JEDDAH — The Saudi banking sector is ‘back on double-digit growth trajectory”, the National Commercial Bank said Monday in its report, noting an overall sustained growth in the banking market, which led it to project that the Saudi banks will maintain such elevated levels of profitability this year and in 2013. NCB's “Saudi Banking Sector Review” for the month of October said the Saudi banks remain resilient on the back of strong fundamentals that include high liquidity, adequate capitalization and prudent risk management and supervision. These fundamentals, in turn, have enabled Saudi banks to recover after two years of weak performance, with profitability and assets growth improving markedly in 2011 and 2012YTD, amid a robust macro-economic environment. The report expects that loan growth will maintain its upside trajectory, growing by nearly 15.9 percent and 15.1 percent Y/Y, in 2012 and 2013, respectively, due to strong economic growth, accelerated government spending and private capital expenditures. It added that net income will be driven by volume growth and noninterest income this year and next. Most banks have optimized their operating expenses and cost of funding, despite the ongoing debt European crisis. Even though oil supply uncertainties was favorable to the Kingdom's twin balances and, in turn to banks, it is imperative to remain vigilant and assess the likelihood of adverse scenarios that might arise going forward, along with their implications on government oil revenues and the Saudi commercial sector. The report further said that the domestic banking system maintained its unique features that represent both strengths and opportunities when compared to global counterparts, notably: (1) the lowest NPL ratio across the emerging and advanced economies at 2.1 percent by the end of the second quarter, which is expected to trend even lower to the 2004-2008 pre-crisis average of 1.9 percent in 2013, (2) exposure to cross-country spill-over effects are minimal, with the foreign currency lending ratio of domestic banks around 5 percent of their total loans, the lowest on a global scale, (3) a well capitalized banking system, with the Capital Adequacy Ratio (CAR) at 17.6 percent that is well above Basel III requirements, and (4) the household debt to GDP at 13 percent and the real estate loans to total loans at 5 percent are quiet low on an international scale, which reflects the huge opportunity banks can avail to enhance their bottom line. It noted too, that “the lack of excess leverage and asset bubbles will continue to support the lower systemic risk of Saudi banks and their profit sustainability.” In terms of liquidity, the Saudi banks' accumulation of liquid assets post the financial crisis provided them with immense opportunities to redeploy and expand their financing portfolios. The risk averseness of the banking industry is slowly diminishing in accord with the robust economic growth in the Kingdom. The industry's Minimum Risk Assets (MRA) ratio has dropped for the third consecutive year in 2011 to 31.0 percent, slightly edging lower than 2006's 31.3 percent, indicative of the increased confidence by local banks. Within the heavy weights, only NCB and BSF have increased their MRA levels by adding 0.8 percent and 1.4 percent, respectively. Furthermore, cash levels have decelerated slightly to 8.5 percent in 2Q2012 from 2011's 11.3 percent as banks increased their risk appetite and granted more loans. Beginning 2012, the loans portfolio accelerated at a faster pace than the flows of deposits into banks. Reflecting a certain amount of optimism in deploying their assets, banks added almost SR89 billion during 2011 and a further SR85.5 billion by the 2Q2012. Fresh lending was focused toward the retail sector as the consumer and credit cards sector witnessed a 23.4 percent gain, or an addition of SR46.0 billion in 2011. Additionally, the electricity, water, gas, and healthcare sector gained the most with 53.8 percent Y/Y in 2011. Total loans last year picked up by 11.6 percent, while deposits rose only 10.7 percent to drive the Loans-to-Deposits (L/D) ratio up from 73.9 percent in 2010 to 74.5 percent in 2011. The L/D ratio continued to increase in 1H2012 reaching 77.6 percent as loans outpaced deposits again with 16.5 percent against 9.4 percent, respectively. The leading banks in effectively utilizing their deposits are INMA and BSF with an L/D ratio of 115.7 percent and 92.3 percent, respectively. Attributed to its large depository base, NCB recorded an L/D ratio of 60.0 percent, despite the rise of its net loans by 15.4 percent in 2Q2012. Deposits in the banking system surpassed the SR1.2 trillion level by the end of June 2012. The composition of deposits by type has been reshaped in the aftermath of the financial crisis. With interest rates being suppressed on a global scale, Saudi was no exception. While time deposits used to account for the majority of deposits prior to the crisis, demand deposits have tipped the scale with a share of 60.9 percent and time deposits dropped to a record low of 34.7 percent by the end of 2Q2012. Even though demand deposits do not generate any returns, holding of cash to grasp opportunities is more appealing than time deposits as many investors await the perfect timing to reinvest in risky assets domestically and internationally. Additionally, foreign currency deposits edged higher by 13.8 percent Y/Y by the end July 2012, primarily supported by government entities that increased their buildup of hard currencies by 26.1 percent Y/Y. Moreover, on an industry level, net investments lost steam during 2011 in comparison to the pace of 2010's. The sudden surge during 2010, when banks recorded a growth of 11.5 percent, on an annual basis, was mostly attributed to the accumulation of domestic government securities as well as capital gains across asset classes. Banks' conservative approach only added a marginal 2.9 percent of additional investments last year that are mostly denominated in US dollar fixed income securities. The slow momentum is maintained throughout this year with an addition of only SAR7.8 billion, or 2.2 percent during the first half of 2012. The four heavy weights in this category, namely NCB, Rajhi, Samba, and Riyad held 68.9 percent of total market's investments in 2010 and have managed to expand their shares by increasing their aggregate share to 72.9 percent by the end of 2011. Saudi banks tend to seek higher-grade investments to avoid possibilities of future losses. This is witnessed by the large increase in investments held at amortized costs as opposed to investments which are held for trading or held as fair value through income statement (FVIS). The latter categories have shown a deceleration given their susceptibility to the global economic turmoil. The majority of investments are secured in high investment grade securities. Lower-medium to non-investment grade and unrated investments barely comprise 11 percent of the total portfolio, thus reducing their balance sheets to market risks. To further protect themselves, banks shifted their investments over the past four years towards non-turbulent geographical regions. The GCC and Middle East along with South Eastern Asia regions have witnessed a sharp rise in asset allocations. Their combined investment level has risen 433 percent over the period between 2007 and 2011 in comparison to North America and Europe's combined growth of 24 percent over the same period. While global financial systems suffered from the European debt crisis, the Saudi banking system has been protected due to the limited exposure to international markets and safety measures taken by banks and SAMA. The Saudi financial system has been proactively cushioning itself from possible local and external systematic risks. During 2Q2012, the non-performing loans (NPL) coverage ratio edged higher to 138.2 percent following 2011's 132.8 percent, a substantial improvement over 2009's 89.8 percent. Ostensibly, SAMA's stricter directives that demanded banks to top up their coverage ratios to 150 percent was the driving force supporting this trend. NCB said in the study that this key milestone will materialize in 2013. — SG/QJM
