Dubai: Saudi Bank’s profitability that witnessed improvement in the first quarter of 2020 is likely to be impacted by COVID-19 headwinds according to global professional services firm Alvarez & Marsal (A&M).
In its first ever ‘KSA Banking Pulse’ report released on Wednesday, A&M said that the top banks in Saudi Arabia showed mixed performance in Q1 2020 as improved operating efficiency and lower provisioning was offset by the effect of reduced interest rates.
The report examines the data of the 10 largest listed banks in the KSA, comparing the first quarter of 2020 (Q1 2020) against the previous quarter (Q4 2019).
Profitability
Despite the outbreak of COVID 19, the performance of KSA banks in terms of loans and advances growth has been encouraging as it grew by +4.9 per cent quarter on quarter in Q1’20.
Profitability has also improved with return on equity (RoE) increasing to 12.5 per cent in the first quarter of the year, as increased operating efficiency and lower provisioning helped in negating the effect of lower operating income.
“We have seen that profitability of the top KSA banks in Q1’20 showed substantial improvement,” said Dr. Saeeda Jaffar, A&M Managing Director and Head of Middle East.
Loans & deposits
Loans & advances and deposits of the top ten banks in Saudi Arabia increased even with tough macroeconomic conditions. Despite the lockdown measures announced towards the end of the first quarter of 2020 , loans and deposits increased 4.9 per cent and 1.5 per cent, respectively quarter on quarter, consequently, net loans to deposit ratio increased to 86 per cent from 83.2 per cent in the previous quarter.
Interest income & NIM
Total operating income fell 1.6 per cent quarter on quarter as net interest income (NII) decreased 3.9 per cent. Following the Q1’20 results major banks have also reduced their 2020 guidance acknowledging the tough market conditions.
NII dropped as low interest rates more than offset an increase in loans and advances. However, this was partially offset by an increase in non-interest income, which grew by about 7 per cent. Non-interest income increased as certain banks reported strong trading income during the quarter.
Low interest rates weighed on NIM. Aggregate NIM fell by about 25 bps to 3.2 per cent in Q1, 2020, largely on account of a 59 bps decline in yield on credit. NIM were at multi-period low levels in Q1 2020, with almost all banks reporting decline in their NIM.
Improved cost efficiency
Cost-to-income ratio improved after rising in the previous quarter. Cost-to-income (C/I) ratio fell to 35.1 per cent in Q1 2020, compared to 37.4 per cent in the previous quarter. Total operating expenses for the coverage banks dropped 7.7 per cent, on the back of cost efficiency measures. Six of the ten banks reported a decline in their C/I ratio.
Provisioning decreased on a sequential basis, but increased substantially annually. Total provisioning fell by 21.8 per cent QoQ. However, NPL / net loans ratio increased from 1.8% in Q4’19 to 1.9 per cent in Q1’20.
Profitability improved as cost efficiency measures and reduced provisioning helped in offsetting the effect of reduced interest rates. Net income increased 13.1 per cent quarter on quarter, as decline in operating expenses and provisioning more than offset a drop in total operating income. Consequently, RoE increased from 11.1 per cent in Q4’19 to 12.5 per cent in Q1’20.
The sector is likely to face a challenging environment due to COVID 19 headwinds. With oil prices dropping, austerity measures from the government are likely to delay major projects and impact demand in the economy. Thus, we expect loan growth to remain limited, while low interest rate regime coupled with a possible increase in provisioning will impact profitability
Squeeze ahead
Despite the relatively strong showing in the first quarter of 2020, A&M expects key operating matrixes of Saudi banks to be impacted in the near term by COVID-19.
“The sector is likely to face a challenging environment due to COVID 19 headwinds. With oil prices dropping, austerity measures from the government are likely to delay major projects and impact demand in the economy. Thus, we expect loan growth to remain limited, while low interest rate regime coupled with a possible increase in provisioning will impact profitability,” said Asad Ahmed, A&M Managing Director.
In the medium to long term, he expects Saudi banks to focus more on rationalizing their costs to hedge against the uncertain conditions
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