Saudi Arabia | Banking Sector

Author: Justin Keay

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Saudi Arabia | Banking Sector Report
Refining The Mix
King Abdullah's Legacy For Saudi Arabia
Saudi Arabia Throws Open The Doors To Foreign Investors


For many banks, the big opportunity for 2015 will be the long-anticipated opening up of the Saudi stock market, the largest in the Gulf, to foreign retail investors. Estimates of how much foreign capital could enter the Tadawul vary. Schroeder’s has suggested it could be as much as $40 billion, which would be equal to 8% of the bourse’s total current value, but others are more cautious.

“Whilst oil prices are where they are, I don’t expect large inflows: I think investors will be cautious and wait at least until energy prices start heading back northwards. I think the opening (to foreign investors) will be gradual, as in China. And it’s not as if they desperately need the money,” says James Reeve, an analyst at Samba Financial Group.

Sector-wise, the currently low oil prices and low Chinese demand suggest petrochemicals won’t attract much interest; however Reeve says the education and health sectors, which are both getting substantial government investment, will be areas to watch.   

To service foreign investor demand, Banque Saudi Fransi, one of the largest Saudi banks, is opening a division within the Dubai International Financial Centre (DIFC): Saudi Fransi Capital International will focus on asset management and brokerage activities. Indeed, Banque Saudi Fransi isn’t the first Saudi financial institution to set up shop in the DIFC. In April 2014, Alkhair Capital became the first Saudi financial institution to get authorization from the Saudi CMA to operate in the DIFC. It is focusing on Islamic finance, anticipating significant demand for sukuk products. Other Saudi banks will probably follow.

However there will still be many opportunities within Saudi Arabia. Reeve says the two main drivers of business for the banks have been government spending, particularly in construction, which over the past four years has been increasing at around 25% a year, and retail spending, which is growing at around 9% a year. Reeve reckons both will continue but at a more modest pace—around 1% or 2% a year. Meanwhile the expected rise in interest rates will also help the banks’ bottom line. “It won’t be such a bumper time as before, but there’s still going to be plenty of business out there,” he argues, especially on the retail side, which remains relatively undeveloped.

Credit cards are a growing business, as are many new Islamic finance products, but once many of the current legal uncertainties are sorted, mortgages, which are currently in their infancy here, promise huge business for the banks. However SABB’s Dew says it is likely that the banks’ innate conservatism—reinforced by SAMA’s regulatory regime—means the focus will remain on keeping things simple. 

“We put an enormous amount of effort into customer service, but this continues to be a huge area of opportunity, for example in continuing to better our online capabilities,” he says, suggesting it would be misguided to consider looking at new complex products rather than just continuing to improve doing what the bank has always done well. 

Dew says the sector’s record—even at the nadir of the global financial crisis, no Saudi bank came close to making a loss, let alone needing a government bailout—speaks for itself. “The bottom line here is that the Saudi bank sector is strong, stable and successful, with high levels of capital and liquidity. I see no reason why that should change,” argues Dew.

GFmag.com Data Summary: Saudi Arabia

CENTRAL BANK: SAUDI ARABIAN MONETARY AGENCY

International Reserves

N/A

Gross Domestic Product
(GDP)

$737,797 billion

Real GDP Growth

2011
8.6%

2012
5.8%

2013
4.0%

GDP Per Capita
Current Prices

$24,953

GDP
Composition By Sector*  

agriculture:
2%

industry:
62.5%

services:
35.5%

Inflation

2011
3.8%

2012
2.9%

2013
3.5%

Public Debt
(general government
gross debt as a % of GDP)

2011
5.4%

2012
3.6%

2013*
2.7%

Government Bond Ratings
(foreign currency)

Standard & Poor’s
AA--

Moody’s
Aa3

Moody’s Outlook
STA

FDI Inflows

2011
$16,308 million

2012
$12,182 million

2013
$9,298 million

*Estimates                                                              
Source: GFMag.com Country Economic Reports, IMF

 

 

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