Leading global professional services firm Alvarez & Marsal's (A&M) latest Saudi Arabia Banking Pulse for Q2 2021 highlights that the total Loans & Advances (L&A) and deposits of top ten Saudi banks witnessed a robust double-digit growth as compared to the previous quarter. Total L&A increased by 13.1 percent and deposits grew by 12.6 percent from Q1'21. L&A and deposit growth was primarily supported by the merger of National Commercial Bank (NCB) and SAMBA to form Saudi National Bank (SNB). The operating income increased for the fourth consecutive quarter by 8.4 percent quarter over quarter (QoQ). The overall operating efficiency for the banking sector deteriorated in Q2'2021 owing to higher operating expenses (+13.7 percent QoQ) and impairments (+81.6 percent QoQ), impacting net profit for the top ten banks in the Kingdom. Aggregate net income decreased 8.1 percent QoQ to SR11.0bn. The fall in net profit, however, was partially offset by an increase in net interest income (+11.1 percent). The cost-to-income (C/I) ratio deteriorated by 1.7 percent QoQ to 35.1 percent. Net Interest Margin (NIM) dropped to 3.02 percent in Q1'21, which is the lowest in the last few quarters, hence the sector-wide margin bounce-back to 3.12 percent in Q2'21 from its multi-period lows. Overall, NIM and yield on credit improved marginally, while cost of funds remained stable on QoQ basis. Asset quality improved as Non-Performing Loans (NPLs) decreased from 2.0 percent in Q1'21 to 1.8 percent in Q2'21. The aggregate coverage ratio increased to 155.6 percent (+4.6 percent points QoQ) as most banks noted an improvement in coverage ratio, highlighting the cushion available for any potential asset quality risks. Co-authored by Asad Ahmed, managing director and head of Middle East Financial Services, and Tariq Hameed, senior director, EMEA Financial Services, Saudi Arabia Banking Pulse, examines the data of the 10 largest listed banks in the Kingdom, comparing the Q2'21 results against Q1'21 results. 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. 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 prevailing trends identified for Q2 2021 are as follows: 1. Aggregate loans & advances (L&A) increased 13.1 percent QoQ in Q1'21 compared to 5.0 percent QoQ growth seen in Q1'20. L&A growth was primarily supported by the merger of NCB and SAMBA (SNB). Increased lending in public (+23.2 percent QoQ), agricultural and fishing (13.4 percent QoQ) and utilities (+4.3 percent QoQ) sectors contributed significantly to the growth. Aggregate deposits for banks grew by 12.6 percent QoQ, compared to 2.2 percent QoQ growth seen in the preceding quarter. Consequently, Loan-to-Deposit Ratio (LDR) increased from 89.7 percent in Q1'21 to 90.0 percent in Q2'21. 2. Operating income grew by 8.4 percent QoQ (compared to 1.2 percent QoQ in Q1'21). Net interest income (NII) increased 11.1 percent QoQ driven by higher interest income. Net fees and commission income increased by 5.5 percent QoQ in Q2'21. However, the other operating income fell ~7.2 percent, as major banks reported lower income from investment and trading activity. 3. NIM improved by 10 bps QoQ to reach 3.12 percent after slipping to its multi- period low levels of 3.0 percent in previous quarter. Yield on credit decreased by 9.3 bps QoQ, while cost of funds remained flat QoQ at 0.4 percent. SNB (+40 bps QoQ) and SIB (+ 21 bps QoQ) reported sizeable expansion in NIM. 4. Cost-to-income (C/I) ratio deteriorated by 1.7 percent points QoQ to 35.1 percent after improving in the previous quarter. Aggregate operating expenses increased 13.7 percent QoQ, while income increased by 8.4 percent during the same period. SNB and BJAZ witnessed the highest deterioration in C/I ratio, increasing by 7.6 percent points QoQ and 7.3 percent points QoQ respectively. 5. Total provisioning increased by ~81.5 percent QoQ, after falling sharply in Q1'21 leading to an increase in cost of risk from 0.62 percent in Q1'21 to 1.03 percent in Q2'21. Provisioning increased as SNB reported higher impairment charges in line with IFRS 9 regulation which requires the acquirer to book fresh impairment on newly on- boarded and revalued assets. Excluding the effect of SNB the cost of risk improved by 6bps QoQ. 6. Return ratios decreased in line with lower profitability levels. Aggregate net income decreased by 8.1 percent QoQ, impacted by higher aggregate operating expenses and higher impairment charges. As a result, return on equity (RoE) decreased to 11.0 percent in Q2'21 from 13.5 percent in Q1'21, after it reached to highest level in the last six quarters in Q1'21. Ahmed commented: "Bottom-line growth suffered in the second quarter, as higher provisioning led to lower profitability following the merger of NCB-SAMBA. Looking ahead, the Saudi banks are likely to focus on better-rated corporates to improve asset quality. "The outlook for cost of risk remains relatively stable with a possible negative bias despite an extension of the loan deferral program by three months until Q3'21. "The Saudi Arabian economy is expected to recover strongly in 2021-2022. Gross domestic product growth is forecasted at 2.4 percent with 4.8 percent driven by recovery in global demand in oil, the easing of pandemic curbs and oil producers' agreement to boost output. "We anticipate that Saudi Central Bank's (SAMA) move towards digital banking coupled with government reforms will support banking sector growth. Furthermore, while fintech companies are expected to stimulate sector M&A activity, this does have potential to exert pressure on traditional banking." — SG
