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Mon 24 Oct 2016 02:35 PM

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Saudi housing, SME lending to drive Al Rajhi Bank's growth to 2020

Chief executive of Gulf kingdom's largest Islamic bank says keen to diversify retail revenues

Saudi housing, SME lending to drive Al Rajhi Bank's growth to 2020

Saudi Arabia's efforts to stimulate the private sector and develop the housing market will be the main drivers of growth for Al Rajhi Bank until the end of the decade, its chief executive told the Reuters Middle East Investment Summit.

The kingdom's largest Islamic bank has traditionally focused on consumer banking, from which it derives 70 percent of its 330.5 billion riyals ($88 billion) of assets and between 55 and 60 percent of its revenues.

Earlier this year, Saudi authorities outlined ambitious plans to diversify the economy of the world's top oil exporter away from hydrocarbons, as crude prices slump.

The reform agenda includes tripling the government's non-oil revenues by 2020 and raising the proportion of Saudis who own their own homes in that timeframe by 5 percentage points to 52 percent.

"We want to diversify our retail revenues but also between retail and the rest of the bank, so hopefully by 2020, we want to improve the mix," Steve Bertamini said in his first interview with international media since taking over as chief executive of Al Rajhi in May 2015.

"If we can capture a disproportionate share of the housing market growth that's expected, and a disproportionate share of the SME (small and medium-sized enterprises) growth... Plus these people are also consumers so you can bank both sides."

In September, Al Rajhi announced it had agreed with the Ministry of Housing to become the first Saudi bank to participate in a new government scheme to increase home ownership. It will offer mortgages with the state funding part of the down-payment.

Al Rajhi's SME business was moved to a specialist entity within the bank at the end of last year.

Having for years enjoyed the benefits of high loan growth and cheap deposits from state oil revenues, Saudi banks are under pressure to adjust to severe cut-backs in state and consumer spending.

Some, including the largest lender National Commercial Bank (NCB), reported falling profits in the third quarter after needing to set aside increasing amounts to cover bad loans.

Al Rajhi recorded nine quarters of declining profits up to mid-2015 but its 16.7 percent increase in third-quarter profit marked a fifth successive quarter of earnings growth.

"We had some customer service issues which we needed to address and there had been some under-investment in some parts of the business," said Bertamini.

The bank's plans include a focus on digitalisation and employee training.

Al Rajhi's retail traditions help in sourcing deposits: its consumer cash is proving to be stickier than the government's oil revenues, which are being withdrawn from local banks to cover the state budget deficit.

Al Rajhi's 0.4 percent rise in deposits in the year to Sept. 30 contrasts with NCB, with perhaps the closest state linkage, which recorded a 15.3 percent slump over the same period.

This helps Al Rajhi's cost of funding, already one of the lowest in the Gulf region according to a Sept. 6 note from Moody's Investor Services, at a time when Saudi money market rates are near seven-year highs.

This higher cost of funding is likely to focus banks more on costs, to maintain margins on lending without passing on the full impact of increased rates to borrowers, Bertamini said.

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