Saudi banking sector set on dramatic growth journey

Saudi banking sector set on dramatic growth journey

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The world economy is in a precarious position. In tandem with the impact of COVID-19, rising interest rates have compelled many countries to declare that they face the possibility of a protracted and arduous recession.

Yet, in Saudi Arabia, the economic climate is comparatively brighter. Elevated energy prices and an increase in tourism resulting from major global events have precipitated immense profitability across the board.

Facilitated by the prescriptions outlined in Saudi Arabia’s all-encompassing Vision 2030, the emancipation of the Kingdom’s banking sector is set on a dramatic growth journey into the next decade.

Banking assets in the country surpassed SR3.5 billion ($931.6 million) in the second quarter of 2022, three years ahead of time, indicating that strong growth is already underway and will only continue to drive the industry forward.

Journey outlined by growth

Between 2011 and 2022, the trajectory of the Saudi banking sector’s loan and deposit volumes has closely mirrored oil price movements, reflecting a changing and highly dynamic economy.

Overall, loan volumes grew at 9.6 percent compound annual growth rate during that period while deposits grew at 6.8 percent, resulting in a loan-to-deposit ratio growth from 77 percent to 101 percent.

It must also be noted that following the collapse in oil prices back in 2014, the 2016-2022 period saw a steady return to growth, showing a resilient economic climate and increased potential for diversification. Profits after taxes and payments for the Saudi banking sector grew at 7.9 percent CAGR during that period.

In parallel, profits after taxes and payments suffered a sudden decline in 2020 as banks increased loan loss provisions due to credit risks posed by the pandemic. However, revenue growth rebounded swiftly in 2021 as loan loss provisions also declined, leading to a sharp rise in profits.

Driven by strong growth from public sector clients (13.9 percent CAGR), retail clients (9.5 percent CAGR), and corporate clients (6 percent CAGR), banking revenues are expected to grow at 8.6 percent CAGR in the 2022-2027 period.

Overall, it can be said that Saudi Arabia has not experienced a spiraled downward trend for long, as it has built the needed resilience over time, and this has encouraged increased activity in the Kingdom, providing added impact in the region and the world.

Next on the horizon

With the growth in volumes forecast earlier, and margins also expected to rise, four avenues emerge as viable options for Saudi banks to consider when pursuing strategies to strengthen their position.

Despite healthy loan growth, tighter funding conditions (as a result of higher borrowing costs and government inflows receding following a softening in energy prices) could impact loan volumes and net interest margin growth.

Saudi banks should revisit their deposit-gathering strategy and in parallel, proactively encourage other funding sources such as term deposits and wholesale funding.

Next, by taking advantage of favorable interest rates, banks can acquire new customers through a range of savings products. Campaigns to improve financial literacy, as prescribed by Vision 2030 to drive growth in the banking sector, can potentially help raise the savings rate from 6 to 10 percent of total household income.

Thirdly, by leveraging favorable macro conditions and strong sector growth, Saudi banks can pursue strategic investments to grow revenues and optimize costs. Areas with promising investment opportunities include emerging digital initiatives, re-imagined customer journeys, and the upgrade of underlying technology infrastructure. And finally, to counter new digital competitors, banks should consider tapping into growing consumer spending trends to expand their portfolio of partnerships. For instance, by partnering with e-commerce businesses and retailers on agency banking and point-of-sale microfinancing solutions, banks can expand their customer base.

Banks can also work with non-banking financial institution partners to extend low-cost financing options to target small and medium-sized enterprises.

  • Markus Massi is managing director and senior partner at Boston Consulting Group and Martin Blechta, principal at BCG.
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