Saudi Banking Sector 2021 Outlook Growth Hinges On Mortgage Lending And Public Spending - Roman Rybalkin Puneet Tuli Benjamin Young Mohamed Damak ...
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Saudi Banking Sector 2021 Outlook Roman Rybalkin
Puneet Tuli
Growth Hinges On Mortgage Lending
Benjamin Young
Mohamed Damak
And Public Spending Feb. 23, 2021Key Takeaways – The Saudi economy will recover in 2021-2022 from the shocks of 2020 as global demand for oil recovers and private consumption increases. That said, real GDP will not return to 2019 levels until 2022, in our view. – The roll out of the vaccine may help avoid further lockdowns but remains contingent on availability. In addition, downside risks related to the virus remain. – We expect credit growth to stabilize in 2021 or reduce slightly. Mortgage origination will remain buoyant and corporate lending is likely to pick up as Public Investment Fund programs create business for contractors. – Cost of risk will remain elevated in 2021, despite stronger-than-expected estimates for 2020, as the Saudi Central Bank lifts its forbearance measures. Combined with very low interest rates, this will weigh on banks’ profitability. – We expect ratings on banks to remain stable in the next 12-24 months. The merger between National Commercial Bank (NCB) and Samba Financial Group (SFG) may create a national champion that could focus on financing large strategic projects.
Saudi Economy Will Recover In 2021 After 2020 Shock
Saudi Economy To Recover In 2021 As OPEC+ Cuts Gradually Expire
Saudi Arabia annual real GDP growth: production
Hydrocarbon GDP Nonhydrocarbon GDP Real GDP
– OPEC+ related oil production cuts and the
6
impact of the pandemic on important
economic sectors eroded real GDP in 2020 by
4 over 4% and triggered a sharp decline in Saudi
Arabia’s net exports.
2
– By 2022, we expect the expiry of OPEC+
Percentage change %
0 quotas and higher oil prices to boost
economic activity to close to 3%.
(2)
– In the years ahead, the government will
(4)
continue to pursue its Vision 2030 program,
which largely aims to support the non-oil
(6) economy and social transformation of the
country via a series of large projects.
(8)
– Downside risks related to the pandemic
(10) remain significant.
2019 2020e 2021f 2022f 2023f
Source: S&P Global Ratings. e--Estimated. f--Forecast.
3Corporate Credit Will Pick Up In 2021
Credit Growth Will Remain Strong In 2021-2022 Boosted By Corporate Segment
Net change in credit by sector
Mortgages Other retail credit Corporate loans Credit growth (right axis), % – Credit
Creditgrowth
growthpicked
pickedup
upinin2020
2020based
basedon
on
stronger
strongermortgage
mortgageand
andsmall
smalland
andmidsize
midsize
250 16 enterprise
enterprise(SME)
(SME)lending.
lending.
14 – We
Weexpect
expectcredit
creditgrowth
growthtotostay
staystrong
stronginin
200 nominal
nominalterms
termsinin2021-2022,
2021-2022,butbuttotoslow
slowdown
down
12 due
duetotohigh-base
high-baseeffect.
effect.
Percentage change
– Corporate
Corporatecredit
creditgrowth
growthmay
will pick
pick up
up as
as Public
public
Bil. SAR
10
150
Investment
investmentFund
fundprograms
programsgenerate
generatebusiness
businessfor
8 contractors.
for contractors.
100
6 – SME
SMEcredit
creditto
toslow
slowdown
downas
asdeferral
deferralprograms
programs
are
arewound
woundout,
out,but
butremain
remainmaterial
materialbecause
becauseofof
4
50
subsidies.
subsidies.
2 – Retail
Retailcredit
creditgrowth
growthwill
willstay
staystrong
strongdue
duetoto
continued
continuedfocus
focuson
onmortgages,
mortgages,although
althoughthe
the
0 0
2019 2020e 2021f 2022f
market
marketwill
willgradually
graduallysaturate.
saturate.
e--Estimated. f--Forecast. SAR--Saudi riyal. SME--Small and midsize enterprise. Source: S&P Global Ratings.
