Onwards and upwards: Strong fundamentals and new opportunities will likely result in steady sector expansion

The banking sector in Saudi Arabia, which is one of the largest in the GCC, posted solid growth in 2011 and 2012. According to data from the Saudi Arabian Monetary Authority (SAMA), the central bank, total banking assets in the Kingdom reached SR1.65trn ($439.7bn) at the end of the third quarter of 2012, up from SR1.54trn ($410.41bn) at the end of 2011 and SR1.42trn ($378.43bn) at the end of 2010.

Bank profitability has also risen in recent years, reaching SR30.9bn ($8.23bn) at the end of 2011, up from SR26.1bn ($6.94bn) at the end of 2010 and SR26.8bn ($7.14bn) at the end of 2009. The industry’s expansion over the past few years is largely the result of strong fundamentals and proactive government oversight, especially in the wake of the 2008-09 downturn. Since mid-2011, in particular, the sector has benefitted from solid non-oil GDP growth and strong spending from both the government and private sector players. Indeed, National Commercial Bank (NCB), for example, recently forecasted continued expansion through 2013.

Strating Point

The banking system was not formalised until the early 1950s, when royalties from oil production and ongoing exploration expenses caused government revenues and expenditures to increase rapidly, necessitating the creation of a central bank. Before, the Kingdom’s financial sector was made up of local moneychangers and a handful of foreign banks. In April 1952 the government launched SAMA, which continues to serve as the central bank today. By the mid1950s oil inflows had boosted local demand for financial services, and the newly formed regulator licenced a variety of foreign and local institutions to offer banking products and services. Banks licenced during this period included local players NCB and Riyad Bank, in addition to a number of foreign institutions.

During the first half of the 1960s the sector went through a brief period of consolidation and restructuring, after Al Watany Bank, a local entity, issued a series of bad loans and was dissolved, subsequently being folded into Riyad Bank. In 1966, largely in response to these events, SAMA, in an effort to shore up its powers, issued the Banking Control Law of 1966, which continues to serve as the backbone of the financial regulatory framework today. The law strengthened the regulatory regime substantially. Under the law, banks were required to maintain rigorous liquidity, reserve and capital adequacy ratios, and SAMA held broad licensing and supervisory powers, many of which are still in place.


The sector grew exponentially through the 1970s, primarily as a result of rapidly increasing oil revenues and related economic activity. By 1980 the Kingdom was home to 12 banks, 10 of which were either fully or partially foreign-owned, according to the Bank for International Settlements (BIS). Declining oil prices through much of the 1980s strained the banking system considerably. By 1986, for example, more than 20% of all loans were non-performing loans (NPLs). Despite these issues, the sector continued to expand through 1990. A number of new entities opened their doors during this period, including the Saudi Investment Bank in 1984 and the Al Rajhi Banking and Investment Corporation in 1988. By 1990 around 25,000 employees worked in the Kingdom’s banks, up substantially from around 11,000 a decade earlier.

Recent History

The banking sector expanded considerably through the 1990s and 2000s, driven by the booming oil industry, regular rounds of consolidation and the Kingdom’s increasingly important non-oil sector. Since the early 2000s SAMA has allowed a number of foreign investment banks to operate in the Kingdom, reversing a 1975 policy that required all banks to have a local partner. In 2004 the central bank issued licenses to a number of foreign investment institutions, including Deutsche Bank, BNP Paribas and JP Morgan. Due in large part to SAMA’s conservative regulatory framework since the 1960s, the banking sector emerged from the 2008-09 financial crisis relatively unscathed.


That said, the default of two local firms – the Saad Group and Ahmad Hamad Algosaibi & Brothers – in 2009 had a negative impact on the Kingdom’s banks. SAMA responded strongly to the crisis. In an effort to mitigate the impact of global liquidity shortages spreading to the local interbank market during the crisis, the central bank cut the repo rate by a cumulative 350 basis points to 2% in late 2008 and early 2009. Similarly, the reverse repo rate was slashed by 175 basis points to 0.25% between late 2008 and mid-2009.

