Saudi banking sector to remain profitable in 2019 despite low oil prices

Banks in Saudi Arabia are expected to post stable balance sheet growth this year on account of improved net interest margins (NIM) and lower cost of funding.

The Kingdom’s expansionary budget and reform-focused policies are also expected to support the sector’s growth, analysts told Argaam.

Even as crude oil prices declined in December 2018 to around 40 percent from their peak in October, rising interest rates in the US should favor Saudi banks— particularly the NIMs— as Gulf currencies are pegged to the US dollar.

In terms of asset growth and profitability, banks in the Kingdom have shown strong performance. Their combined net liquid assets grew by 7 percent year-on-year (YoY) to SAR 53.1 billion in the first nine months of 2018.

Moreover, Saudi-listed lenders reported a 9 percent increase year-on-year (YoY) in aggregate net profit to SAR 3.48 billion in September 2018.

Additionally, 12 banks in the Kingdom recently reached a SAR 16.7 billion settlement with the General Authority of Zakat and Tax (GAZT) to resolve long-standing Zakat payments. The lenders have announced that the settlement will not impact their earnings, as the payments have already been accounted for.

Argaam recently spoke to some leading analysts to gauge the impact of lower oil prices and Zakat payments on the growth outlook of Saudi lenders 2019.

Here is what they had to say:

Mazen Alsudairi, head of research, Al Rajhi Capital

“It will be stable growth, benefiting from interest rate adjustments and stable level of provisions and we are optimist of the potential for oil prices. The growth of lending is the main challenge, but we think government spending will be a catalyst.”

Chiradeep Ghosh, analyst, SICO Bahrain

“Saudi banks’ earnings to be driven by NIM expansion and we are penciling a high single-digit earnings growth. We estimate Saudi banks to witness 15-18bps NIM expansion, driven by an expected 2 rate hikes in 2019. Subdued oil prices may delay project roll-out; however KSA Government with a low debt-to-GDP can easily raise fresh debt to fund its planned expenditure.”

“More Saudi nationals joining the work force would provide consumer lending opportunities, especially mortgage.”

“The Zakat issue would be a one-time settlement which will not impact the banks’ profit and loss (P&L) but would be deducted from their equity.”

Jaap Meijer, Managing Director, Arqaam Capital

“Lower oil prices may increase the Saibor-Libor spread slightly if oil prices remain below $60 a barrel for a prolonged period, boding well for loan spreads. Tailwind is mostly coming from higher Saibor rates, even if the US rate cycle was to stop by the middle of the year, banks will benefit from higher net profit margins.”

“Furthermore, we expect a slight increase in corporate loan demand (projects) and a pick-up in home loans.”

Write to Sunil Kumar Singh at sunil.kumar@argaamplus.com