Saudi Arabian bank business

The Kingdom’s banking sector started 2020 on a promising note, with 13 local banks serving a
population of over 30m people. However, low oil prices and the disruptive effects of the Covid-19
pandemic are likely to undermine asset growth over the course of the year, though the Kingdom’s banks
have previously demonstrated the ability to remain profitable despite difficulties. Looking to the longer
term, banks are likely to venture beyond the competitive corporate and retail segments and develop
their offering in underserved areas of the market, such as lending to smaller enterprises and
microfinance

Market size:
The Saudi Arabian retail banking market showed a strong growth in 2017. Revenues increased 8.5%, up
to SAR 39 billion representing 45% of total banking revenues, with the support of high demand for
consumer loans and credit card, driven by the expansion in population and the products of personal
loans

Saudi Arabia's banking sector enters a challenging:

Saudi Arabia is home to more than 27% of the GCC’s total banking assets, and is the region’s second-
largest banking industry in terms of assets and the largest in terms of market capitalisation. Having
achieved promising profit growth in 2019, the sector entered 2020 ready to capitalise on the
opportunities presented by the Kingdom’s ambitious development strategy. Vision 2030 provides a
roadmap for the development of financial services in the country and a raft of lending opportunities in
key sectors such as infrastructure, health, education and entertainment. However, declining oil prices
and the effects of the global Covid-19 pandemic in early 2020 will make for a challenging year for the
domestic banking industry. The government’s announcement of a series of measures to mitigate the
impact of the crisis has therefore been welcomed by market participants.
Domestic Players:
As of the first quarter of 2020 Saudi Arabia’s banking sector comprised 13 locally licensed banks, five of
which held total assets worth more than SR200bn ($53.2bn). With over SR507bn ($135.2bn) in assets,
NCB is both the largest and oldest bank in Saudi Arabia, and as such plays a central role in the country’s
economy. Its position as a catalyst for growth was further cemented in 1999, when the government
acquired a majority stake in the institution through its sovereign wealth fund, the Public Investment
Fund (PIF). The Kingdom’s second-largest bank, Al Rajhi, is one of the largest Islamic banks in the world,
and at the beginning of 2020 claimed assets worth nearly SR384.1bn ($102.4bn). Founded in 1957, it is
the leading institution in the sharia-compliant segment that also includes Alinma Bank, Bank Albilad, and
Bank AlJazira – which altogether account for around one-quarter of total banking sector assets. The
third-largest bank, Riyad Bank, is another early market entrant, having been founded in 1957. At the
start of 2020 it posted total assets of SR265.8bn ($70.9bn). In December 2018 the bank revealed that it
was engaged in merger talks with NCB, with which it shares a common shareholder in the PIF. However,
in December 2019 both lenders announced that the negotiations had ended without any agreement.

The Kingdom’s fourth-largest lender, SABB, secured its place among the country’s top-five banks after a
successful merger with Alawwal Bank in June 2019. Previously known as Saudi Hollandi Bank, Alawwal
Bank had been active in the Kingdom since the 1920s. It assisted with the creation of Saudi Arabia’s first
currency and payment for the nation’s first oil export. SABB, meanwhile, has been a key participant in
the banking industry for almost 70 years and is an associate of the HSBC Group. As of December 2019
the total assets of the new merged entity stood at SR265.5bn ($70.8bn)

Performance:
Saudi Arabia’s banking industry has faced a number of challenges in recent years. The decline in oil
prices in late 2014 brought to an end a period of double-digit growth that the sector had experienced
for many years. The necessary fiscal reform that followed led to uncertainty regarding growth
opportunities and, in some cases, delayed payments to contractors for government projects. In 2015 the
effects of lower oil prices brought aggregate asset growth to a modest 3.4% over the year, totalling
SR2.2trn ($586.5bn). By 2017 asset growth had slowed further, to 0.4%, while the sector’s net loans
showed a contraction of 1.1% for the year. In 2018 the positive effects of firming oil prices, which
reached their highest point since late 2014, were offset by reductions in energy subsidies and companies
adopting a wait-and-see approach with regard to expansion plans, resulting in fewer lending
opportunities. However, by 2019 the continued stabilisation of oil prices, combined with the
acceleration of major infrastructure projects under Vision 2030, brought more positive results.

The total assets of Saudi Arabia’s five largest banks grew by 16% in 2019 to reach SR1.7trn ($453.2bn).
Their combined loans and advances, meanwhile, expanded by 15% to SR1trn ($266.6bn). The top-five
lenders posted an impressive 30% growth in profits, totalling SR34bn ($9.1bn), up from SR26.2bn ($7bn)
in 2018. While the Kingdom’s banking sector as a whole posted single-digit growth, its 7.4% increase in
profits in 2019 was still a promising sign
Mortgage Growth:
The emergence of real estate lending as a major driver of retail credit growth is a direct result of
regulatory changes designed to increase the homeownership ratio among nationals from 47% in 2018 to
70% by 2030. The Kingdom was expected to achieve its target of 60% by the end of 2020, local media
reported in March that year, although Covid-19 and declining oil prices are likely to slow the pace of
construction projects and short-term demand for housing.