4Cost Of Risk Will Stay Elevated Until 2022-2023
Cost Of Risk Will Gradually Normalize From 2022 Onward
140
120
120 110 110 – We expect cost of risk to stay elevated in 2021
100 82
at about 120 basis points. This reflects our
80
view that the volatile global health situation
Basis points
80 68 71
60
55 and international travel restrictions still weigh
40
on the economy.
20
– Although the 2020 results seemed stronger-
0
2016 2017 2018 2019 2020e 2021f 2022f 2023f than-expected, we view this as a distortion
caused by fast growth in mortgages across
Banks’ Cost Of Risk Benefitted From Longer Than Expected Forbearance the year and lending to government-related
Banks' weighted average 2020 CoR guidance S&P Global Ratings 2020 COR expectation
entities in the first quarter of 2020.
130
– Additional provisions may be needed to offset
Basis points
110 the wind-down of SME support programs in
90
2021, including payment deferrals.
70
50
Q1 2020 Q2 2020 Q3 2020 Q4 2020
e--Estimated. f--Forecast. COR--Cost of risk. Q--Quarter. SME--Small and midsize enterprises. Weighted average guidance of NCB,
ARB, SFG, BSF, and Riyad Bank. Source: S&P Global Ratings.
5Capitalization Will Stay Strong Through 2021-2022
– Saudi banks are well-capitalized by international standards.
– We expect rated banks’ capitalization to stay strong, as measured by our risk-adjusted capital ratio.
Capitalization Is Strong … … And We Expect It To Remain So
RAC ratio, %
Tier 1 capital ratio Capital and reserves/Total assets S&P Global Ratings threshold for adequate assessment
S&P Global Ratings threshold for strong assessment
20 14
18
12
16
RAC ratio in 2021, %
14 10
12
%
8
10
6
8
6 4
4
2
2
0 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 NCB + ARB Riyad BSF ANB SIB Global Average Average
Samba top 100 U.S. bank German
2018 2019 2020 average bank
Source: Saudi Central Bank. RAC--Risk-adjusted capital. Source: S&P Global Ratings.
6Saudis Are Withdrawing Less Cash
– Payment in cash has gradually become less prevalent in Saudi Arabia, demonstrating a growing digitalisation of the banking system. This
exposes Saudi financial institutions to competition from challenger banks in the future.
– Banks face more competition in retail spaces because of open application programming interface (API) policies and the emergence of
fintech companies. In particular, buy-now-pay-later cards and peer-to-peer lending are becoming popular.
ATM Cash Withdrawals Declined In Favor Of POS Payments ATM Use For Noncash Transactions Has Also Fallen
Share of cards in total retail spending, %
Volume of ATM cash withdrawals, % change YoY (right scale) Number of ATM transactions per card issued except cash withdrawal
Volume of POS payments, % change YoY (right scale)
40 40 10
8.7
Number of transactions
8
30 20 6.7
Percentage change
6
20 0
%
4
10 (20)
2
0 (40) 0
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20
YoY--Year-on-year. POS—Point of sale. Q--Quarter. Source: S&P Global Ratings, Saudi Central Bank. Q--Quarter. Source: S&P Global Ratings, Saudi Central Bank.
7NCB-SFG Merger Will Create A National Champion
Merger With SFG Will Double NCB’s Corporate Market Share
– Merger of NCB and SFG will sharply change
30 the landscape in corporate lending, creating a
NCB+SFG (pro-forma) player with pro forma market share of almost
Banks' share in total corporate loans (%)
25 30%.
– It is not yet clear to what extent the
20 government will use the merged bank’s
balance sheet to finance strategic projects.
