By Ed Attwood
Net profits SBB at rose 53 percent last year. MD David Dew explains why - despite the abundant liquidity in the system - the kingdom’s banking sector is a tough nut to crack
Around half-way through last year, Saudi Arabia’s net foreign assets broke through the half-a-trillion-dollar barrier. They now stand at around $536bn, having risen 22 percent during the course of 2011.
To put that into perspective, the kingdom is sitting on a cash pile that is roughly equivalent to its own annual gross domestic product (GDP), and significantly bigger than the GDP of countries like Norway, Iran and Poland.
It is a colossal sum, and its rapid growth shows no sign of slowing down. The figure, along with the stubbornly high oil price, goes some way to explaining why King Abdullah was able to announce $130bn worth of additional spending plans last year, which would have crippled the budget of most normal countries. It also explains why Saudi Arabia’s banks are in a remarkably enviable position.
For David Dew, the managing director of one of the kingdom’s biggest lenders, Saudi British Bank (SABB) — which is 40 percent owned by HSBC — the forecast for 2012 looks as strong as ever, helped by the effects of last year’s government stimulus.
“We are planning for real growth in the economy this year in Saudi in the four-to-five percent range,” he says. “If you then look at the banks’ balance sheets and you look at the overall market for Saudi banks — which grew by roughly ten percent, maybe a little higher for deposits, but roughly ten percent — I would say our projections for the overall Saudi banking sector balance sheet for this year would be in the ten-fifteen percent range, or roughly double the size of the underlying real growth in the economy.”
Research carried out by Arabian Business shows that the country’s eleven listed banks, plus unlisted National Commercial Bank, made a total of SAR7.6bn ($2.02bn) in profits in the last quarter, a sixteen percent rise compared to the same quarter last year. Over the year as a whole, the banking sector pulled in SAR28.1bn ($7.49bn) in profits, an eighteen percent increase over 2010.
From the worldwide perspective, those are pretty healthy returns. One fly in the ointment, however, has been the provisioning levels that most Saudi lenders have had to implement due to a pair of high-profile corporate bad debtors. Between the end of 2008 and 2010, non-performing loans held by listed banks rose by 132 percent to SAR10.2bn.
However, Dew thinks that this period of high provisioning has now largely come to an end — a factor which should lead to even stronger profits during the course of this year.
“I believe what you saw in 2011 was a return to more normal provisioning levels among all the Saudi banks and SABB was no exception to that,” he says. “Provisioning is still a little higher than we would wish — and higher than over the average length of the cycle – but it is on a downward trend among all Saudi banks.”
In the final quarter of last year — amid a mixed bag of results published by Saudi lenders — SABB posted a 65 percent rise in net profits to $174m, which the bank attributed at the time to a drop in operating costs. Meanwhile, full-year results showed net profits rising 53 percent to SAR 2,888m against the year before.
“The key drivers of the results, as always, are the revenue numbers — which I think were broadly in line with the overall market; costs, where we have taken some very effective cost-control measures during the course of 2011, and provisioning numbers,” says Dew. “But in any given quarter, you expect to see some level of stability in terms of revenue and costs, but you can see swings in provisioning numbers, so I think it would be more accurate and realistic to look at the overall results for the year, rather than focus on a particular quarter.”
With numbers like that, one would assume that it’s been an easy year for SABB. Not so, according to Dew. While he is happy to tick off the strong economic fundamentals on his fingers — the oil price, strong demographics, hefty foreign reserves and so on — he does indicate that the sector does face some challenges. One of those is competition.
While the number of banks in the kingdom is relatively small — certainly in comparison to countries like the UAE and Qatar, where there are far more lenders catering to a fraction of Saudi Arabia’s population — competition is cut-throat. As a result, any attempt to grow market share is tough.
“The banks compete quite aggressively on price,” Dew says. “They compete particularly aggressively for quality assets — both corporate and retail. So despite the growth in balance sheets, the banking system is not seeing similar growth in overall profitability, or, indeed, margins.”
The managing director adds that he expects those pricing pressures to continue this year, particularly given the healthy liquidity that the sector has built up during a period where it has been more risk averse than in the past, and thus more reluctant to lend. Given that the Saudi Arabian Monetary Agency (SAMA) — the kingdom’s central bank — mandates that all banks must adhere to an 85 percent advances-to-deposits ratio, the resulting liquidity means that lenders can afford to try and undercut each other.
“If the banks are competing aggressively on price, then they are all, clearly, trying to grow ancillary business and generate non-funds income,” Dew points out. “But, in some respects, these are nice problems to have. And I do not see any bank consolidation taking place.”
