Saudi banking sector outlook ‘positive’ on resilient economy: interview

The outlook for banks in Saudi Arabia remains positive for 2019, supported by a modest loan and deposit growth as the economy continues to improve, Muhammad Faisal Potrik, head of research at Riyad Capital, told Argaam in an exclusive interview.

It is widely expected that financing for big projects and mortgages could contribute towards loan growth in the Kingdom, Potrick said.

He also believes Tadawul’s inclusion in FTSE Russell and MSCI index this year will prop up prices of banking stocks, given the rising interest of foreign investors.

Here’s a look at Argaam’s full interview with Potrick:

Q: What is your outlook for 2019 for the Saudi banking sector? What factors could impact or support it?

A: The outlook for the Saudi banking sector is positive for 2019 on the back of expectations of a modest loan and deposit growth as the GDP growth rate improves. Rising SAIBOR rates in the year would help improve net special commission income for the banks. Also, rising interest in banking stocks by foreign investors as they enter the Saudi market on FTSE and MSCI index inclusion is likely to prop up stock prices at the Tadawul. Investors need to monitor provisions at some banking names though.

Q: How important are M&A for the Saudi banking sector? Do you see more M&A taking place?

A: The merger activity in the banking sector seems to be geared towards consolidation and creating even stronger entities with regional and global presence while taking advantage of cost and operational synergies that accrue in the merger process. At the same time, there are hints of the Saudi Arabian Monetary Authority (SAMA) being open to issuing new banking licenses.

Q: In December, 12 listed Saudi banks reached a settlement over the payment of Zakat. Will this move impact banks and weigh on their share prices?

A: The overall effect of the Zakat settlement has been very positive for the banks. It has removed a long-standing uncertainty that investors had about a potential charge. As expected, the market has taken this settlement extremely positively and helped the banking sector outperform the TASI by 23 percent in 2018. This good performance has continued into 2019 with an outperformance of 5 percent year to date. While some banks have taken a one-time charge on their shareholders equity in 2018, return on equity (RoE) going forward has improved. Capital Adequacy Ratio (CAR) across the sector remains very healthy.

Q: Which segments do you think will reflect growth for banks this year?

A: Overall, we believe there will be modest loan growth in 2019 with both the corporate and retail segment contributing. This would vary from bank to bank. Financing for big projects and mortgages could contribute towards loan growth.

Write to Parag Deulgaonkar at parag.d@argaamplus.com