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|