Banking Sector: Developing New Sources Of Income

BMI View: We retain our positive outlook on Saudi Arabia's commercial banking sector. Aside from still-strong lending activity, growth in fee income will be boosted by the underwriting of Islamic bonds and the gradual opening of the stock market to foreign investors.

Latest data for Saudi Arabia's commercial banks has broadly matched our expectations, with lending activity remaining strong on the back of favourable macroeconomic developments. Annual credit growth has moderated compared to 2013 levels, but remained at 11.8% as of June 2014 - in line with our forecasts of 11.0% by the end of the year and 10.0% in 2015. Given robust growth in the non-oil economy - as underlined by both official data and leading indicators of economic activity - we expect demand for credit to remain significant over the coming quarters.

As a result of sustained balance sheet growth, the overall profitability of the sector should stay robust. Financial results for the second quarter of 2014 have been broadly positive, with the notable exception of Al Rajhi Bank - the largest listed lender - which saw a fourth consecutive quarterly decline in earnings due to higher provisioning. We expect one of the recent headwinds to corporate lending profits - the initiation of the 'Saudisation' policy, which has triggered labour market pressures in the construction industry - to gradually dissipate as we head towards 2015. Highlighting the buoyant state of the rest of Saudi Arabia's non-oil sector, the country's July HSBC/SABB purchasing managers' index (PMI) reading came in at 60.1, the highest level since September 2012.

Following The Economy
Saudi Arabia - Commercial Banks and Real GDP Growth

BMI View: We retain our positive outlook on Saudi Arabia's commercial banking sector. Aside from still-strong lending activity, growth in fee income will be boosted by the underwriting of Islamic bonds and the gradual opening of the stock market to foreign investors.

Latest data for Saudi Arabia's commercial banks has broadly matched our expectations, with lending activity remaining strong on the back of favourable macroeconomic developments. Annual credit growth has moderated compared to 2013 levels, but remained at 11.8% as of June 2014 - in line with our forecasts of 11.0% by the end of the year and 10.0% in 2015. Given robust growth in the non-oil economy - as underlined by both official data and leading indicators of economic activity - we expect demand for credit to remain significant over the coming quarters.

Following The Economy
Saudi Arabia - Commercial Banks and Real GDP Growth

As a result of sustained balance sheet growth, the overall profitability of the sector should stay robust. Financial results for the second quarter of 2014 have been broadly positive, with the notable exception of Al Rajhi Bank - the largest listed lender - which saw a fourth consecutive quarterly decline in earnings due to higher provisioning. We expect one of the recent headwinds to corporate lending profits - the initiation of the 'Saudisation' policy, which has triggered labour market pressures in the construction industry - to gradually dissipate as we head towards 2015. Highlighting the buoyant state of the rest of Saudi Arabia's non-oil sector, the country's July HSBC/SABB purchasing managers' index (PMI) reading came in at 60.1, the highest level since September 2012.

Continuing To See Steady Lending Activity
Saudi Arabia - Commercial Bank Loans

Saudi Arabian banks' income will also be boosted by the growing demand for Islamic bonds (sukuks) in the Gulf, the result of corporates seeking to diversify their funding sources while taking advantage of low borrowing costs. Companies and government entities in Saudi Arabia issued SAR19.2bn of bonds in the first half of 2014, up by 36.2% from the same period of 2013, according to Bloomberg data. Three of the top 10 banks helping issue sukuks from the Gulf so far this year are from Saudi Arabia, although their combined market share remains below HSBC's (see table below). The fees obtained through the underwriting of Islamic bonds are increasingly complementing lending activities as a revenue driver for the country's banks, a trend we see continuing in 2015. As an illustrative example, Al Rajhi's investment banking arm has announced its ambition to play a central role in underwriting and investing in sukuks, and received regulatory approval in July 2014 for the launch of its first Islamic mutual fund. 

GCC - ISLAMIC BONDS ISSUED IN 2014*, BY UNDERWRITER
Underwriter Amount (USDmn) Issues Market Share (%)
HSBC Bank 2139.91 7 19.2
JP Morgan 1344.39 4 12.1
Deutsche Bank 1136.18 5 10.2
Banque Saudi Fransi 1133.21 2 10.2
Emirates NBD 659.38 7 5.9
Standard Chartered Bank 619.27 5 5.6
Dubai Islamic Bank 526.04 5 4.7
National Commercial Bank 511.06 2 4.6
Riyad Bank 426.62 2 3.8
National Bank of Abu Dhabi 394.38 4 3.5
*As of time of writing on August 20; Source: Bloomberg

Government plans to open up Saudi Arabia's stock market (the TASI) to foreign investors by the middle of 2015 will provide another tailwind to domestic banks (see 'Planned TASI Opening Will Buoy GCC Equities', July 22). We continue to see a narrow and gradual opening of the exchange as the most likely scenario, a view supported by recent reports that overseas investors could face a 20% ceiling on combined foreign ownership of any listed stock. Yet while the liberalisation of the market is likely to proceed more slowly than hoped for by investors, the opening will still help to generate fees for local banks and creates new growth opportunities - particularly if IPO activity picks up over the coming quarters. The Tadawul Bank Index has risen by 15.7% since the plans were unveiled, to their highest level since 2008.

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Related sectors of this article: Economy, Banking/Finance
Geography: Saudi Arabia
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