Is it the right time to expand into Saudi Arabia?

25 January 2017

The kingdom has granted license to a Japanese lender and has allowed Emirates NBD to launch additional branches

With 2017 GDP growth forecasts revised down and softer economic conditions expected to pose further headwinds for lenders in Saudi Arabia until the end of 2018, is this the best time to enter the Saudi market or even try and expand the branch network there?

The Bank of Tokyo-Mitsubishi and the UAE’s Emirates NBD, the biggest lender by assets in Dubai, think it is.

The Japanese lender has recently received a license from Saudi Arabian Monetary Authority (Sama) to operate in the kingdom and the central bank is considering request of a regional bank to launch operations in the kingdom. Emirates NBD has been given a nod to open up three additional branches in the kingdom, one of the first regional lenders to receive such a permission from Sama.

The approval to expand operations, however, is not without a caveat, as Emirates NBD has been asked to focus on funding the small and medium-sized sector in the kingdom, according to a Saudi Arabia-based banking source. Growth of SMEs is central to Riyadh’s plans to kick start its economy, which International Monetary fund says will grow by only 0.4 per cent this year, rising 2.3 per cent in 2018. The IMF’s early forecast in October 2016 for the kingdom was for 2 per cent growth in 2017 and 2.6 per cent in 2018.

Emirates NBD has recorded a 13 per cent decline in its fourth-quarter 2016 net profit to AED1.85bn ($503.7m) as it battled tougher economic conditions in its home market. Looking for growth options elsewhere does make sense for the lender but investing in expansion in a market where majority of existing lenders are struggling to maintain profitability themselves, might not be such a good idea.

Banks in the past took advantage of high oil prices and government spending sprees with some posting double digit top and bottom growth. In 2016, the new economic realities have begun to sink in, with deteriorating asset quality and a rise in operating costs on the back of credit losses, hampering growth.

In fact, with a few exceptions, banks in most GCC markets have reported flat to negative growth in quarterly and full-year profits and rating agency Standard & Poor’s estimates that the financial profile of the regional lenders will further weaken this year and next, weighed down by sluggish economies and the tougher operating environment.

Saudi Arabia, however, believes its economic reform programme is on course and Riyadh has contested IMF’s projections for the kingdom’s GDP growth, saying the Washington-based lender many not have access to all the relevant information.

Sama Governor Ahmed Alkholifey, believes the cash crunch, which forced the regulator to inject billions of riyals into the kingdom’s banking system last year, is over. Message from Alkholifey is clear – the kingdom is open for business and it will welcome requests from other foreign banks. It might be a good offer for lenders with longer-term investment horizons to gain access to the biggest regional economy - providing they consider the short-to-medium term risks.

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