JEDDAH: Saudi Arabia’s banking sector is one of the strongest in the Middle East and its strength is based on high profitability, strong liquidity, high capitalization and strict supervision by Saudi Arabian Monetary Agency (SAMA). Total deposits with Saudi banks grew to SR916 billion at the end of June 2009, since banks tried to attract more deposits as interbank lending tightened, according to BMG Financial Group’s Saudi Banking Sector Review released this week.
Demand deposits constitute 43 percent of the total deposits, partially driven by higher demand for Islamic banking services, which provide a low cost of funding for Saudi banks, and is one of the key reasons behind their high margins. Meanwhile, 79 percent of demand and saving deposits are secured from the private sector, as opposed to 21 percent from government entities.
Saudi banks posted solid financial results throughout the past decade and remained amongst the most profitable banks in the region. However, the banks witnessed a decline in profitability in 2007 and 2008. Saudi banks posted a combined net income of SR30 billion as at the end of December 2008, down 1 percent from 2007, and 13 percent from SR35 billion in 2006. The main reason for the lower profitability was the significant drop in non-funded income, which was affected by the slower Saudi stock market activity. The increase in provisioning to cover for financial investment losses and the foreseeable drop in asset quality had also contributed to the decline in banks’ profits.
Saudi banking sector has shown moderate asset, loan and deposit growth, compared to regional peers over the past few years. In terms of banking assets, Saudi Arabia is the second largest in the region, after the UAE. However, despite the large size of its population (the largest in the GCC) and banking assets, the Saudi banking sector is still largely under-penetrated, with a loan-to-GDP ratio of 42 percent, a deposit-to-GDP ratio of 48 percent and a retail lending-to-GDP ratio of 10 percent as of the end of 2008. Saudi Arabia has demonstrated a reasonable level of liquidity, with a loan-to-deposit ratio of 88 percent as of the end of December 2008.
There are currently 22 banks in Saudi Arabia, of which 12 banks are local (national and joint venture) and 10 are foreign (five are of GCC origins and five are international). These figures take into account the recent establishment of Alinma Bank. The government and prominent families own majority stakes in many of the Saudi banks including National Commercial Bank (NCB), Al-Rajhi Bank and Samba Financial Group.
Al-Rajhi Bank, Bank Albilad and Alinma Bank are fully Shariah-compliant.
International banks such as Deutsche Bank, BNP Paribas, and J.P. Morgan acquired licenses to open offices in Saudi Arabia starting 2002, when the market liberalized further.
“We consider the Saudi banking sector to be under-branched, with 22 banks operating in Saudi Arabia having an overall branch network of 1,426 and serving a population of around 25 million, thus effectively 17,530 people per branch,” BMG Chairman Basil Al-Ghalayini said.
Al-Rajhi Bank has the biggest branch network in Saudi Arabia by far, with 436 branches, followed by National Commercial Bank (NCB) with 279 branches.
Banks in Saudi Arabia provided moderate credit growth over the last few years, after a period of strong growth in consumer lending. Total credit facilities grew at a 1999-2008 CAGR of 18 percent, where growth peaked at 34 percent in 2004 and 36 percent in 2005. However, in 2009, total credit facilities had shown a slowdown, with a 1 percent drop to register SR739 billion as at the end of March 2009 versus December 2008, signifying the slowdown in the economy and a reluctance in lending.
Corporate lending growth reached its peak in 2008, with a growth of 39 percent. In March 2009, corporate lending reached SR556 billion, 1 percent drop from the December 2008 figure, held back by the economic slowdown, which weakened the ability of banks to find lending opportunities, especially in an environment of high default risk. “Despite slower growth, we believe that corporate banking would still hold a major portion of total lending, especially given SAMA’s regulations restraining consumer lending growth,” the BMG chairman said.
The BMG initiated coverage on the Saudi banking sector, foreseeing moderate growth in the short to medium term, but positive on its long-term prospects. The coverage includes Al-Rajhi Bank, SABB (Saudi British Bank) and Samba Financial Group.
Samba offers the highest upside potential amongst the banks the BMG covers and is trading at the most attractive multiples.
BMG assigned an “add” recommendation for Samba.
SABB was assigned a “Neutral” recommendation, based on the DECF (Discounted Equity Cash Flow) valuation and because of its high trading multiples.
Using discount rate of 12 percent and a terminal rate of 2 percent, SABB’s share price offers over 10 percent upside potential to the current market price.
Al-Rajhi Bank is currently over-valued and assigned the bank a “Reduce” recommendation, especially that it is trading at one of the highest multiples in the MENA region.
In commenting on BMG’s latest report, the chairman said: “Saudi and international investors are in need of reliable and quality research reports to guide them to proper investing. The more reports we have covering the Saudi market the more educated we become to make right investment decisions.”
Al-Ghalayini added: “The Saudi market has been known to be poorly covered by quality research, as a result it has been abused and manipulated by daily speculators.”
