The aggregate net income of Saudi banks increased by 28.4% year-on-year (YoY) to SR62.7 billion ($16.7 billion) in 2022, a report said, noting that they are likely to remain on a profitable path in 2023 with continued credit growth.   

The latest Saudi Arabia (KSA) Banking Pulse from leading global professional services firm Alvarez & Marsal (A&M) shows that higher credit demand, better asset yield, and operating efficiencies drove the top Saudi lenders’ profitability amidst rising benchmark interest rates.

FY’22 witnessed a high credit growth compared with deposits and is seen inching up further given strong economic momentum and investments, pushing the loan-to-deposit ratio to 96.7%. This can largely be attributed to demand in personal loans and real estate activities. The banks’ credit growth stood at 14.4% YoY, while deposits grew by 8.3% YoY.

In 2023, Saudi Arabian Monetary Authority (SAMA) will continue extending tenors for its support packages and other facilities to avoid a credit crunch. Higher interest rates are expected to result in migration of current and savings accounts toward term deposits.

NIM expanded as asset yield improvement surpassed changes in the funding cost. NIM improved by 15bps YoY to 3.0% due to higher spread between yield on credit (YoC) to 5.8% YoY and cost of funds (CoF) to 1.1% in FY’22. The consolidated net interest income (NII) surged (+15.7%) due to a rise in the SAMA policy rate during the year.

A&M’s KSA Banking Pulse examines data of the 10 largest listed banks in the Kingdom, comparing the FY’22 results against FY’21 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 2022 are as follows:
1. Loans & advances (L&A) growth significantly outpaced deposits growth in FY’22. Total L&A for the top 10 banks grew at 14.4% YoY whereas aggregate customer deposits increased by 8.3% YoY in FY’22. Nine out of the top 10 banks reported growth in deposits. Consequently, loan-to-deposit-ratio (LDR) improved by 5.1% YoY to 96.7%.

2. Operating income grew because of increased NII and non-funded income. Total operating income increased by 15.5% YoY as compared to 3.0% YoY in FY’21. The growth in operating income was primarily driven by NII which increased by 15.7% YoY and non-funded income which increased by 14.5% YoY in FY’22.

3. Six of the top 10 banks have reported expansion in NIM, with aggregate NIM increasing by 15bps YoY on YoC expansion more than CoF, amidst rising benchmark interest rates. YoC expanded (+93 bps YoY) more than cost of funds (+71bps YoY).

4. Cost-to-income (C/I) ratio improved by 2.3% to 32.5% in FY’22. The operating income reported growth of 15.5% YoY whereas the operating expense grew at a slower rate of 7.7% YoY in FY’22. Cost efficiencies improved at an aggregate level mainly due to branch rationalization in FY’22. Nine of the top 10 banks witnessed improvement in C/I ratio.

5. Aggregate Cost of Risk (CoR) improved significantly on the back of lower impairment charges. The CoR improved 19 bps YoY to settle at 0.46% for FY’22. Total impairments decreased by 19.5% YoY in FY’22. KSA banks remain well covered above 150% along with improving asset quality.

6. Rising interest rates boosted the profitability of KSA banks. Total net income increased by 28.4% YoY; as a result, the return ratios such as Return on Equity (ROE) and Return on Asset (ROA) improved by 2.3% points YoY to 13.8% and 0.3% points YoY to 2.0% respectively in FY’22.

Asad Ahmed, Managing Director and Head of Middle East financial services at A&M commented: “We consider the Saudi banks’ capital position to be strong. Profitability improved due to an increase in operating income which was further supported by lower impairments.

“SAMA has increased its interest rates along with the US Federal Reserve (+425bps) in FY’22 and we expect SAMA to continue matching monetary tightening by the Reserve, which will help boost the overall banking sector’s NIMs and in turn its profitability. Corporate lending is likely to increasingly drive credit growth in the near term as Saudi Vision 2030 projects are implemented.” – TradeArabia News Service