Perhaps most importantly, SAMA pushed some SR11.3bn ($3bn) in local and foreign currency into the banking system, in addition to SR15bn ($4bn) in swaps. This injection had the intended effect of supporting non-oil sector growth through end-2009, at which point most of the deposits had already been withdrawn.

The medium-term consequences of the crisis have been largely positive. Most banks have worked to improve risk management, boost provisioning and tighten loan portfolios. As of late 2012 the sector was widely considered to be fortified against future shocks and well positioned to carry out business in the future.

Oversight & Monetary Policy

SAMA has a far-reaching mandate that includes overseeing all aspects of the banking system, the insurance sector and the Kingdom’s monetary policy. In terms of monetary policy, the central bank’s primary long-term objectives include strengthening the Saudi riyal, carrying out the government’s banking and investment policies and regulating the commercial banking sector.

The Kingdom’s monetary policy is based on its fixed exchange-rate policy, under which the Saudi riyal has been pegged to the US dollar at a rate of SR3.75 to $1.00 since 1986. SAMA uses a number of tools to manage monetary conditions, including interest rates and banking regulations, especially lending and reserve requirements. In general, when oil revenues are up, SAMA records a fiscal surplus, and when oil exports are down it runs down foreign exchange assets and works to boost domestic demand through deficit spending.

Inflation in the Kingdom averaged around 1% on an annual basis between the 1980s and early 2000s. In 2006 rising domestic demand for food and housing bumped up prices considerably, and particularly in the years leading up to the financial crisis. In lieu of inflation targeting, which is not an option in the Kingdom due to the fixed exchange rate, in 2007 and 2008 SAMA sought to address the inflation through the implementation of subsidies and by boosting supply. After peaking at just over 11% in July 2008, according to BIS data, the rate dropped substantially over the following years, averaging around 5% in 2011, according to data published by Bloomberg. SAMA is expected to continue to match US interest rates for the foreseeable future. High liquidity levels point to continued low inflation for the foreseeable future, with NCB recently forecasting a rate of 4.8% in 2012 and 4.5% in 2013.

Islamic Banking

Islamic banking has come to play an increasingly important role in Saudi Arabia over the past decade. Unlike many other central banks in the region, which regulate sharia-compliant institutions under a distinct set of rules, SAMA maintains a single regulatory framework for Islamic and conventional institutions. In practice, all active commercial banks offer at least some Islamic products and services, while some banks are fully sharia compliant.

In March 2010 Muhammad Al Jasser, the governor of the central bank at the time, spoke about the bank’s activities at the Conference for Islamic Banks and Financial Institutions in Damascus. “At SAMA we supervise and regulate sharia-compliant activities in accordance with the same practices applied to conventional commercial banking businesses,” he said. “Hence, standards of capital adequacy, liquidity and other supervisory and monitoring requirements apply to both sharia-compliant institutions and banks. SAMA, in cooperation with Saudi banks and financial institutions, has deep-rooted international standards, such as those set forth in Basel II and those prescribed by the [Malaysia-based] Islamic Financial Services Board for risk management, corporate governance and internal controls.”

By The Numbers

Banking assets have grown substantially in recent years as a result of a sector-wide round of provisioning in the wake of the downturn. According to official SAMA data, as of the end of the third quarter of 2012 total banking assets had reached SR1.65trn ($439.73bn), up from SR1.54trn ($410.41bn) at the end of 2011, SR1.42trn ($378.43bn) at the end of 2010 and SR1.1trn ($293.15bn) at the end of 2007.

Short-term demand deposits totalled SR693bn ($184.69bn) as of the third quarter of 2012, which was equal to nearly 59% of total deposits of SR1.18trn ($314.47bn) in the same period. Prior to the 2008-09 downturn, time deposits made up the largest percentage of total deposits in the Kingdom. With interest rates down around the world in recent years, however, many private depositors – both individual and corporates – have moved their money into more flexible short-term demand accounts. According to NCB data, time deposits accounted for just 34.7% of total deposits by the end of the second quarter of 2012, which was an all time low. Foreign currency deposits have jumped substantially over the course of 2012, reaching SR172.2bn ($45.89bn) at the end of the third quarter, up from SR136.4bn ($36.35bn) at the end of 2011 and SR123.1bn ($32.8bn) at the end of 2010, according to the central bank. This growth was primarily the result of increasing public sector funds.

