Banking sector

Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Saudi Banks Sector
Banks –Finance
6 April 2017
income generally have moved along with net financing growth. Given that total financing
growth has slowed (YTD down marginally), and trading volume on the Tadawul has
remained weak in Q1 2017, we believe total commission and fees income may come under
pressure.
Figure 2 Commission and fees depends mostly on financing given
SAR mn
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
SAR mn
50,000
40,000
30,000
20,000
10,000
-
(10,000)
(20,000)
(30,000)
(40,000)
Sequential change in loans (RHS)
Commission and Fees
Source: SAMA, Company data, Al Rajhi Capital
Asset yields may not rise as much as expected: After rising sharply in H2 2016, we
believe Q1 asset yields may not have risen as much as previously expected due to the fall in
SAIBOR towards the end of the quarter. Assuming financing rates for corporates are reset
every 6 months, total corporate book may re-price only after 6 months. Hence change in asset
yields are likely to be more gradual as compared to change in SAIBOR. We note that average
SAIBOR in Q1 (average of each day for the past 180 days) is slightly lower than in Q4 2016,
which may lower asset yields on q-o-q basis contrary to estimates at the start of the quarter.
Given different financing and deposit structure of banks, impact on banks are likely to vary
with banks with higher corporate exposure likely to see re-pricing sooner as compared to
banks with higher retail exposure.
As a result, after healthy profits in 2 months, provisioning could weaken Q1 earnings
further: As per SAMA’s monthly data, cumulative profit for months of January and February
grew at a moderate pace of 3.5% y-o-y. We believe this may be attributable to an expansion in
NIMs, helped by lower cost of deposits. However, as mentioned above, a potential increase in
provisions could impact profitability for the quarter. In the past, banks have booked higher
provisions in the third month of the quarter. We also observe that some banks have seen a
sharp increase in past dues but not impaired financing.
Liquidity squeeze is unlikely: SAMA has changed the calculation regulation for SAIBOR.
The inter-bank exchange rate would now be calculated by Thomson Reuters, which our
checks suggest is likely to reduce volatility. We believe there is unlikely to be a liquidity
squeeze which could result in SAIBOR levels rising as we saw in 2H 2016.
a) Financing growth, which remains correlated to gross capital spending is expected to
remain moderate. As companies look to deleverage to save on financing costs, loan to deposit
ratio may moderate. Moreover, if the government pays off its dues soon, it could further
improve the liquidity situation.
b) Additionally Saudi Arabia's government decided to suspend its monthly issue of domestic
bonds in March (source: Maal). Even otherwise there is ample scope for SAMA to mitigate an
unexpected liquidity squeeze. For example, even when Saudi Govt issued domestic bonds in
the past, banks were able to purchase these bonds by selling SAMA bills held by them (See
figure 18). So in-turn this resulted in shift from SAMA to Govt through two different
instruments. Moreover, the liquidity with banks has improved over the last few quarters. The
banking sector’s deposit with SAMA (including holding of SAMA bills) as a % of total deposits
stood at c14%, up from a low of 11% in June 2016, while they are only required to hold 7% of
Disclosures Please refer to the important disclosures at the back of this report. 2