The Saudi banking sector remains one of the strongest in the region and with a positive outlook, the new NCB Capital Report said. The combination of good net interest margins, growing fee income, reduced cost of risk and cost efficiency positions the Saudi banking sector strongly among its peers, it said. An underleveraged equity base and ROE expansion supported by increasing government expenditure supports growth. “Efficient asset utilization supports the strength of Saudi Banks,” said Farouk Miah, Acting Head of Equity Research commenting on the new NCB Capital Report. “Although the yield on assets has been declining due to a focus on loan volume growth, Saudi banks' NIMs of 3.0 percent in 1H11 were ahead of the regional peers' average of 2.8 percent. Saudi banks were able to generate good NIMs given their large pool of customer deposits, which enables them to keep the cost of funds low and maintain current net interest income levels.” The report highlighted that Saudi banks enjoy the highest fee income to assets ratio. The Saudi banking sector reported a 16.6 percent YoY growth in fee income during 1H11 owing to increased trading turnover as well as improved banking activities. “This led to an increase in the fee income to asset ratio to 0.9 percent, better than the regional peer average of 0.7 percent as well as US banks' average of 0.3 percent for 1H11,” Miah added. Moreover, Saudi banks' profitability remains one of the strongest and ROE and ROA levels increased in 1H11 to 14.9 percent and 2.3 percent respectively from 13.2 percent and 2.0 percent in 2010, supported by lower provisions and strong fee income. Comparable net interest spreads, growing fee income, reduced cost of risk and comparable cost efficiency all lead to significant ROE and ROA levels when compared to peers. Qatar with 18.2 percent ROE and 2.8 percent ROA in 1H11 remained the strongest in terms of banking profitability. With the exception of Kuwait and Oman, all the other countries witnessed an improvement in profitability levels in 1H11. According to a ROE decomposition analysis, Saudi banks' net interest income to asset ratio came in at 2.8 percent vs. the GCC peers' average of 2.6 percent in 1H11. In addition, improved asset quality of Saudi banks has reduced provisions. According to NCB Capital, the Saudi banking sector's asset quality improved in 1H11 and remained one of the strongest among peers with all the banks' Non Performing Loans (NPL) coverage ratio exceeding 100 percent. “The combination of a stringent credit policy and an improvement in asset quality led to a decline in the provision expenses to average asset ratio to 0.3 percent in 1H11, similar to Qatar but lower than the 1.1 percent in the UAE and 1.2 percent in Kuwait,” Miah further said. The report highlighted that the Saudi banking sector's operating efficiency falls broadly in-line with comparable peers. “Comparable cost-to-income ratio keeps margins competitive,” Miah added. “The salary bonuses which were paid in 1H11 increased the Saudi banks' cost-to-income ratio to 36 percent in 1H11 from 34 percent in 2010. Despite an increase in the cost-to-income ratio, the operating efficiency of Saudi banks is lower than the GCC peers' average cost ratio at 38.5 percent.” Saudi banks' equity multiple stands at 6.5x against the GCC average of 7.8x, US's 8.8x and SAMA's comfortable limit of 8.0x. This shows that there is scope for Saudi banks to increase their loan books and expand their ROE. “The Saudi banking sector is the most liquid with 0.32 percent of free float volume traded daily on average for the last three months. This is higher than other peers in the GCC. Qatar ranks the second highest with a ratio of 0.12 percent. UAE's banking sector which has 19 listed banks is surprisingly amongst the lowest with just 0.03 percent,” Miah said. Despite the Saudi banking sector index falling by about 13 percent YTD, the Saudi banks' total market cap was the highest in the region followed by Qatar and Kuwait.