Expanding liquidity throughout the commercial banking sector in recent years, along with increased confidence in the wider economy, has resulted in a major jump in credit issuance since mid-2011. Bank claims on the private sector reached SR965.3bn ($257.25bn) at of the end of the third quarter of 2012, according to SAMA, up from SR858.4bn ($228.76bn) at end-2011 and SR775.8bn ($206.75bn) at end-2010. According to a report from Banque Audi, the recent jump in lending is the result of rising demand from the private retail and corporate sectors, which is largely a reflection of the Kingdom’s rapidly expanding non-oil economy. At the same time, bank claims on the public sector have improved slightly over the course of the year, hitting SR214.5bn ($57.16bn) at the end of the third quarter of 2012, up from SR209.6bn ($55.86bn) at the end of 2011 and SR241.3bn ($64.3bn) at the end of 2010. Short-term credit dominates the industry’s loan portfolios, accounting for just over 57% of total credit at the end of the third quarter of 2012.

Taking into account the government’s growing expenditures on infrastructure and housing, and the banking sector’s high liquidity levels, it is no surprise that profitability among local financial institutions has soared in recent years. According to SAMA data, net earnings in the sector reached SR28.75bn ($7.66bn) in the first 10 months of 2012, compared to SR30.9bn ($8.34bn) for the whole year of 2011. According to Banque Audi data, the sector’s return on average assets ratio reached 2.4% at the end of May 2012, up from 2.1% at the end of 2011 and 1.9% at the end of 2010. Similarly, the sector’s return on average equity reached 16.5% in May 2012, up from 14.5% at the end of 2011 and 13.2% at the end of 2010. Asset quality has also improved in recent years, as evidenced by the NPL to total loans ratio, which hit 2.1% at the end of the second quarter of 2012, down from 2.7% at the end of 2011.

Major Players

As of late 2012 the sector consisted of 12 local banks and a growing number of foreign banks. The industry is dominated by a handful of large-scale institutions. As of the end of the second quarter of 2012 the top four banks boasted SR938.7bn ($250.16bn) in total assets, which was equal to nearly 59% of total banking assets of SR1.59trn ($423.74bn) in the same period. The top bank by assets at the end of the second quarter of 2012 was NCB, with SR320.4bn ($85.39bn), or just over 20% of total assets. Al Rajhi Bank was second, with SR238.2bn ($63.48bn), or nearly 15% of total assets. In third and fourth place, respectively, were Samba Financial group, with SR199.5bn ($53.17bn), or 12.5% of the total; and Riyad Bank, with SR180.6bn ($48.13bn), or 11.3% of the total.

Rounding out the list are Banque Saudi Fransi, with $39.2bn in assets; Saudi British Bank, with $40.48bn; Arab National Bank, with $32.09bn; Saudi Hollandi Bank, with $16.52bn; Saudi Investment Bank, with $14.26bn; Bank Al Jazira, with $12.6bn; Bank Al Inma, with $11.78bn; and Bank Al Bilad, with $7.75bn (see analysis).

Recent Developments

The rise in domestic lending since mid-2011 is considered to be an important trend. In the first two quarters of 2012 Saudi banks added SR85.5bn ($22.78bn) in credit, compared to SR89.9bn ($23.96bn) over the entirety of 2011. The banks’ steadily expanding loan portfolios are closely linked to the sector’s accretion of assets in 2009 and 2010. During 2011 and the first three quarters of 2012 the majority of bank loans went toward the commerce sector, followed by manufacturing and processing, and services. By the end of second-quarter 2012 the home finance segment had jumped by 83.4% year-on-year, from SR16.5bn ($4.4bn) to SR47.9bn ($12.76bn). This was likely the result of the July 2012 mortgage law, which is expected to have a major impact on the housing and construction sectors going forward. According to Nabil A Al Mubarak, CEO of the Saudi Credit Bureau, the new law is expected to have knock-on effects for the sector. In particular, Al Mubarak pointed to attendant developments for the financial market in areas such as debt securitisation. These will necessitate regulation and monitoring, but in the long term they will increase the sophistication of the market and the opportunities it presents, according to Al Mubarak.

