Saudi banks set for 4-year high growth as rates offset oil

Lenders are weighing potential mergers as central bank and sovereign wealth fund explore the possibility to increase their scale

RIYADH • Saudi Arabian banks may report double-digit earnings growth this year as rising interest rates and increased government spending offset the risk of higher bad-debt charges.

Even loans may expand faster — albeit nowhere near the pace of a decade ago — after four years of declines led to a contraction in 2017. The government’s 2019 budget increased spending in the face of plunging oil prices, casting doubt on whether the kingdom will hit its fiscal-deficit targets.

“More stimulus, business confidence, privatisation and a stronger economy will also support lending to the private sector,” said Edmond Christou, a banking analyst at Bloomberg Intelligence (BI) in Dubai. “Strong mortgage lending is likely to continue into 2019, boosted by government incentives, which may compensate for slower growth in personal loans and car leases as new responsible lending rules take effect.”

Bank Deals

The better outlook comes as the kingdom’s biggest lender, National Commercial Bank (NCB), on Dec 24 announced the start of takeover talks with Riyad Bank. Other firms are also said to be weighing potential mergers as the central bank and sovereign wealth fund, which owns stakes in some Saudi lenders, explore the possibility combining banks to increase their scale.

Combined pretax earnings at the country’s 12 listed banks will probably climb 12.4% in 2019, higher than the 9.8% growth seen in the first nine months of last year, according to data compiled by Bloomberg. That compares to a compounded annual growth rate of 6.2% in the five years through 2017, the data show.

The lenders are getting help from the US Federal Reserve (Fed), which hasn’t yet signalled an end to its tightening cycle. The kingdom’s central bank followed the Fed last month by raising rates 25 basis points (bps) because the riyal is pegged to the dollar, lifting the income banks make on loans.

Stocks Climb

“We expect the Fed to go for two rate hikes in 2019,” said Chiradeep Ghosh, a financial-institutions analyst at SICO BSC, adding 15bps18bps in net-interest margins at major Saudi banks.

The Tadawul Banks Index climbed 31% in 2018, even after a 38% drop in oil prices in the fourth quarter and as the economy struggles to recover from 2017’s contraction.

“Lower oil prices will impact if they result in lower government spending or payments,” said Aqib Mehboob, an analyst at Saudi Fransi Capital in Riyadh.

The shares were also lifted after earnings statements in October and November showed stronger margins, some pick-up in lending and lower cost of risk, he said. Projects announced by the government added some impetus.

There are some headwinds, with consumers battered by higher interest rates, the introduction of value-added tax, reduced fuel subsidies and higher utility bills. At least 11 lenders also

agreed last month to pay back-taxes worth a combined 16.75 billion riyals (RM18.63 billion) for a religious levy, less than they had originally been assessed.

Furthermore, while higher rates help margins, there is a lag of three to six months for corporate loans to reprice, and even longer for retail books, said BI’s Christou. A pick up in credit and a drop in bad-loan recoveries will also increase loan-loss charges, he said.

Government spending is central to a meaningful recovery in corporate lending, said Shabbir Malik, a bank analyst at EFG-Hermes Holding SAE in Dubai.

“The challenges for Saudi banks in 2019 include growing loan books outside of retail mortgages; containing any increase in cost of funds if oil prices remain weak; driving cost efficiency through digitisation and countering competition from digital-payment platforms,” said Mehboob of Saudi Fransi Capital. “The Saudi British Bank (SABB)-Alawwal merger and potential NCB and Riyad Bank merger may drive other banks to evaluate opportunities to gain scale.”

“Lenders like Alinma Bank and Bank Albilad will still grow aggressively as they seek to gain market share, but Samba Financial Group’s selective risk approach makes it unlikely to be a growth beater,” said Christou of BI. “Al Rajhi is unlikely to compete aggressively on corporate lending as long as margins remain under pressure. The SABB-Alawwal merger may delay the return to growth until the second half, while NCB is likely to outperform the industry in terms of growth.” — Bloomberg