The profitability metrics of the top 10 banks in the Kingdom of Saudi Arabia witnessed an improvement with post Covid-19 economic recovery, according to the latest report published by leading global professional services firm Alvarez & Marsal (A&M).
The country’s 10 largest listed banks analysed in A&M’s KSA Banking Pulse are Saudi National Bank (SNB), Al Rajhi Bank, Riyad Bank (RIBL), Saudi British Bank (SABB), Banque Saudi Fransi (BSF), Arab National Bank (ANB), Alinma Bank, Bank Albilad (BALB), Saudi Investment Bank (SIB) and Bank Aljazira (BJAZ).
The Saudi Arabia (KSA) Banking Pulse for FY 2021 report revealed that the aggregate loans and advances (L&A) grew 14.2 percent year-on-year (YoY) as all the top ten banks reported growth. However, deposit mobilisation slowed down in FY’21.
The KSA Banking Pulse report attributed the 15.5 percent YoY growth in net income to higher operating income, which climbed 3.5 percent YoY while impairments lowered 28.9 percent, compared to the previous year.
The net interest margin (NIM) declined by 18 bps to 2.9 percent in FY’21, compared to the previous year, as interest rates fell to a 15-year low.
Despite the lower NIM, the banks’ increased profitability demonstrates higher efficiency across the sector.
Using independently sourced published market data and 16 different metrics, the report assesses banks’ key performance areas, including size, liquidity, income, operating efficiency, risk, profitability, and capital.
According to the report, the prevailing trends identified for FY 2021 were:
1. L&A growth remained strong; supported by recovering consumer spending while deposits growth slowed down in FY’21.
The aggregate L&A increased at a higher rate of 14.2 percent YoY in FY’21 as compared to 12.8 percent YoY in FY’20.
This was driven by robust performance in the mortgage segment across the banking sector. The aggregate retail mortgage across the KSA banking sector increased by 47.8 percent to SAR 413bn.
The deposit growth was slower at 7.2 percent YoY as compared to 9.2 percent YoY in FY’20. Consequently, aggregate loan-to-deposit ratio (LDR) rose to 91.5 percent from 86.0 percent, highlighting the higher consumer spend as the economy continues its post-pandemic recovery.
2. Total operating income increased by 3.5 percent YoY. The growth was primarily due to higher net interest income (+4.0 percent YoY), resulting from higher cost efficiencies during the low interest rate environment and net fee & commission income (+9.9 percent YoY).
The growth was partially negated due to lower currency translation related losses and lower operating income (-8.3 percent YoY).
3. Aggregate net interest margin (NIM) declined by 18 bps YoY to 2.9 percent in FY’21, largely on the back of low interest rate environment.
Saudi Arabia’s Central Bank had previously cut repo rates by 125 bps in March ’20 to c.s 1.0 percent, the lowest interest rates since 2007, to support the economy during the pandemic.
Aggregate yield on credit declined by 74 bps YoY, while cost of funds fell 23 bps YoY.
4. Cost-to-income (C/I) ratio decreased by 0.2 percent points YoY to 35.2 percent, as banks’ administrative expenses increased at a slower pace.
The aggregate operating income (+3.5 percent YoY) increased at a higher rate compared to operating expenses (+2.9 percent YoY).
5. Total impairments decreased by 28.9 percent YoY to SAR 12.4bn, as banks reported lower provisions, alongside the economic recovery, due to higher consumer spending, increasing oil prices and infrastructure spend.
Consequently, cost of risk increased by 39 bps YoY to 0.7 percent.
6. Aggregate net profit improved by 15.5 percent YoY, due to higher operating profit and decreased provisions.
This resulted in an increase in profitability ratios such as Return on Equity (RoE) and Return on Assets (RoA) to 11.4 percent and 1.7 percent from 10.9 percent and 1.6 percent, respectively.
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