Banks have found it easier to lend since the Commercial Credit Bureau was launched in February 2009. A joint venture between SAMA, the Saudi Credit Bureau and local banks, the credit bureau has allowed banks to easily assess credit risk, which has had a positive impact on NPL ratios, in particular.

“The credit bureau system is the best thing that has happened to consumers and business establishments in Saudi Arabia,” said Mohammed Muhawesh, the general manager of Dar Al Etiman Al Saudi, a consumer finance company that focuses on automobile finance. “It provides huge assistance in underwriting and decision making, enabling good customers to receive better rates, slashing fraud and enabling businesses to speed up crucial decision-making capacity as well as helping companies to identify delinquent consumers and collection processes.”

Spending Spree

Local banks have also benefitted substantially from a jump in retail spending throughout the Kingdom in recent years. According to SAMA data, an average of SR54bn ($14.39bn) was withdrawn from Saudi ATMs on a monthly basis over the summer of 2012, which works out to around SR2000 ($533) per person. Incidentally, the nation’s monthly minimum wage is SR3000 ($800). “Employers are now required to pay their staff into bank accounts, whereas before it was common practice, particularly in the informal sectors, to pay in cash or by cheque,” said Khalid Baghdadi, managing director of Almajal G4S, a local security firm. “This means that ATM usage is increasing rapidly. Banks are expanding their ATM networks, and it is being felt on the streets. Now it is pretty common to see long lines at ATMs. This was not the case three years ago.”

According to Priyan L Attygalle, CEO of American Express Saudi Arabia, the use of cash is largely the norm in the Kingdom, although this is beginning to change. “Saudi Arabia is still a cash-based society where credit cards are not extensively used; however, this is changing quickly. Factors such as frequency of travelling, a more prepared infrastructure, and ultimately, e-government improvements and e-routes are helping to increase card usage,” Attygalle told OBG.


While the sector has performed well in recent years, the Kingdom’s banks are prone to a number of structural challenges. For example, the hydrocarbons sector continues to play a major role in the overall economy, thus, like much of the rest of the non-oil economy, local banks and financial institutions remain susceptible to international oil price volatility.

While lending has recovered over the past year, most banks’ loan portfolios are still light in terms of lending to small and medium-sized enterprises, which account for nearly 90% of locally registered firms. Additionally, the sector’s deposit portfolios continue to be heavily concentrated. According to a recent report from Moody’s, the top 20 depositors in the banking system account for around one-third of deposits. With short-term demand deposits making up nearly 60% of the total, this represents a mismatch in the sector’s asset/liability maturity profile. Finally, the financial sector has suffered as a result of a long-term skills shortage in the region, which has only been exacerbated by the “Saudiisation” initiative, which requires that a certain percentage of a company’s workforce be made up of nationals.

Still, the banking sector is poised for continued expansion in the coming years. As of the end of the second quarter of 2012 the industry had an NPL ratio of 2.1% – the lowest among all emerging and advanced economies, according to NCB data. High liquidity levels as a result of a period of provisioning in the wake of the financial crisis mean that many banks are preparing to boost lending further in the coming years. Similarly, a capital adequacy ratio of nearly 18% means that the sector is theoretically well positioned to withstand an external shock or a temporary decline in oil prices. Finally, the government’s plan to invest heavily in housing and infrastructure projects is expected to be a boon for the local financial services sector over the coming decade. With these strengths in mind, Saudi banks are looking forward to steady expansion for years to come.

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The Report: Saudi Arabia 2013

Banking chapter from The Report: Saudi Arabia 2013

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