The performance of the top 10 banks in Saudi Arabia has been largely strong and positive, according to a new report.
Global professional services firm Alvarez & Marsal (A&M) has published its fourth annual edition of the Kingdom of Saudi Arabia (KSA) Banking Pulse for the fiscal year 2023.
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Operating income grew by 9.5 percent, driven by higher Non-Interest Income (NII). Additionally, Net Interest Margins (NIMs) improved by 3.5 percent, and both the cost-to-income ratio (C/I) and the Cost of Risk (COR) showed improvement. Overall, the return on equity (ROE) increased to 14.5 percent, while the return on assets (ROA) remained steady at a healthy 2.0 percent. Looking ahead, the outlook for Saudi banks is expected to remain stable to positive.
During FY’23, liquidity faced relative pressure as loan growth outpaced deposit growth, primarily due to high interest rates. Government and Resident Entity (GRE) deposits reached a record high of 31.2 percent (compared to 28.4 percent in 2022) of total KSA bank deposits, accounting for 68.2 percent of the total deposit increase in FY’23. This resulted in an increase in money supply in the economy, helping to moderate liquidity conditions in the Saudi Arabian banking system.
Net Interest Margin
The Net Interest Margin (NIM) expanded slightly to 3.1 percent as the yield on credit (YoC) increased by 2.1 percent year-on-year, surpassing the cost of funds (CoF) growth of 1.8 percent year-on-year. The slower pace of loan growth compared to deposit growth can be attributed to the Saudi Central Bank (SAMA) increasing the policy rate.
A&M’s KSA Banking Pulse analyzes data from the 10 largest listed banks in the Kingdom, comparing the FY’23 results with the FY’22 results. The report utilizes independently sourced published market data and examines 16 different metrics to assess banks’ key performance areas, including size, liquidity, income, operating efficiency, risk, profitability, and capital.
The 10 largest listed banks in the country analyzed 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).
Prevailing trends
Here are the major trends observed for FY 2023:
1. Loans and advances (L&A) experienced faster growth compared to deposits. The aggregate L&A for the top 10 banks grew by 10.6 percent year-on-year (YoY), while customer deposits increased by 7.8 percent YoY in FY’23. As a result, the loan-to-deposit ratio (LDR) increased by 2.5 percent YoY, reaching 99.2 percent.
2. Total operating income increased by 9.5 percent YoY, compared to 15.4 percent YoY in FY’22. The growth in operating income was primarily driven by Net Interest Income (NII), which increased by 10.9 percent YoY, and non-funded income, which increased by 4.3 percent YoY in FY’23. Among the top 10 banks, SABB reported a significant increase of 31.7 percent YoY in operating income, mainly due to a substantial rise in net interest income (+39.6 percent YoY).
3. Net Interest Margin (NIM) improved to 3.1 percent due to a higher spread between the yield on credit (+2.1 percent YoY) and the cost of funds (+1.8 percent YoY) in FY’23. Additionally, the slower pace of differential loan growth compared to deposit growth contributed to the improvement. Aggregate net interest income (+39.6 percent YoY) grew due to the increase in the SAMA policy rate (+100bps YoY) during the year.
4. The cost-to-income (C/I) ratio improved by 0.6 percentage points to 31.9 percent in FY’23. Operating income showed a growth of 9.5 percent YoY, while operating expenses grew at a slower rate of 7.5 percent YoY in FY’23. Seven out of the ten banks witnessed an improvement in the C/I ratio.
Other major trends
5. The cost of risk improved by 5 basis points (bps) YoY, settling at 0.41 percent for FY’23. Total impairments marginally decreased by 1.1 percent YoY, reaching AED9.8 billion in FY’23. BALB reported a significant improvement of 29 bps YoY, while RIBL reported the highest deterioration of 20 bps YoY in FY’23.
6. Rising interest rates contributed to the profitability of KSA banks. Aggregate net income increased by 11.8 percent YoY, resulting in an improvement of 0.8 percentage points YoY in return on equity (ROE), reaching 14.5 percent in FY’23. However, return on assets (ROA) remained stable at 2.0 percent in FY’23, showing positive traction.
Stability and growth potential of Saudi banking sector
Mr. Asad Ahmed, managing director and head of Middle East financial services at A&M, expressed that the stability and growth potential of the Saudi banking sector were highlighted in the 4th annual KSA Banking Pulse. He noted the remarkable growth in operating income and an increase in return on equity. Despite economic challenges, the industry effectively navigated through by leveraging favorable credit conditions. The analysis conducted by A&M indicates the enduring stability of the sector and its promising upward trajectory, which reinforces their optimism for its future.
Mr. Ahmed further stated that considering Saudi’s Vision 2030, the banking sector in the Kingdom is expected to play a central role in achieving its objectives. A positive outlook is anticipated for KSA banks, with prospective loan growth, improving asset quality, and well-capitalized books. Taking into account the upcoming scenario of interest rate cuts by the second half of 2024, it is expected that net interest margins (NIMs) will remain stable at around 3.0 percent throughout the year.
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