Saudi lenders will face increasing pressure to explore new markets to drive revenue and profit growth in the coming years. Although the kingdom’s banking sector is highly liquid with a stable outlook, competition is strong between lenders and margins on deals remain tight. A generally low interest rate environment is further pressurising margins.

Saudi banks have been posting second-quarter results for 2014, with most institutions reporting healthy profit growth compared with the second quarter last year. Much of this growth has been driven by rising revenues, fuelled in part by increased lending activities. The banks also reduced some of their provisioning needs during the quarter.

But with yields on lending declining across the sector, financial institutions will need to compensate by considering other ways of bolstering profits. They will need to do more business to maintain profitability.

One bank that is being hit by the fall in yields is Al-Rajhi Bank, the largest lender listed on the Saudi Stock Exchange (Tadawul).

Although still commanding a large market share in retail banking, increased competition from other banks has pushed down margins, contributing to an 8 per cent decline in the bank’s second-quarter profits. Higher provisioning costs also led to the decrease.

Retail banking is just one area that Saudi banks are moving into as a means of generating more income. They are also considering the high-net worth individual, wealth management and private banking markets. Financing the small-to-medium enterprise market is also proving attractive to lenders.

With margins to remain under pressure in the foreseeable future, providing new services and products will be one way the banks can maintain a competitive edge.

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