Rania Nashar, CEO of Samba Financial Group, discusses the bank’s plans to overcome challenges and continue to grow in the future.
Global Finance: What is driving the growth of Saudi banks?
Rania Nashar: The Vision 2030 perspective of the kingdom has started to gain strength, with the non-oil economy showing consistent increase and adjusting itself to the goals laid out in the Vision. The announced budget is positioned to provide a support platform of sustainable growth looking forward to the years 2020 and beyond, and this will be strengthened with stable oil prices and an aggressive spending outlook to support the vision platform. Saudi banks are pursuing strategies to align with the goals of Vision 2030, and this is helping drive growth in the sector.
The foremost opportunity we see is the growth in the mortgage loans market. This is a strong positive, as increase in home ownership is an important ambition for the country. Recent data from SAMA [the Saudi Arabian Monetary Authority] already reveals a sizeable portion of recent growth as contributed through the home mortgage window. The active role played by the REDF/MOH [Real Estate Development Fund and the Ministry of Housing] in stimulating this segment is the key catalyst in this growth, as we expect this to further increase over the next year.
One must remember that Saudi Arabia has a young and fast-growing population. This of course drives housing demand; but it also spurs demand for a range of infrastructure, utilities, consumer goods and a host of other lifestyle-support industries.
The Vision 2030 program places considerable emphasis on developing the tourism and entertainment sectors. The authorities are pushing ahead with megaprojects such as Neom [a planned cross-border smart city and tourism destination near the Red Sea] , Qiddiya [an entertainment and tourism complex under construction in Riyadh] and the Red Sea [a luxury-tourism-oriented development project on the Red Sea coast]; while the facilities around holy sites have also been expanded and improved. The Public Investment Fund is taking the lead on these projects, supported by bank finance playing an important auxiliary role. This is a strong story and one that will create a positive ripple effect across the economy.
Another key factor for banking-sector growth is the opportunity to expand the investment book positioned toward the new domestic bond issuance opportunity. This will bring benefits as the government continues to address its fiscal deficit through fresh issues of debt. Banks are more than eager to invest in high-quality government debt to improve their margins.
Finally, the empowerment of women in the kingdom is also contributing to banking sector growth. The growth of female employment and mobility naturally raised demand for bank accounts, and we expect this trend to continue.
GF: Describe some of the challenges you face, and how you plan to overcome them.
Nashar: The Financial Sector Development Program has addressed key structural issues and looks to find workable solutions. For example, promoting lending to the SME [small and midsize enterprise] sector has been one of the top priorities of the authorities. To address this, various stimulants are offered. The capital of the Kafalah Program, which underwrites bank loans to SMEs, has been increased; an SME investment fund has been established; and a program to develop financial literacy among SMEs has been set up.
In addition, the Commercial Pledge Law has been revised: The collateral registry now covers movable collaterals, which should in turn allow businesses, particularly SMEs, to leverage their assets into capital for investment.
Measures to improve low savings ratios are addressed, and the government is focusing on improving financial literacy. Financial education content is now being developed, in conjunction with the Ministry of Education. Banks have also been encouraged to actively promote savings products. Over 2019, Samba launched its Sovereign Sukuk Fund initiative—the first of its kind in the kingdom—to encourage Saudi households to invest in government debt. In addition, Samba launched our Thamarat online savings account, offering higher returns to the depositors. The success of all these initiatives shows there is strong and positive demand from Saudi households for investments that will provide long-term income stream benefits to all.
One of the critical challenges faced by the banking sector is the interest rate cuts triggered by the Fed’s actions. Although we do not expect a steeper decline in interest rates in the coming year, we expect some predictable erosion on the net margin book due to a ripple effect. At Samba, alternate strategies and levers are already in place to control the downside risks of such rate cuts. This will be achieved through changing the lending mix by continued growth in high-yield home mortgage lending as well as improving cross-sell opportunities between corporate, private and consumer segments.
Samba plans to strengthen our retail footprint by increasing our branch network as well as enhanced product offerings targeting mass, SME and wealth segments. The focus on growing the loan book is a key factor as it reduces the sensitivity of revenues to lower interest rates.
Asset-quality fears have subsided to a large extent, and we are comfortable with our asset portfolios. This will also help in bringing down credit costs for next year. We continue to maintain a strong liquidity position and a highly liquid balance sheet, which remains a key source of competitive strength for us. Our capital and liquidity profile, recently diversified through issuance of long-term funding sources, also reflects the strong financial position of the bank and the success of our business model.
GF: How is your bank supporting private-sector growth and foreign investment?
Nashar: Samba embarked on a major push to use its balance sheet to bolster the kingdom’s economic development. One can see this in our Q3 2019 results: Our loan growth was more than 9%, year-on-year; and we reduced our cash balances with the central bank by 22%.
At heart, we are a corporate bank; and we have a strong track record in project finance across utilities, and infrastructure in particular. While these will continue, we are also growing our mortgage loan book. As a privileged corporation of the kingdom, we are sensitive to the society around us and have contributed actively by providing 500 houses to low-income families.
With specific reference to the SME sector, Samba is working to grow its lending portfolio within the Kafalah scheme and support financial literacy programs for SMEs and the general public both. We have our own financial awareness program that provides budgeting tools and advice to families on how to approach financial decisions.
We recently launched a very successful [$1 billion] bond, for which takeup was particularly strong in Europe and Asia. Part of the rationale for the bond issue was to start pegging out the yield curve for the banking sector. We hope other Saudi banks will follow our lead, because there is great interest in the Saudi economic story, and the banking sector in particular. Foreign capital inflows will help the banking sector to grow with the economy.