The global professional services firm, Alvarez & Marsal (A&M), has released its latest Saudi Arabia (KSA) Banking Pulse for FY 2021. The report suggests that the profitability metrics of the top 10 banks in the Kingdom of Saudi Arabia witnessed an improvement with post COVID-19 economic recovery. The aggregate loans and advances grew 14.2 per cent year-over-year (YoY) as all the top 10 banks reported a growth, however, deposit mobilisation slowed down in FY’21.
The KSA Banking Pulse for FY 2021 notes that the growth in net income (15.5 per cent YoY) is mainly attributed to higher operating income (+3.5 per cent YoY) along with lower impairments (-28.9 per cent YoY). The net interest margin (NIM) declined by 18 bps YoY to 2.9 per cent in FY’21 as interest rates fell to a 15-year low. Despite the lower NIM, the banks’ increased profitability demonstrates higher efficiency across the sector.
A&M’s KSA Banking Pulse examines data of the 10 largest listed banks in the Kingdom, comparing the FY’21 results against FY’20 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 FY 2021 are as follows:
- Loans and advances growth remained strong; supported by recovering consumer spending while deposits growth slowed down in FY’21. The aggregate loans and advances increased at a higher rate of 14.2 per cent YoY in FY’21 as compared to 12.8 per cent YoY in FY’20. This was driven by robust performance in the mortgage segment across the banking sector. The aggregate retail mortgage across the KSA banking sector increased by 47.8 per cent to SAR 413billionn.
The deposit growth was slower at 7.2 per cent YoY as compared to 9.2 per cent YoY in FY’20. Consequently, aggregate loan-to-deposit ratio (LDR) rose to 91.5 per cent from 86.0 per cent, highlighting the higher consumer spending as the economy continues its post-pandemic recovery.
- Total operating income increased by 3.5 per cent YoY. The growth was primarily due to higher net interest income (+4.0 per cent YoY), resulting from higher cost efficiencies during the low-interest-rate environment and net fee and commission income (+9.9 per cent YoY). The growth was partially negated due to lower currency translation related losses and lower operating income (-8.3 per cent YoY).
- Aggregate net interest margin (NIM) declined by 18 bps YoY to 2.9 per cent in FY’21, largely on the back of low-interest rate environment. Saudi Arabia’s Central Bank had previously cut repo rates by 125 bps in March ’20 to c.s 1.0 per cent, the lowest interest rates since 2007, to support the economy during the pandemic. Aggregate yield on credit declined by 74 bps YoY, while cost of funds fell 23 bps YoY.
- Cost-to-income (C/I) ratio decreased by 0.2 per cent points YoY to 35.2 per cent, as banks’ administrative expenses increased at a slower pace. The aggregate operating income (+3.5 per cent YoY) increased at a higher rate compared to operating expenses (+2.9 per cent YoY).
- Total impairments decreased by 28.9 per cent YoY to SAR 12.4bn, as banks reported lower provisions, alongside the economic recovery, due to higher consumer spending, increasing oil prices and infrastructure spend. Consequently, cost of risk increased by 39 bps YoY to 0.7 per cent.
- Aggregate net profit improved by 15.5 per cent2 YoY, due to higher operating profit and decreased provisions. This resulted in an increase in profitability ratios such as Return on Equity (RoE) and Return on Assets (RoA) to 11.4 per cent and 1.7 per cent from 10.9 per cent and 1.6 per cent, respectively.
Overview
The table below sets out the key metrics:
| CATEGORY | METRIC | 2020 | 2021 |
| Size | Loans and Advances Growth (YoY)) | 12.8% | 14.2% |
| Deposits Growth (YoY) | 9.2% | 7.2% | |
| Liquidity | Loan-to-Deposit Ratio (LDR) | 86.0% | 91.5% |
| Income and Operating Efficiency | Operating Income Growth (YoY) | 3.2% | 3.5% |
| Operating Income / Assets | 3.9% | 3.6% | |
| Non-Interest Income / Operating Income | 23.4% | 23.0% | |
| Yield on Credit (YoC) | 5.6% | 4.9% | |
| Cost of Funds (CoF) | 0.6% | 0.4% | |
| Net Interest Margin (NIM) | 3.1% | 2.9% | |
| Cost-to-Income Ratio (C/I) | 35.4% | 35.2% | |
| Risk | Coverage Ratio | 148.2% | 164.4% |
| Cost of Risk (CoR) | 1.1% | 0.7% | |
| Profitability | Return on Equity (RoE) | 10.9% | 11.4% |
| Return on Assets (RoA) | 1.6% | 1.7% | |
| Return on Risk-Weighted Assets (RoRWA) | 1.9% | 2.1% | |
| Capital | Capital Adequacy Ratio (CAR) | 20.3% | 19.9% |
Source: Financial statements, investor presentations, A&M analysis
Asad Ahmed, managing director and head of Middle East financial services at A&M commented: “In 2022, we expect corporate and mortgage lending to grow primarily due to giga government initiatives such as Red Sea project, Qiddiya and NEOM. Moreover, higher crude oil prices following the Russia-Ukraine conflict should also support the overall government spending in Saudi Arabia.
“Furthermore, we expect that the rate increase announced by the Saudi Central Bank to match the US Federal Reserve’s rate hike policy, will boost the banking sector’s net interest margins and in turn its profitability.”
