Ris­ing in­ter­est rates set to boost Saudi banks' earn­ings

The Pak Banker - - FRONT PAGE -

The gov­ern­ment's 2019 bud­get in­creased spend­ing in the face of plung­ing oil prices, cast­ing doubt on whether the king­dom will hit its fis­cal-deficit tar­gets.

Saudi Ara­bian banks may re­port dou­ble-digit earn­ings growth this year as ris­ing in­ter­est rates and in­creased gov­ern­ment spend­ing off­set the risk of higher bad- debt charges.

Even loans may ex­pand faster - al­beit nowhere near the pace of a decade ago - af­ter four years of de­clines led to a con­trac­tion in 2017.

The gov­ern­ment's 2019 bud­get in­creased spend­ing in the face of plung­ing oil prices, cast­ing doubt on whether the king­dom will hit its fis­cal-deficit tar­gets.

"More stim­u­lus, busi­ness con­fi­dence, pri­va­ti­za­tion and a stronger econ­omy will also sup­port lend­ing to the pri­vate sec­tor," said Ed­mond Chris­tou, a bank­ing an­a­lyst at Bloomberg In­tel­li­gence in Dubai.

"Strong mort­gage lend­ing is likely to con­tinue into 2019, boosted by gov­ern­ment in­cen­tives, which may com­pen­sate for slower growth in per­sonal loans and car leases as new re­spon­si­ble lend­ing rules take ef­fect."

The bet­ter out­look comes as the king­dom's big­gest len­der, Na­tional Com­mer­cial Bank, on De­cem­ber 24 an­nounced the start of takeover talks with Riyad Bank. Other firms are also said to be weigh­ing po­ten­tial merg­ers as the cen­tral bank and sov­er­eign wealth fund, which owns stakes in some Saudi lenders, ex­plore the pos­si­bil­ity com­bin­ing banks to in­crease their scale.

Earn­ings at the coun­try's 12 listed banks will prob­a­bly climb 10.1 per­cent in 2019, higher than the 9.8 per­cent growth seen in the first nine months of last year, ac­cord­ing to data com­piled by Bloomberg. That com­pares with a com­pounded an­nual growth rate of 6.2 per­cent in the five years through 2017, the data show.

The lenders are get­ting help from the Fed­eral Re­serve, which hasn't yet sig­nalled an end to its tight­en­ing cy­cle. The king­dom's cen­tral bank fol­lowed the Fed last month by rais­ing rates 25 ba­sis points be­cause the riyal is pegged to the dol­lar, lift­ing the in­come banks make on loans.

"We ex­pect the Fed to go for two rate hikes in 2019," said Chi­radeep Ghosh, a fi­nan­cial-in­sti­tu­tions an­a­lyst at SICO BSC, adding 15-18 ba­sis points in net-in­ter­est mar­gins at ma­jor Saudi banks.

The Tadawul Banks In­dex climbed 31 per­cent in 2018, even af­ter a 38 per­cent drop in oil prices in the fourth quar­ter and as the econ­omy strug­gles to re­cover from 2017's con­trac­tion.

"Lower oil prices will im­pact if they re­sult in lower gov­ern­ment spend­ing or pay­ments," said Aqib Me­hboob, an an­a­lyst at Saudi Fransi Cap­i­tal in Riyadh.

The shares were also lifted af­ter earn­ings state­ments in Oc­to­ber and Novem­ber showed stronger mar­gins, some pick-up in lend­ing and lower cost of risk, he said. Projects an­nounced by the gov­ern­ment added some im­pe­tus.

There are some head­winds, with con­sumers bat­tered by higher in­ter­est rates, the in­tro­duc­tion of val­ueadded tax, re­duced fuel sub­si­dies and higher util­ity bills. At least 11 lenders also agreed last month to pay back-taxes worth a com­bined 16.75 bil­lion riyals ($4.5 bil­lion) for a re­li­gious levy, less than they had orig­i­nally been as­sessed.

Fur­ther­more, while higher rates help mar­gins, there is a lag of three to six months for cor­po­rate loans to reprice, and even longer for re­tail books, said BI's Chris­tou. A pick up in credit and a drop in bad-loan re­cov­er­ies will also in­crease loan­loss charges, he said.

Gov­ern­ment spend­ing is cen­tral to a mean­ing­ful re­cov­ery in corpo- rate lend­ing, said Shab­bir Ma­lik, a bank an­a­lyst at EFG-Her­mes Hold­ing SAE in Dubai.

"The chal­lenges for Saudi banks in 2019 in­clude grow­ing loan books out­side of re­tail mort­gages; con­tain­ing any in­crease in cost of funds if oil prices re­main weak; driv­ing cost ef­fi­ciency through dig­i­ti­za­tion, and coun­ter­ing com­pe­ti­tion from dig­i­tal-pay­ment plat­forms," said Me­hboob of Saudi Fransi Cap­i­tal.

"The SABB-Alawwal merger and po­ten­tial NCB and Riyad Bank merger may drive other banks to eval­u­ate op­por­tu­ni­ties to gain scale."

"Lenders like Alinma Bank and Bank Al­bi­lad will still grow ag­gres­sively as they seek to gain mar­ket share, but Samba's se­lec­tive risk ap­proach makes it un­likely to be a growth beater," said Chris­tou of BI.

"Al Ra­jhi is un­likely to com­pete ag­gres­sively on cor­po­rate lend­ing as long as mar­gins re­main un­der pres­sure. The SABB-Alawwal merger may de­lay the re­turn to growth un­til the sec­ond half, while NCB is likely to out­per­form the in­dus­try in terms of growth." -APP

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