Loan growth for Saudi banks will remain strong in 2012 as they focus on retail lending, NCB Capital, Kingdom's largest asset manager and leading wealth management company, said Tuesday in its latest study. It forecast that government spending and bonus salaries in 2011 will have a "recurring effect" on banks' balance sheet growth in 2012. In addition, net interest margins are likely to compress particularly for banks with significant exposure to the corporate sector as competition increases. NCB Capital expects the bottom line this year to be driven by volume growth and non-interest income. "Banks focus on the underpenetrated retail segment is a key recurring theme," said Farouk Miah, head of Equity Research at NCB Capital. "Improved provision coverage, asset quality and capital base make Saudi banks well-equipped to continue the strong lending growth recorded in 2011. Overall, we expect loan growth of 12.4 percent in 2012 led by a retail loan growth of 16 percent." The report estimates that 2012 government expenditures will rise 13 percent, leading to a budget surplus of SR150 billion, or 7.1 percent of GDP. The continuing expansionary fiscal policy, coupled with low-interest rates should maintain healthy economic growth and boost domestic liquidity. The corporate sector will benefit from continuing government support and estimate a corporate loan growth of 11 percent, it added. Lending by the banking sector was also boosted by the government abandoning the "advance mobilization scheme" which provided companies with government contracts up to 30 percent financing. This aided the building and construction sector of corporate loans which grew 25.4 percent in 2011 and similar growth levels is expected going forward. Moreover, the report said most Saudi banks believed that it was unlikely for the mortgage law to be passed in the near-term. NCB Capital believes that even if the mortgage law is passed, it will not have an immediate and full effect on mortgage lending until the supply of housing becomes more affordable. A key trigger for mortgage lending, even in the absence of enforced formal institutions, is the introduction of tax on underdeveloped lands, easing pressure on property prices. This will be a key trigger for mortgage lending going forward. While a mortgage law will facilitate bank lending, a land tax will ensure greater supply to meet the demand of homebuyers, the report noted. The report highlighted that banks' share of demand deposit has increased significantly over the past few years. It currently stands at its highest level of 58 percent up from a low of 40 percent at the end of 4Q08. "It is no surprise that the switch came after interest rates started to decline; indeed we attribute this to the low interest rate environment which significantly limited the opportunity cost associated with non-interest bearing deposits,"said Miah. "In addition, the reduced rates had a noticeable substitution effect as depositors' preferred short-term liquidity over longer term deposits at limited returns while abundant liquidity reduced banks' demand for longer maturity funds." However, NCB Capital expects demand for time deposits to increase as the opportunity cost, in absolute terms, for demand deposits rises. "We believe conventional banks, particularly those who target high-income depositors, to be at most risk. Shariah-complaint banks, on the other hand, face a lesser risk as more conservative depositors forgo interest on religious principles," Miah said. "More importantly, however, Shariah-compliant banks target customers on the low-end of the income curve; 90 percent of Al Rajhi's retail depositors, for example, are low to mid income earners and hence the opportunity cost, in absolute terms, is limited even in the case of a spike in interest rates." On a YTD basis, the daily average value traded in the local equity market is up 98 percent YoY to SR8.7 billion and is 130 percent higher from the corresponding period in 2011. NCB Capital expects the TASI to sustain increased level of activity for 2012 supporting a 21 percent sector growth in fee income. NCB Capital prefers stocks of established players such as Al Rajhi, Samba and Riyadh Bank due to their attractive valuations and their ability to take advantage of the opportunity in the retail segment. "These names also stand to benefit most from the strong equity market activity. We downgrade Saudi Investment Bank and Arab National Bank to Neutral from Overweight." Miah further said.
