Riyadh, Kingdom of Saudi Arabia – December  19, 2020 – Leading global professional services firm Alvarez & Marsal (A&M) has released its latest Saudi Arabia Banking Pulse for Q3 2020. The report suggests that the profitability outlook for banks showed signs of improvement as increased operating income and reduced provisioning supported return ratios. Saudi Arabia’s top 10 banks also reported an increase in loans and advances (L&A) which grew at a faster pace in Q3’20 (3.0% QoQ), compared to Q2’20 (1.9% QoQ). This growth was primarily driven by increased credit uptake in consumer and credit card segment. Similarly, deposits showed signs of improvement in comparison to the previous quarter. These can be partially attributed to an uptick in economic activity during the quarter following the easing of lockdown measures.

Saudi banks continued to improve their efficiency, as cost to income (C/I) ratio declined for the third consecutive quarter. Although operating expenses increased this quarter (+4.6% QoQ), C/I ratio fell as operating income increased at a quicker pace (+6.5% QoQ). Net interest margins (NIM) also continued to decline substantially, reaching 3.02% – the lowest level in past several quarters due to continued decline in yield on credit. Furthermore, the provisions for loans decreased by 36.7% QoQ to SAR3.2billion in Q3’20, which was a positive element in the results.

Alvarez & Marsal’s Saudi Arabia Banking Pulse examines the data of the 10 largest listed banks in the Kingdom of Saudi Arabia (KSA), comparing the third quarter of 2020 (Q3 2020) against the previous quarter (Q2 2020).

The prevailing trends identified in Q3 2020 are as follows:

1. Aggregate loans and advances (L&A) and deposits increased at a faster pace. Despite a slowdown in the economy, L&A (+3.0% QoQ) and deposits (+2.8% QoQ) of the top 10 KSA banks increased at a faster pace in Q3’20. Consequently, loans to deposit ratio (LDR) increased to 86.9% in Q3’20 from 86.7% in Q2’20. The improvement in the L&A and deposits growth could be partially attributed to the opening of some sectors of the economy post Q2’20.
2. Operating income increased, driven by support from major income streams. Operating income increased 6.5% QoQ, compared to a drop of 3.9% QoQ in Q2’20. The improvement in the operating income was driven by an increase in net interest income (NII +2.0% QoQ) and net fee and commission income (+20.0% QoQ). The improvement in NII was despite reduced system-wide interest rates. Fee income increased as easing of lockdown measures in certain sections of the economy potentially generated higher fee / commission income from cards. In terms of individual banks, operating income for NCB increased at the fastest pace (+18.3% QoQ). On the other hand, SABB’s operating income declined 7.6% as the bank’s NII reduced, largely on the back of decline in L&A (-0.7% QoQ).
3. Net interest margin (NIM) continued to decline, as system-wide rates touched multi-year lows. Aggregate NIM fell by 3bps to 3.02% in Q3’20, largely due to 19 bps decline in yield on credit caused by the lower interest rate environment. SABB (-27 bps QoQ) and RIBL (-20 bps QoQ) reported the highest decline in NIM.
4. Cost-to-income ratio improved for the third consecutive quarter. Cost-to-income (C/I) ratio improved to 34.3% in Q3’20, compared to 34.9% in Q2’20. Total operating expenses increased 4.6% QoQ. However, this was offset by a faster increase in operating income. Six of the top 10 banks reported a decline in the C/I ratio.
5. Provisioning decreased substantially, after rising in the previous quarter. Total provisioning decreased by 36.7% QoQ, after rising sharply in Q2’20. NPL / net loans ratio remained broadly stable at 2.0%. Cost of risk declined from 1.28% in Q2’20 to 0.79% in Q3’20. Coverage ratio declined further to reach 144.1%, as NPLs increased 3.6% QoQ.
6. Profitability improved as increased operating income and reduced provisioning supported return ratios. Net income increased 27.5% QoQ, as total operating income increased 6.5% QoQ and provisioning declined 36.7% QoQ. As a result, RoE increased to 13.2% from 10.6% in Q2’20.

Alvarez & Marsal’s report uses independently sourced published market data and 16 different metrics to assess 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 National Commercial Bank (NCB), Al Rajhi Bank, Riyad Bank, Samba Financial Group, Saudi British Bank, Banque Saudi Fransi, Arab National Bank, Alinma Bank, Saudi Investment Bank and Bank Albilad.

OVERVIEW

The table below sets out the key metrics:

Source: Financial statements, investor presentations, A&M analysis

Dr. Saeeda Jaffar, A&M Managing Director and Head of Middle East, and Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services, co-authored the report.

Mr. Ahmed commented: “While we have witnessed an overall improvement in profitability this quarter, the near-term outlook for Saudi banks looks bearish. The Saudi government’s announcement to cut budget spending by 7.5% in 2021 could have a spill-over effect in other sections of economy. We also expect interest rates to remain at current record low levels, which could limit NII growth.

“However, Saudi banks’ strong capitalisation levels would provide some cushion against any material deterioration of the fundamental profile of banks. Furthermore, the Saudi central bank’s extension of the loan deferral program until the end of the first quarter of next year is expected to provide some relief for the economy to recover from the effects of COVID-19.”

About Alvarez & Marsal

Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) for leadership, action and results. Privately held since its founding in 1983, A&M is a leading global professional services firm that provides advisory, business performance improvement and turnaround management services. When conventional approaches are not enough to create transformation and drive change, clients seek our deep expertise and ability to deliver practical solutions to their unique problems.

With over 5,000 people across four continents, we deliver tangible results for corporates, boards, private equity firms, law firms and government agencies facing complex challenges. Our senior leaders, and their teams, leverage A&M’s restructuring heritage to help companies act decisively, catapult growth and accelerate results. We are experienced operators, world-class consultants, former regulators and industry authorities with a shared commitment to telling clients what’s really needed for turning change into a strategic business asset, managing risk and unlocking value at every stage of growth.

To learn more, visit: AlvarezandMarsal.com. Follow A&M on LinkedIn, Twitter, and Facebook.

###