For SABB, that ancillary business largely focuses around its somewhat unique proposition for the Saudi market. Via its close ties to HSBC, the bank is positioning itself as the portal through which its customers can access international markets.
“On the corporate side, we help our clients connect with the rest of the world — so whether it is trade financing, trade solutions, whether it is payments and cash-management solutions, or whether it is treasury and foreign exchange solutions,” Dew says. “Or whether it is to facilitate capital flows and investment flows both in and out of the kingdom. And we are seeing good growth in pretty much all of those areas I have mentioned.”
However, that growth in ancillary revenues has not led to a sizeable gain in market share. Dew says that SABB’s portion of the Saudi banking sector sits at roughly ten percent, a number that he says has been “pretty consistent” over a long period of time, despite the entry of Bank Al Bilad and Alinma Bank into the market over the past five years.
“The banks are remarkably good at defending market share — this does not change significantly from year to year, and it has not changed significantly over a five-year — perhaps longer — period,” he says. “They [the new banks] have competed aggressively and they have developed a level of market share, so the other banks have clearly lost out, but the new entrants have had to fight very hard…and of course the overall market has grown.”
But one area that doesn’t interest Dew quite so much — despite the media clamour — is the long awaited introduction of Saudi Arabia’s mortgage law. The SABB official believes that the new legislation will not automatically lead to a flurry of lending from the kingdom’s banks.
“I think the mortgage law — when it is eventually passed, and clearly it has been under discussion for a long time — will help,” Dew says. “But I do not see it as a panacea that will automatically resolve the housing issues in Saudi Arabia and, in particular, the pressure on affordable housing.”
Last year, the Shoura Council — Saudi Arabia’s highest consultative body — pushed through their approval of the mortgage-financing law, which now needs only to be approved by King Abdullah. However, the draft legislation is still yet to be signed off.
Dew, whose firm was the first Saudi lender to provide a specific home loan product seven years ago, suggests that some banks might be put off offering mortgages due to long tenures and fixed interest rates.
“The biggest concern we have in that business is actually funding and an interest-rate mismatch,” he says. “By that I mean we are lending at essentially fixed rates for long periods of time — fifteen to 25 years — without the ability to match fund.”
“So we and the other banks providing this financing are taking interest-rate risk. And that, for us, is a bigger concern, and a bigger risk factor, than the fact that there is, or is not, a mortgage law.”
In 2011, King Abdullah announced that 500,000 extra homes would be built in the kingdom. Overall, around 1.65 million homes — or 275,000 units annually — are expected to be built over the next five years.
There are also signs that banks are more willing to lend after a lengthy period of provisioning and risk aversion. January data from the Saudi Arabian Monetary Agency (SAMA), showed that lending to the private sector rose by 11.7 percent year-on-year in January — its highest gain for two years.
“The mortgage law will help regulate the whole industry; for example, it will help to regulate lending entities that at the moment are not regulated by SAMA,” says Dew. “But I do not think the mortgage law by itself will make any significant difference to SABB’s home loan policies or products.”
But Dew says that there appears to be more interest in another potential growth area — that of sukuk issuance. Earlier this year, SABB’s local partner, HSBC Saudi Arabia, led the successful ten-year SAR15bn issuance from the General Authority of Civil Aviation (GACA), which was three times oversubscribed. That move was interpreted by many as a government push to get behind sukuk and conventional issuances, which have dwindled in the last couple of years.
“My perspective is that the market will grow — there will be more issuance in 2012, and I think you will see growth in both sukuk and conventional debt issuance,” Dew says. “It also comes back to the point about competition for quality assets; there is liquidity in the system and there are investors willing to invest in quality assets at a reasonable yield.”
The SABB managing director is reluctant to give a forecast for the bank’s performance in 2012 — understandable, given that it is listed — but does indicate that the lender would expect “get its fair share” of the projected ten-fifteen percent balance sheet growth across the sector.
Long term, he sees Saudi Arabia economic fundamentals as remaining positive, despite the issue of unemployment, which remains one of the kingdom’s key challenges.
“I actually do not see it as a challenge from the numbers perspective, if you look at the breakdown of population,” he says. “Of the, say, 28 million population, some six to seven million are expatriates, mostly workers. What is the Saudi unemployment rate, say ten percent of the workforce, so under one million? So it is not a jobs problem per se.
“There may be education issues, there may be skills gaps, but these can and are being addressed. I think for every challenge that comes along, it brings an opportunity.”