Saudi may grant licenses to more foreign banks: KPMG

The Saudi banking sector is likely to witness a number of regulatory changes this year, which includes granting of more banking licenses to foreign financial institutions, consultancy firm KPMG said in a new report.

"Apart from the string of reforms that may drive changes in the economy, the banking sector specifically is also likely to see some significant developments with the Saudi Arabian Monetary Authority finalizing the cybersecurity framework for banks," it added.

In 2017, net profit of Saudi-listed banks rose 8.7 percent, backed by an increase in total asset base, higher SAIBOR rate, and reduction in operating expenses.

Overall, the profitability of GCC banks increased by 6.7 percent last year, compared with a decline in the previous year. Bank assets grew 4.4 percent in comparison to more developed markets, due to increased lending to government and related entities to support national-level growth initiatives.

Meanwhile, the overall non-performing loan (NPL) ratio for the GCC banking sector reduced by 0.3 percent to 3.2 percent, as a result of the more stringent risk policies adopted by banks in recent years, given regulators' focus on credit, the consultancy noted.

The average total capital adequacy ratio (CAR) of the GCC banks reached 18.7 percent, well above the minimum regulatory requirement for all GCC countries, it added.

"This year's results have demonstrated the GCC banking sector's resilience and ability to weather political and economic challenges in the region and across the globe," said Emilio Pera, head of financial services, KPMG Lower Gulf.

"Overall, it looks like banks have performed well in 2017, although growth is still not as high as the sector experienced in recent years, which is reflected in both fundamentals and market sentiment."

However, KPMG said factors pressurizing banks were lower return on equity as equity balances increased at a higher rate compared with profit growth rates.

Profitability of the banks was also impacted due to margin compression arising from higher funding costs.

"The adoption of International Financial Reporting Standards 9 from 1 January 2018 is likely to have an adverse impact on banks' common equity tier (CET) 1 ratios and, in turn, impact profitability, as the cost of risk increases under the new accounting rules," the consultancy noted.

Looking ahead, Pera said the consultancy expects that GCC banks will further increase their focus on cost and operational efficiencies to mitigate lower profit growth rates.