Profitability metrics of the top 10 banks in Saudi Arabia witnessed an improvement during 2021 with post Covid-19 economic recovery, with net income increasing by 15.5 percent YoY to SR48.8 billion ($12.8 billion), a report said.

The aggregate loans and advances (L&A) grew 14.2 percent year-over-year (YoY) as all the top ten banks reported a growth, however deposit mobilization slowed down in FY’21, according the latest Saudi Arabia (KSA) Banking Pulse for FY 2021 released by professional services firm Alvarez & Marsal (A&M).

The report notes that the growth in net income (15.5 percent YoY) is mainly attributed to higher operating income (+3.5 percent YoY) along with lower impairments (-28.9 percent YoY). The net interest margin (NIM) declined by 18 bps YoY to 2.9 percent in FY’21 as interest rates fell to a 15-year low. Despite the lower NIM, the banks’ increased profitability demonstrates higher efficiency across the sector.

A&M’s KSA Banking Pulse examines data of the 10 largest listed banks in the Kingdom, comparing the FY’21 results against FY’20 results. Using independently sourced published market data and 16 different metrics, the report assesses banks’ key performance areas, including size, liquidity, income, operating efficiency, risk, profitability, and capital.

The country’s 10 largest listed banks analysed in A&M’s KSA Banking Pulse are Saudi National Bank (SNB), Al Rajhi Bank, Riyad Bank (RIBL), Saudi British Bank (SABB), Banque Saudi Fransi (BSF), Arab National Bank (ANB), Alinma Bank, Bank Albilad (BALB), Saudi Investment Bank (SIB) and Bank Aljazira (BJAZ).

The prevailing trends identified for FY 2021 are as follows:

1. L&A growth remained strong; supported by recovering consumer spending while deposits growth slowed down in FY’21. The aggregate L&A increased at a higher rate of 14.2 percent YoY in FY’21 as compared to 12.8 percent YoY in FY’20. This was driven by robust performance in the mortgage segment across the banking sector. The aggregate retail mortgage across the KSA banking sector increased by 47.8 percent to SAR 413bn.

The deposit growth was slower at 7.2 percent YoY as compared to 9.2 percent YoY in FY’20. Consequently, aggregate loan-to-deposit ratio (LDR) rose to 91.5 percent from 86.0 percent, highlighting the higher consumer spend as the economy continues its post-pandemic recovery.

2. Total operating income increased by 3.5 percent YoY. The growth was primarily due to higher net interest income (+4.0 percent YoY), resulting from higher cost efficiencies during the low interest rate environment and net fee & commission income (+9.9 percent YoY). The growth was partially negated due to lower currency translation related losses and lower operating income (-8.3 percent YoY).

3. Aggregate net interest margin (NIM) declined by 18 bps YoY to 2.9 percent in FY’21, largely on the back of low interest rate environment. Saudi Arabia’s Central Bank had previously cut repo rates by 125 bps in March ’20 to c.s 1.0 percent, the lowest interest rates since 2007, to support the economy during the pandemic. Aggregate yield on credit declined by 74 bps YoY, while cost of funds fell 23 bps YoY.

4. Cost-to-income (C/I) ratio decreased by 0.2 percent points YoY to 35.2 percent, as banks’ administrative expenses increased at a slower pace. The aggregate operating income (+3.5 percent YoY) increased at a higher rate compared to operating expenses (+2.9 percent YoY).

5. Total impairments decreased by 28.9 percent YoY to SAR 12.4bn, as banks reported lower provisions, alongside the economic recovery, due to higher consumer spending, increasing oil prices and infrastructure spend. Consequently, cost of risk increased by 39 bps YoY to 0.7 percent.

6. Aggregate net profit improved by 15.5 percent YoY, due to higher operating profit and decreased provisions. This resulted in an increase in profitability ratios such as Return on Equity (RoE) and Return on Assets (RoA) to 11.4 percent and 1.7 percent from 10.9 percent and 1.6 percent, respectively.  

Asad Ahmed, Managing Director and Head of Middle East financial services at A&M commented: “In 2022, we expect corporate and mortgage lending to grow primarily due to giga government initiatives such as Red Sea project, Qiddiya and NEOM. Moreover, higher crude oil prices following the Russia-Ukraine conflict should also support the overall government spending in Saudi Arabia.

“Furthermore, we expect that the rate increase announced by the Saudi Central Bank to match the US Federal Reserve’s rate hike policy, will boost the banking sector’s net interest margins and in turn its profitability.” – TradeArabia News Service