Alvarez & Marsal Releases Saudi Banking Pulse for Q1 2022

  • Increased operating income, improved cost efficiency and reduced impairment have boosted industry profitability, especially for smaller banks
  • Loans and advances and deposits increased significantly by 5.2% and 3.9% quarter-on-quarter (QQ), respectively

Kingdom of Saudi Arabia – Alvarez & Marsal (A&M), the leading global professional services firm, has released its latest Saudi Arabia (KSA) banking pulse for the first quarter of 2022. The report suggests that the overall profitability of major Saudi banks grew significantly by 17.6% quarter-on-quarter (QoQ) in Q1’22, primarily driven by operating income growth of 5.6% QoQ. Improved cost efficiency and lower impairment charges also supported growth, with most banks posting improved coverage ratios and net lending ratios, underscoring their improved credit profile.

A higher net interest margin (NIM) could be attributed to the increased focus on personal loans, compared to corporate loans, which generally offer better asset returns compared to corporate loans. Yield ratios increased in the current quarter compared to Q4’21, with improved profitability and higher return on equity (ROE).

At a sector level, loan growth reflected heightened market confidence, potentially driven by the economic rebound, increased consumer spending and higher oil prices. Loans and advances (L&A) and deposits from major banks increased by 5.2% and 3.9% QoQ respectively.

A&M’s KSA Banking Pulse looks at data from the Kingdom’s 10 largest listed banks, comparing Q1’22 results to Q4’21 results. Using independently-sourced published market data and 16 different metrics, the report assesses key areas of bank performance, including size, liquidity, revenue, operational efficiency, risk, profitability and the 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).

The the dominant trends identified for Q1 2022 are as follows:

1. L&A and deposits increased significantly in Q1’22. L&A of the top ten banks increased 5.2% QoQ in Q1’22, while deposits increased 3.9% in Q1’22. Consequently, as L&A growth outpaced deposit growth, the loan-to-deposit ratio (LDR) edged up 1.1% QoQ to 92.7% from 91.5% in Q4’2.1.

2. Operating income was up 5.6% QoQ compared to -0.7% QoQ in Q4’21. The increase is mainly due to a 9.5% quarter-on-quarter increase in net fees and commissions and gains from foreign exchange and transaction-related income, +46.1% quarter-on-quarter. Non-interest income (NII) edged up 0.8% quarter-on-quarter.

3. The NIM has fallen to its lowest levels since 2019, but is expected to rise in the next quarter due to rising interest rates. Seven of the top ten banks reported a contraction in the NIM, with the overall NIM declining by 7 QoQ basis points. The NIM deteriorated to 2.86% as overall net interest income of +0.8% QoQ grew at a slower pace compared to net interest bearing assets of +3.9% QoQ. Yield on credit was flat at 4.8% for Q1’22, while cost of funds rose 6.0 basis points to 46.2 basis points.

4. Banks reported a significant improvement in cost efficiency in Q1’22. The cost/income (C/I) ratio improved significantly by 3.9 percentage points quarter-on-quarter to 33.1%. The improvement in the C/I ratio is explained by the reduction in operating expenses by 5.5% quarter-on-quarter, while operating income increased by 5.6% quarter-on-quarter.

5. The cost of risk (CoR) improved by 10 basis points to 0.44% due to lower comprehensive loss provisions. Eight of the top ten banks reported a decline in CoR. Total impairments fell by 15.0% QoQ in Q1 22 to SAR 2.2 billion, mainly due to lower impairments for SABB to -85.5% QoQ, BJAZ to -41.1% QOQ and SNB to -24.2% QOQ.

6. The profitability of the sector has improved with the increase in net profits of eight out of ten banks. Aggregate net income increased by 17.6% QoQ and as a result, return on equity (RoE) and return on assets (RoA) improved by 1.9% QoQ and 0.2% QoQ respectively. SABB recorded the largest increase in RoE of 4.5% qoq to 7.6%, due to the decline in the bank’s impairment charges of -85.5% qoq.

OVERVIEW

The table below presents the key indicators:

CATEGORY

METRIC

Q4 2021

Q1 2022

Cut

Growth in loans and advances (T/T)

2.9%

5.2%

Growth in deposits (T/T)

2.8%

3.9%

Liquidity

Loan to deposit ratio (LDR)

91.5%

92.7%

Revenue and operational efficiency

Growth in operating profit (TQ)

-0.7%

5.6%

Operating income / Assets

3.6%

3.7%

Non-interest income / operating income

22.1%

25.7%

Yield on Credit (YoC)

4.8%

4.8%

Cost of Funds (CoF)

0.4%

0.5%

Net interest margin (NIM)

2.9%

2.9%

Cost/income ratio (C/I)

37.0%

33.1%

Risk

The coverage ratio

164.4%

164.7%

Cost of risk (CoR)

0.5%

0.4%

Profitability

Return on equity (RoE)

11.2%

13.1%

Return on Assets (RoA)

1.7%

1.9%

Return on risk-weighted assets (RoRWA)

2.1%

2.4%

Capital

Capital adequacy ratio (CAR)

19.9%

20.0%

Source: Financial statements, investor presentations, A&M analysis

Mr. Asad Ahmed, Managing Director and Head of Middle East Financial Services at A&M, said: “The first quarter saw a general improvement in profitability across the banking industry. Overall efficiency improved in the quarter, as evidenced by the cost/income ratio declining by 3.9% compared to the prior quarter in Q1’22.

In May 2022, the Central Bank of Saudi Arabia (SAMA) raised interest rates by 50 basis points in line with hikes by the US Federal Reserve. Recent interest rate increases in Saudi Arabia reflect rising US dollar rates and are likely to provide a boost to banking sector profitability given the Gulf currencies’ ties to the dollar.

A buoyant energy market, rising interest rates and increased consumer spending bode well for a continued positive outlook for the Saudi banking sector. We expect SAMA to continue to match US Federal Reserve rate hikes, which will help boost sector NIMs and reflect broad-based profitability improvements. Saudi Arabia posted a budget surplus of $15.33 billion for the first quarter, well above previous estimates of $24 billion for 2022. This is the first surplus since 2014 and it will have a positive economic impact.

-Ends-

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CONTACT:
Kiran Makhija / Prerna Agarwal
Hannover Middle East
Sandra Sokoloff, Senior Director of Global Public Relations
Alvarez & Marsal,