Heading For Another Year Of Healthy Growth

BMI View: We expect the profitability of Saudi Arabia's commercial banking sector to remain robust heading into 2014, although the ongoing difficulties faced by the construction sector could put mild pressure on earnings over the coming quarters. We forecast credit growth of 13.0% by end-2013 (from 10.0% previously), and 10.0% in 2014.

The profitability of Saudi Arabia's commercial banking sector will remain robust heading into 2014, bolstered by strong private sector activity and bright prospects for retail . Al Rahji and Samba Financial Group , the country's two largest listed banks by market capitalisation, posted net profit gains of 1.4% y-o-y and 1.5% respectively in the second quarter of the year. Saudi bank shares have outperformed other sectors: as of the time of writing on August 19, the banking index was up by 23.0% year-to-date, compared to 19.0% for the broader TADAWUL index. We forecast total asset growth of 9.0% and 8.0% in 2013 and 2014 respectively, down slightly from an average of 11.5% y-o-y in the first half of the year.

Liquidity Conditions Remain Favourable
Saudi Arabia - Commercial Bank Deposits

Deposit growth picked up pace over the second quarter of the year, reaching 14.4% y-o-y in June. We now pencil in deposit growth of 13.0% by the end of the year (from 10.0% previously ), slowing to 10.0% in end-2014 as a result of high base effects.

Credit growth has remained vigorous , averaging 15.9% y-o-y over the first six months of the year. We have raised our forecasts slightly, and now project total lending growth of 15.0% and 13.0% in 2013 and 2014 respectively (from 13.0% and 11.0% previously). Strong household consumption and supportive fiscal policies from the government remain the principal d rivers of lending activity , and have helped to boost the lucrative retail lending segment in particular . Latest data from the Saudi Arabian Monetary Agency points to annual growth of 22.2% in consumer loans granted by Saudi commercial banks over the second quarter of 2013, up from 20.9% in Q212. Housing finance , where room for growth remains significant, expanded by 25.2% y-o-y in the same period.

Steady Growth In Credit
Saudi Arabia - Commercial Bank Loans, SARbn and % chg y-o-y (RHS)

However, one point of concern is the construction sector, where operating conditions have become more challenging since the beginning of the year as a result of the government's 'Saudisation' measures and associated increases in labour costs (see 'Labour Laws To Undermine GCC's Largest Market?', August 3) . This has led to delays in project implementation, as well as the disruption of a substantial share of the infrastructure project pipeline: in July, a member of the National Committee in Saudi Chambers suggested that 36% of registered construction project contracts in the country had been cancelled.

As a result, smaller contracting firms are st ruggling to service their debts, putting mild pressure on commercial banks' earnings. B anks' exposure to the construction sector has moderated sharply over the last two quarters, with construction loans falling by 1.0% y-o-y in Q213 (the worst performance since Q211). Commercial banks will likely need to book extra loan loss provisions against domestic investments over the coming quarters, although we note that the risk to overall banking sector stability remains limited. Non-performing loans (NPLs) amounted to only 1.9% of the total in 2012 (down from 2.3% in 2011), and SAMA has long encouraged domestic banks to build strong provisioning buffers. The ratio of total provisions to gross NPLs reached 145.1% in 2012, according to IMF data - the highest since 2008.

Construction Sector Slowdown
Saudi Arabia - Credit Growth By Sector, % chg y-o-y

BMI projects the US Federal Reserve to hold off on raising the benchmark funds rate until 2015 (see 'Tightening Finally On The Horizon', July 1) . Owing to the currency peg between the US dollar and the riyal, w e expect no change to the Central Bank's (SAMA) key policy rates over the coming quarters, with the repo and reverse repo set to stay at their current levels of 2.0% and 0.25% respectively. This will continue to boost credit volumes, although commercial b anks will face low interest margins for a sixth consecutive year throughout 2014.

This article is tagged to:
Sector: Country Risk
Geography: Saudi Arabia

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