Despite above concerns, the
overall liquidity situation of banks
remains sanguine and banks in the
Kingdom are well capitalised to
absorb systemic shocks. Fitch Ratings
recently affirmed its credit ratings
on eleven Saudi Arabian banks and
upgraded its outlook on three banks,
further reflecting the stability in the
Saudi banking sector. Meanwhile, the
implementation of Basel III is unlikely
to put any stress on the Saudi financial
system, as banks in the Kingdom have
maintained a high capital adequacy
ratio since the financial crisis in 2008.
Gross NPLs as a percent of total
loans have witnessed a decline in the
third quarter of 2013 as compared
to the end of 2012. Additionally,
rising coverage ratios among major
banks highlight that they remain well
poised to mitigate challenges arising
due to prospects of a possible rise
in impairments.
With the advent of strong non-oil
growth witnessed in recent years,
Saudi banks have continued to show
resilience and have outperformed
their western peers in terms of
profitability and efficient utilisation
of their resources. The RoE (Return
on Equity)3 for Saudi banks stands at
over 10 per cent compared to single
digit returns at the larger European
and US banks.
Banks
Although banks have high appetite
for lending, their approach has been
conservative. At the end of 2013, the
loan-to-deposit ratio for Saudi banks
stood at 80 per cent, which is below
the SAMA’s prescribed level of 85 per
cent and compared to 74 per cent for
US and 103 per cent for European
banks. Although the loan-to-deposit
ratio can be looked upon favourably as
a means of cushioning the banks from
the impact of a global downturn, it
has constrained the industry’s growth
potential in terms of lending.
leaving out SME’s and the housing
sector. What is required for the
banking sector are regulatory reforms
and initiatives by the government and
the central bank, which can enable
credit flow to these crucial sectors
of the economy. Despite the pickup
in credit growth, SMEs continue to
suffer from lack of financing. The
lending to SMEs as a percentage of
total loans stands at about 2 per cent4
in Saudi Arabia as compared to an
average of over 20 per cent5 for the
rest of the world.
LOAN TO DEPOSIT RATIO
160%
120%
80%
40%
0%
ly
Ita
e
nc
Fra
e
on
z
uro
E
y
an
rm
Ge
re
po
S
a
ing
i
ud
Sa abia
Ar
n
pa
Ja
US
Source: St. Louis Federal Reserve, Ernst & Young Report, SAMA
One of the sectors that has
experienced constraints in financing
from banks is the small and medium
enterprises
(SME’s)
segment.
Historically, banks in the Kingdom
have focussed on sectors such as
construction and manufacturing,
Return
Return Net Interest Tier 1 Risk-Based
NPA’s/
on Assets on Equity
Margin
Capital Ratio Total Assets
Banque Saudi
Fransi
1.8%
12.9%
2.4%
13.7%
0.7%
Samba Financial
2.2%
13.6%
2.6%
18.3%
1.1%
Al Rhaji Bank
3.0%
21.8%
4.1%
17.1%
1.0%
Bank of America
0.4%
3.3%
2.5%
12.3%
0.9%
Citigroup
0.7%
6.4%
2.5%
13.6%
0.5%
HSBC Holdings
0.6%
9.1%
1.7%
14.1%
-
Credit Suisse
0.3%
6.5%
1.2%
17.0%
0.2%
Source: Bloomberg
In fact, SME’s can act as an effective
medium of the much needed job creation
in the Kingdom. Unlocking the potential
of SME’s, however, would require
targeted and continued support from the
government in the form of enabling
capital access to these entities across their
development stages. The current regulatory
framework requires the implementation of
new bankruptcy protection laws coupled
with mandatory corporate governance for
the development of SME’s.
Mortgage financing is yet another
segment that has remained highly
underpenetrated in the Kingdom as a lack
of appropriate framework has prevented
banks from aggressively focussing on
this segment. With demand for housing
expected to remain buoyant, we believe
this segment holds tremendous potential
for driving loan growth. However,
cont. on pg20
www.cpifinancial.net
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