Sabb is attempting to wrestle back its market share in the kingdom. But with competition more intense than before, it will be a challenge
Sabb’s first-quarter profits rose 21 per cent this year, following a drop of 7 per cent in 2010
It has been a tumultuous few years for the banking sector the world over, but stability is gradually returning. The same is true in Saudi Arabia, where the rollercoaster ride has been felt by Sabb.
Since the start of the global financial crisis, the management of the bank has changed twice and, in three out of the past four years, profit has fallen significantly. But the bank is keen to look forward now and David Dew, managing director of the bank since April last year, is optimistic that a corner has been turned.
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“The health of the bank is strong and prospects are good,” he says. “We have a clear strategy and there is a lot of alignment behind it. There have been some changes in the management of the bank, but we have a strong team in place now.”
High provisioning levels
Many of the bank’s troubles over the past few years were common to the whole market. High provisions have been a particular challenge, mainly because of exposure to defaults at local corporate Saad Group and Ahmad Hamad al-Gosaibi & Brothers.
Dew is confident that provisions have come to an end now. “The level of provisions for the banking sector in the first quarter of 2011 is about half that of the first quarter of last year,” he says. “At the moment, there is good reason to believe that trend will continue, so I think provisioning levels are now coming back in line with long-term trends. Of course, there is always the potential for an unpleasant surprise, but I do think we are in for a period of sustained profitability and sustained growth.”
The level of provisions for the banking sector in the first quarter of 2011 is about half that of the first quarter of last year
David Dew, Sabb
There are already encouraging signs that profitability is set to grow. Sabb’s first-quarter profit rose 21 per cent in 2011, an encouraging sign after a 7 per cent decrease in 2010. “There is every evidence that the recovery in the banking sector is sustainable,” says Dew. “When you look at what is driving that improved performance, it is coming from rising loan growth, albeit not at the levels of 2007-08, but it is resuming. General activity in the economy and the banking sector continues to rise and there is a strong sense that all the specific bad debt problems are behind the banks now.”
Dew admits the recovery has been slower to take hold than many expected. Predictions that provisioning had peaked and profitability would start to come back have been made since mid-2009 and proved too optimistic. “It has probably taken longer for the economy to start moving again than perhaps people expected,” he says.
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The return of bank lending is also taking longer than expected, mainly because the provisioning cycle has spread out much longer than envisaged. “It has a real impact on the psychology of lending when you are still provisioning,” says Dew. “But at the same time, demand has probably been more subdued, so it is not like there have been long lines of customers failing to get the credit they required. Demand has been lower than a lot of people had forecast.”
Sustainable credit growth
Dew expects credit growth in 2011 to total about 8-10 per cent by the end of the year. “If you compare current growth to the level of loan growth in 2007-08, it’s obviously lower, but those figures were not sustainable. Growth closer to 10 per cent is much more sustainable,” he says.
Although the growth in lending is welcome, the continued competition among Saudi banks to lend, and the associated drop in margins, is not. “I’d like to think the pressure on pricing has run its course. You have to ask, at the current rates some banks are lending, whether that is truly covering the cost of capital and the cost of risk,” Dew says. “So, because of that I think there is not much scope for a continued reduction in pricing.
“The bigger question for me is how long will the current levels be maintained and I think that will depend on how long it takes for growth to really start appearing on the balance sheets of banks. I think once the average loan-to-deposit ratio of the banking sector gets back above 80 per cent, then the pressure on margins will start to reverse.” That could take some time, with the ratio in April at about 75 per cent and both sides of the loan book, to retail and corporate customers, growing more slowly than people had hoped.
One of the other impacts of the financial crisis is that it forced Saudi banks to shift to doing the majority of their lending in riyals rather than dollars. Dew says he cannot see this being rolled back now. “Fundamentally, this is a dollar-based economy. Having said that, it’s always better to have a banking system that is predominantly in the local currency,” he says. “Typically, the margins on dollar loans will be higher than for Saudi riyal loans as there is greater appetite to lend in riyals, and my sense is that this will continue for some time.”
Overall, Dew says the outlook is good. “We see a steady stream of infrastructure projects and, yes, one or two may not be progressing as fast as we thought they would, but there is a good pipeline,” he says. “We are seeing an increase in trade and foreign exchange transactions, so these areas will provide growth. We are also seeing a definite pick-up in the retail sector as a result of the government’s fiscal stimulus packages.”
He rejects the notion that government spending packages are crowding out banks and the private sector from the economy, saying: “A lot of these planned infrastructure projects are so important to the core economic fabric of the country that the government has to take a major lead on them and is doing so.”
As contracts are awarded, the private sector’s role will increase in the economy, says Dew. Likewise, as the use of public-private partnerships expands in Saudi Arabia, the opportunities for the private sector to play a role in supporting the government’s objectives will rise.
Perhaps more important, will be the encouragement of small and medium-sized enterprises. It is these businesses that Riyadh hopes to generate a lot of the private-sector jobs needed to provide opportunities for its growing population. Sabb sees this as a major area of focus. The bank is developing a three-year strategy to address this sector, which so far the banks have had limited success in.
“It’s not an easy sector to cover anywhere in the world and it tends to jump between feast and famine,” says Dew. “You give it a lot of support, then some bad debts show up and you cut back and the cycle starts again. We are doing our best to do our bit for these companies.”
Dew is less convinced about the mortgage law, often cited as an opportunity for an explosion in lending in Saudi Arabia. Banks have already developed mortgage products, he says, and Sabb is thought to have one of the largest market shares in home finance. But the government has yet to finalise legislation supporting property ownership, property repossession, enforced eviction and asset liquidation, despite the law being under discussion for many years.
The main issue that needs to be addressed to help banks provide mortgage finance has to do with the interest rate risk banks have to take on in booking mortgages. Dew says the law is unlikely to address this.
He foresees two ways of overcoming the problem. The development of a securitisation market in Saudi home loans would allow banks to pool mortgage assets and sell them to investors, who are happy to hold them long term or trade them. The other way is for the government to issue more long-term debt to build up a pricing benchmark that would help develop the interbank market and provide some funding capability for the banks to solve the mismatch.
Given the links between securitisation and the subprime crisis that started the global economic downturn, Dew says any attempt to start a securitisation market in Saudi Arabia would need to develop slowly. “Obviously the regulator would proceed very carefully and look closely at securitisation, but as long as it is managed properly with the right regulation, it is a valuable tool,” he says.
It is unclear if either of these will actually occur, but before the mortgage sector really takes off, these issues will have to be addressed.
Sabb also needs to make progress in other areas to reverse the decline in its share of the Saudi banking sector in terms of profits seen over the past few years.
In 2008, the bank had 11 per cent of profits in the sector; that has now slipped to 7 per cent. Bringing provisioning to an end will help and the first-quarter 2011 figures show that the bank’s performance is rapidly improving. But with competition more intense than ever, Sabb will have a difficult time wrestling back its market share.
- Managing director of Sabb since April 2010
- Deputy chief executive of HSBC Amanah
- Chief operating officer of HSBC USA
- Deputy managing director of Saudi British Bank
- Joined HSBC in 1977