Major retail banks are working alongside the Ministry of Housing and the real estate sector to meet
these ambitious targets, most notably through a state-backed housing programme that encourages
lenders to allocate more funding to the mortgage segment. Mortgage lending also received a boost from
SAMA’s decision to raise the loan-to-value limit for real estate loans in January 2018.

“Home loans in Saudi Arabia increased dramatically over the course of 2018 and 2019, as mortgage
finance companies and commercial banks benefitted from subsidised financing designed to increase
homeownership,” Fabrice Susini, CEO of the Saudi Real Estate Refinance Company (SRC), told OBG.
According to SAMA, real estate lending by banks grew by 168% in 2019 to reach SR27bn ($7.2bn).

Key Market Trends:

Al-Rajhi Bank is the highest retail loans provider with 35.8%, and Banque Saudi Fransi is the lowest retail
loans provider with 9.9%.
The banks in Saudi Arabia have a huge opportunity to develop ways to engage their retail customers on
a digital basis. According to Bain & Company’s survey of 152,000 bank consumers in 29 countries, of
which more than 1,900 customers were in Saudi Arabia. The survey results stated that 72% of the Saudi
Arabian customers interact with their banks digitally, but this group is much higher in other countries.
Among all the countries, Saudi Arabia has one of the lowest shares of digital first customers (those who
perform more than half of their banking online or via mobile devices). These customers are significantly
more loyal to their banks than traditional channel users. As with their counterparts in other countries,
Saudi banks face stiff completion from tech companies that offer financial services. Already, 53% of
Saudi Arabian bank customers use a third-party online payment solution, and 72% said they trust at
least one technology company more than banks in general. Earning customer loyalty is an important
challenge for Saudi banks

The changing Saudi banking landscape:

While Western banks saw their valuations drop substantially during the first 18 months of the COVID
pandemic — and have yet to recover — the declines among Saudi banks have been smaller and their
valuations are now closer to, if not above, their pre-pandemic levels. Identifying the drivers of this
seemingly contradictory trend helps us better understand the shifts within the Saudi banking sector and
the growing impacts of policies related to Vision 2030, the country’s long-term economic development
and diversification program.

In 2020 NCB, Saudi Arabia’s largest bank, had its most profitable year to date, achieving a net operating
revenue of SAR21.5 billion ($5.3 billion). This was driven by a 99% increase in the bank’s residential
finance portfolio, resulting in a net increase in income of 7% in its retail banking operation . This was
surpassed by the bank’s treasury operation, which saw a 20% rise in net income, driven by the issuance
of Saudi government sukuks — sharia-compliant bonds. Similar trends can be seen throughout the Saudi
banking sector, where the main areas of growth have been residential mortgages, increased corporate
lending, and lending to the state, in descending order of importance. Al-Rajhi Bank saw mortgages rise
by 90% in 2020, while Saudi Investment Bank emphasized the importance of a reduction in tax from 15%
to 5% for retail property buyers to spur housing demand. Numbers from the Saudi Central Bank (SAMA)
show that residential mortgage finance (houses, apartments, and land) contracts have increased by a
factor of 17 since 2016. This extraordinary growth is fuelled by initiatives from the Ministry of Housing
and the Real Estate Development Fund (REDF), which are at the tip of the spear of Crown Prince
Mohammed bin Salman’s ambitious goal of ensuring 70% homeownership by 2030.

Top competitors:

 AL-RAJHI BANK
 NATIONAL COMMERCIAL BANK
 SAMBA F INANCIAL GROUP
 ALINMA BANK
 SAUDI BRITISH BANK

How do you people pay?

The major elements of the Saudi payments infrastructure are the RTGS, ATM, EFTPOS and cheque
clearing systems as well as an electronic bill presentment and payment system, the Saudi Arabian Riyal
Interbank Express (SARIE) system is the RTGS system that underpins the Saudi payments environment.

These are: Electronic Payment: which is done through online banking services (Government Payments,
Sadad) Phone call: through banking services – phone banking. ATMs
Target group:
Top Banking - Corporate Companies in Saudi Arabia;

 Standard Chartered Bank

 Bank Dhofar
 The National Commercial Bank (NCB)
 Banque Saudi Fransi
 Arab National Bank (ANB)
 First Gulf Bank (FGB) - Online
 Al Rajhi Bank
 Saudi Hollandi Bank
 JPMorgan Chase - UK
 Gulf International Bank (GIB)
 C & D Business Consultants
 Temenos
 Saudi Economic and Develop
 National Bank of Kuwait (NBK)
 Maveric Systems Ltd
 CIT Group
 Bank Aljazira
 J.P. Morgan Chase Bank –
 SAT Microsystems