Saudi banks set to outperform their regional peers in 2021-2022
Roman Rybalkin, CFA, Associate Director at S&P Global Ratings, says strong capitalisation, conservative regulation and government stimulus will support the banking sector in the kingdom
Roman Rybalkin, CFA, Associate Director at S&P Global Ratings
Strong capitalisation of the banking sector, conservative regulation and government stimulus will support Saudi banks through 2020-2021. As a result their profitability will surpass those of GCC peers despite low interest rates and still elevated cost of risk.
After the shocks witnessed in 2020, the Saudi economy is expected to recover in 2021-2022 due to an increase in global demand for oil and increase of private consumption. By 2022, we expect the expiry of OPEC+ quotas and higher oil prices to boost economic activity to close to 3 percent.
That said, the real GDP will not return to 2019 levels until 2022. Still we expect the strong capitalization, conservative regulation, and government stimulus to help the banking sector navigate the challenges in the next two years.
We expect the government will continue to pursue its Vision 2030 programme, which largely aims to support the non-oil economy and social transformation of the country via a series of large projects. However, the downside risks related to the pandemic will continue to remain significant at least in the short term.
In 2020, the banking sector witnessed an increase in credit growth on the back of stronger mortgage and small and midsize enterprise (SME) lending, helped by Saudi Central Bank’s liquidity injection. We expect credit growth to stay strong in 2021-2022, but it might come lower than 2020 due to high-base effect.
The Public Investment Fund is expected to launch new programs and make additional domestic investments. This could increase the demand for corporate lending in the years to come as PIF will continue to award contracts for businesses and boost corporate credit growth in 2021-2022.
Further in line with the Vision 2030 to achieve a home ownership rate of 70 percent, the stimulus for mortgages will continue, and we expect the retail credit growth will stay strong in 2021-2022 due to the origination of new mortgages.
In the long term, however, the market will gradually slowdown.
The 2020 results were stronger-than-expected thanks to the fast growth in mortgages across the year and lending to government-related entities in the first quarter of 2020. In 2021, we expect a stabilisation at best as additional provisions might be needed to offset the wind-down of SME support programmes.
Therefore, the cost of risk will remain elevated at about 120 basis points, as the Saudi Central Bank lifts its forbearance measures. This also reflects our view that the global health situation and international travel restrictions may still weigh on the economy.
Projected return on assets for Gulf Cooperation Council banking systems in 2021
However, despite the lower profitability, it is expected that the Saudi Arabian banks will outperform their regional peers in 2021-2022. This largely reflects the relatively modest impact of the pandemic on the quality of banks’ loan books to date and stronger growth of mortgage lending.
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Saudi banks set to outperform their regional peers in 2021-2022
Roman Rybalkin, CFA, Associate Director at S&P Global Ratings, says strong capitalisation, conservative regulation and government stimulus will support the banking sector in the kingdom
Roman Rybalkin, CFA, Associate Director at S&P Global Ratings
Strong capitalisation of the banking sector, conservative regulation and government stimulus will support Saudi banks through 2020-2021. As a result their profitability will surpass those of GCC peers despite low interest rates and still elevated cost of risk.
After the shocks witnessed in 2020, the Saudi economy is expected to recover in 2021-2022 due to an increase in global demand for oil and increase of private consumption. By 2022, we expect the expiry of OPEC+ quotas and higher oil prices to boost economic activity to close to 3 percent.
That said, the real GDP will not return to 2019 levels until 2022. Still we expect the strong capitalization, conservative regulation, and government stimulus to help the banking sector navigate the challenges in the next two years.
We expect the government will continue to pursue its Vision 2030 programme, which largely aims to support the non-oil economy and social transformation of the country via a series of large projects. However, the downside risks related to the pandemic will continue to remain significant at least in the short term.
In 2020, the banking sector witnessed an increase in credit growth on the back of stronger mortgage and small and midsize enterprise (SME) lending, helped by Saudi Central Bank’s liquidity injection. We expect credit growth to stay strong in 2021-2022, but it might come lower than 2020 due to high-base effect.
The Public Investment Fund is expected to launch new programs and make additional domestic investments. This could increase the demand for corporate lending in the years to come as PIF will continue to award contracts for businesses and boost corporate credit growth in 2021-2022.
Further in line with the Vision 2030 to achieve a home ownership rate of 70 percent, the stimulus for mortgages will continue, and we expect the retail credit growth will stay strong in 2021-2022 due to the origination of new mortgages.
In the long term, however, the market will gradually slowdown.
The 2020 results were stronger-than-expected thanks to the fast growth in mortgages across the year and lending to government-related entities in the first quarter of 2020. In 2021, we expect a stabilisation at best as additional provisions might be needed to offset the wind-down of SME support programmes.
Therefore, the cost of risk will remain elevated at about 120 basis points, as the Saudi Central Bank lifts its forbearance measures. This also reflects our view that the global health situation and international travel restrictions may still weigh on the economy.
However, despite the lower profitability, it is expected that the Saudi Arabian banks will outperform their regional peers in 2021-2022. This largely reflects the relatively modest impact of the pandemic on the quality of banks’ loan books to date and stronger growth of mortgage lending.
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