15
SFG NCB – Given that Al Rajhi Bank (ARB) already has a
BSF SABB Riyad strong position in the retail segment, the
10 increase in competition may dent the
ANB
profitability of smaller players in the long
Alinma ARB
5 SIB BAB term.
BAJ
0
0 5 10 15 20 25 30 35 40
Banks' share in total retail loans (%)
Source: S&P Global Ratings based on banks’ financial statements as of Sept. 30, 2020.
8Low Interest Rates Eat Into Profitability
1. We Project That Interest Rates Will Stay Low For Longer… 2. … Which Would Weigh On Saudi Banks’ Net Interest Margins…
Federal funds target rate Saudi banks’ NIM
200 3.4
Percentage points
150 3.2
Basis points
100 3.0
50 2.8
0 2.6
2019 2020 2021f 2022f 2023f 2018 2019 2020e 2021f 2022f
3. … Despite Increasing Share Of Higher-Rate Retail Business... 4 … Resulting In Lower Returns
Share of retail in total credit Saudi banks’ ROA
50 2.0
Percentage points
40
Percentage points
1.5
30
1.0
20
0.5
10
0 0.0
2018 2019 2020e 2021f 2022f 2018 2019 2020e 2021f 2022f
f--Forecast. NIM--Net interest margin. ROA--Return on assets. Source: S&P Global Ratings.
9Profitability Still Outperforms Regional Peers
Saudi Arabian Banks Will Outperform Their Regional Peers
Projected return on assets for Gulf Cooperation Council banking systems in 2021
1.4 – Despite the lower profitability, we anticipate
that, on average, Saudi banks will outperform
1.2
their regional peers.
– This largely reflects the relatively modest
1.0 impact of the pandemic on the quality of
banks’ loan books and stronger growth of
Percentage points
0.8 mortgage lending.
0.6
0.4
0.2
0.0
Saudi Arabia Qatar Kuwait Bahrain Oman UAE
Source: S&P Global Ratings. UAE--United Arab Emirates.
10S&PGR Outlooks On Saudi Banks Are Mostly Stable
Our Outlooks On Saudi Banks Are Mostly Stable
Bank SACP Ratings – Our outlooks on Saudi banks are mostly
stable, indicating that we expect the size of
The National Commercial Bank bbb+ BBB+/Positive/A-2 the economy, conservative regulation, and
lack of aggressive growth pre-2020 to help the
banking sector navigate the challenges of
Samba Financial Group bbb+ BBB+/Positive/A-2
2021-2022.
Al Rajhi Bank bbb+ BBB+/Stable/A-2 – The positive outlooks on NCB and SFG signify
that the post-merger institution may have a
stronger credit profile than the individual
Riyad Bank bbb+ BBB+/Stable/A-2
banks.
Banque Saudi Fransi bbb BBB+/Stable/A-2
Arab National Bank bbb BBB+/Stable/A-2
The Saudi Investment Bank bbb- BBB/Stable/A-3
SACP--Stand-alone credit profile. Source: S&P Global Ratings.
11Related Research
– GCC Economic Activity Held Back By Its Hydrocarbon-Heavy Economic Structure And OPEC-Related Production Cuts,
Dec. 7, 2020
– Saudi Arabia-Based The National Commercial Bank And SAMBA Financial Group Outlooks Revised To Positive On
Planned Merger, Oct. 16, 2020
– Banking Industry Country Risk Assessment: Saudi Arabia, Oct 13, 2020
– GCC Banks: Lower Profitability Is Here To Stay, Oct. 13, 2020
– Saudi Arabia 'A-/A-2' Ratings Affirmed; Outlook Stable, Sept. 25, 2020
12Analytical Contacts
Roman Rybalkin, CFA Puneet Tuli
Associate Director Associate
roman.rybalkin@spglobal.com puneet.tuli@spglobal.com
+7 495 783 40 94 +971 4 372 7157
Benjamin Young Mohamed Damak
Director Senior Director
benjamin.young@spglobal.com mohamed.damak@spglobal.com
+ 971 4 372 7191 +971 4 372 7153
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