Riyad Bank in Saudi Arabia. Banks in Saudi Arabia are expected to maintain strong loan growth in 2021, largely led by retail lending leading to sustainable growth in profitability. Image Credit: Gulf News Archives

Dubai: Banks in Saudi Arabia are expected to maintain strong loan growth in 2021, largely led by retail lending leading to sustainable growth in profitability.

Saudi Arabia’s stock marketed listed banks reported a 14 per cent rise in aggregate net profit before Zakat (a mandatory religious charity) and tax to the tune of SR 4.02 billion in March 2021 as against SR 3.53 billion a year earlier, according to data from the Saudi Central Bank (SAMA).

Banks’ aggregate assets grew by over 11 per cent year on year (YoY) to SR3.035 trillion in March, combined deposits increased by 9 per cent year on year to SR1.980 trillion in the same month, whereas loans to the private sector saw an increase of 15 per cent year on year to around SR 1.871 trillion by the end of March.

Analysts and rating agencies expect Saudi banks to maintain their strong loan growth this year too. Data from Standard & Poor’s show bank credit expanded by 14.5 per cent last year and is projected to be in excess of 10 per cent this year.

“This (2020 loan growth) mostly stemmed from mortgage and SME lending, as well as from drawdowns of credit lines, with corporates bracing for pandemic-related restrictions. We think banks’ lending will slightly exceed 10 per cent in 2021-2022 thanks to a stimulus for mortgages, and government and PIF investments in the economy,” said Roman Rybalkin, an analyst at S&P.

Data on Q1 earnings showed increase in net profits of Saudi banks due in part to corporate credit growth, which picked up substantially in 2021 after the Public Investment Fund programmes helped generate additional business for contractors and small and medium enterprises.

Retail driven

The credit growth will be significantly supported by mortgages that are expected to expand by 30 per cent per year.

While government support and the country’s demographic trends, with hundreds of thousands of young Saudis reaching adulthood each year and a gradual trend for smaller families will boost mortgage demand, new government investments led by the Public Investment Fund (PIF) at $40 billion per year, will also contribute to corporate credit.

Banks with a larger portion of retail lending have profitability metrics at the higher end of the sector. Saudi banks have been actively chasing retail lending as a result, adjusting their strategies and increasing their appetite for this segment. According to rating agency Fitch, retail lending accounted for 38 per cent of total lending at end of the third quarter of 2020, up from 31 per cent at end-2016.

Various factors support the high retail growth, including strong margins on retail products and the Saudi government placing home ownership at the centre of its Vision 2030 strategic plans. This has led to vast programmes of government subsidies that boost margins and guarantees (since 2017) for retail mortgages.

“Returns on retail portfolios are supported by unusually low funding costs, with retail loans largely funded by retail non-interest-bearing deposits (NIBs). The absence of caps on retail loan pricing also contributes to high margins,” said Amin Sakhri, an analyst at Fitch Ratings.

Asset quality

Along with strong growth in lending Saudi banks’ asset quality is expected to decline this year.

“We expect Saudi banks’ asset quality indicators will deteriorate as the banks lift payment deferrals in 2021. Under our base-case scenario, cost of risk could exceed 100 basis points (1 per cent) in 2021 before it starts to normalise from 2022. We think higher leverage in the economy, together with a higher share of SME lending, will result in a higher run rate of cost of risk than pre-2020,” said Rybalkin.