estimated at around 500 billion Saudi riyals ($133.3 billion), which makes up one third of Saudi banks’ total loan book to the private sector, according to a recent report.

Over the next decade, around 1.22 million new homes are expected to be constructed in the kingdom, according to Al Rajhi Capital, with the current run rate of around 0.18 million homes in 2019, set to pick up to 0.19 million a year for the next three years.

“Banks with a strong retail franchise are most likely to benefit from mortgage growth as they should be able to leverage their relationship with retail customers to cross sell the product. Accordingly, Al Rajhi, NCB and Riyad are placed well with retail market share of 37 percent, 22 percent and 10 percent respectively as on 2018 end,” it said.

Saudi economic overhaul plan ‘Vision 2030’ aims to achieve home penetration rate of 70 percent among its citizens by 2030.

With the Saudi government subsidizing home ownership, the effective interest is almost 0 percent for a 20-year mortgage worth 500,000 Saudi riyals, and around 3.5 percent for a mortgage worth 1 million Saudi riyals. 

“Given the higher benefit in purchasing house at the lower end and lower income category of buyers, the average mortgage value has declined to SAR 0.43 million Saudi riyals in Q3 2019 vs. 0.56 million Saudi riyals in Q3 2018,” the report said. 

“Assuming 80 billion Saudi riyals increment in mortgage market next year and everything else remaining constant, we estimate that mortgage could add c.5% of the TTM profits (trailing twelve months) to the sector’s bottom line in 2020,” it said. 

There could also be a spill over effect on allied sectors (for example, building materials) which could further aid loan growth,” it added.

Al Rajhi Capital assumes that home ownership penetration is 50 percent as of 2018 with the rate set to increase to 70 percent by 2030 based on Vision 2030 targets.

It also assumes that housing will remain subsidized with up to SAR 500,000 interest cost on mortgage covered by the Saudi government, with a family size set to remain constant at six members per household.

Currently, Saudi families which own houses, already have two houses on an average per family, according to Al Rajhi Capital calculations.

(Writing by Nada Al Rifai , editing by Seban Scaria)

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© ZAWYA 2019

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