Dubai: Saudi banks could find it tough to maintain profitability in 2021 as the Saudi Central Bank lifts its support measures and interest rates expected remain low, according to Standard & Poor’s (S&P).
“The Saudi economy will recover in 2021-2022 from the shocks of 2020 as global demand for oil recovers and private consumption increases. That said, real GDP will not return to 2019 levels until 2022, in our view,” said Roman Rybalkin, an analyst at S&P.
Credit growth picked up in 2020 based on stronger mortgage and small and midsize enterprise (SME) lending.
The rating agency expects credit growth to stay strong in nominal terms in 2021-2022, but to slow down due to high-base effect. Overall, retail credit growth is likely to stay strong due to continued focus on mortgages, although the market will gradually saturate.
S&P analysts expect corporate credit growth to pick up as public investment fund programmes generate business for contractors, credit to small and medium enterprises (SME) are seen slowing down as deferral programmes come to a close.
Asset quality & profits
Saudi banks are expected to face asset quality issues warranting additional provisions in 2021 as the central bank withdraws its forbearance measures extended following the COVID-19 crisis.
Cost of risk will remain elevated in 2021, despite stronger-than-expected estimates for 2020, as the Saudi Central Bank lifts its forbearance measures. Combined with very low interest rates, this will weigh on banks' profitability.
“We expect cost of risk to stay elevated in 2021 at about 120 basis points. This reflects our view that the volatile global health situation and international travel restrictions still weigh on the economy,” said Rybalkin.
Although the 2020 results seemed stronger-than-expected, S&P sees this as a distortion caused by fast growth in mortgages across the year and lending to government-related entities in the first quarter of 2020.
Despite the lower profitability, analysts said, on average, Saudi banks will outperform their regional peers. This largely reflects the relatively modest impact of the pandemic on the quality of banks’ loan books and stronger growth of mortgage lending.
Payment in cash has gradually become less prevalent in Saudi Arabia, demonstrating a growing digitalisation of the banking system. This exposes Saudi financial institutions to competition from challenger banks in the future.
Banks face more competition in retail spaces because of open application programming interface (API) policies and the emergence of fintech companies. In particular, buy-now-pay-later cards and peer-to-peer lending are becoming popular.
S&P expects ratings on banks to remain stable in the next 12-24 months. The outlooks on Saudi banks are mostly stable, indicating that we expect the size of the economy, conservative regulation, and lack of aggressive growth pre-2020 to help the banking sector navigate the challenges of 2021-2022.
The rating agency said, the merger between National Commercial Bank (NCB) and Samba Financial Group (SFG) may create a national champion that could focus on financing large strategic project. The positive outlooks on NCB and SFG signify that the post-merger institution may have a stronger credit profile than the individual banks.