Saudi Arabia’s buoyant banking industry will be among the principal beneficiaries of an inflow of overseas funds that analysts say will be triggered by the abolition on 15 June of the bar on direct foreign institutional investment in local listed firms.

Rules that will govern foreign investment in the Saudi Stock Exchange (Tadawul), permit qualified foreign investors including banks, brokerages, fund managers and insurance companies with at least $5bn in assets under management to participate.

Banks to gain

The kingdom’s banks will gain in two ways. All own share brokers that will generate earnings from orders placed by foreign investors. And it is likely that discriminating foreign investors will probably choose Saudi banks as the Tadawul’s safest and best first choice.

Despite the lower oil prices, the kingdom’s 12 locally incorporated commercial banks are liquid, well-capitalised and poised to enjoy a further era of balance sheet and profit growth.

Masood Ahmed, the Washington-based IMF’s Middle East and Central Asia department director, delivered a resoundingly positive assessment of trends in the Saudi banking sector in a statement to MEED on 5 May. “The banking sector is well positioned to weather any slowdown in growth,” he said. “Banks in Saudi Arabia are profitable, liquid, well-capitalised and well provisioned. The regulatory and supervisory framework is strong.”

Independent analysts concur. “The Saudi banking sector has strong liquidity and capital,” says Redmond Ramsdale, financial institutions ratings director at US-based Fitch Ratings.

“Saudi Arabia’s banking sector is well capitalised, which is evident from the strong capital adequacy ratios that local lenders boast,” says Naveed Ahmed, research group senior manager at Kuwait’s Global Investment House. “That – combined with improving asset quality, increasing non-performing loan coverage and lowering provisions – adds greatly to the attractiveness for investors.”

In numbers

SR2 trillion Total value of balance sheets of Saudi commercial banks at the end of 2014

1.3 per cent Proportion of non-performing loans in Saudi commercial banks’ total loan portfolio in 2014

Source: MEED

Analysts say the principal risk is the impact of the sharp fall in oil prices on government spending and private sector confidence. But this is dismissed as a matter of immediate urgency.

“The kingdom’s reserve coverage levels are among the highest in the GCC,” says Ramsdale. “We think the lower oil prices will continue to be manageable in the short term. Liquidity is tightening a little, but this should be manageable for the foreseeable future due to high external reserves held by the [government] that are likely to be drawn down before or at least in addition to government deposits in the banks, and thus preserve liquidity for longer.”

“For the moment, there are no concerns about the kingdom’s banks,” says Apostolos Bantis, emerging market credit strategist at Germany’s Commerzbank. “Their capitalisation is strong and as long as the government keeps up its spending on big projects, I don’t see any risks.”

Saudi Arabia’s banking industry is the second-largest in the GCC after the UAE’s. At the end of 2014, the kingdom’s locally incorporated commercial banks reported for the first time that their balance sheets in total were worth more than SR2 trillion.

Total assets grew by 10 per cent last year to continue a trend evident for almost three decades. In only one year in the past 26 has there been no growth in the banking industry and that was during the crisis caused by Iraq’s invasion of Kuwait in 1990. It slowed for two years after the global financial crisis, but has averaged more than 10 per cent in the past four years.

World’s highest

The average profitability of the 12 banks is still among the world’s highest, although below the peak seen in 2011-13, when aggregate net income to total end-year assets was more than 2 per cent. Their return on end-of-year equity has averaged about 14.5 per cent since 2010.

The kingdom’s banks are well capitalised by international standards. In 2014, their aggregate end-year equity to asset ratio rose to more than 14.5 per cent and has not been below 13 per cent in recent history. At the end of 2014, Saudi lenders had an average capital adequacy ratio of more than 17 per cent compared with the Basel III guideline for 2015. The kingdom’s banks also have exceptionally low non-performing loans, accounting for about 1.3 per cent of their total loan portfolio at the end of 2014.

Assets, profits and equity of locally incorporated commercial banks are expected to grow in 2015-17. The result will be higher dividend payouts and further growth in the value of the banking sector on the Tadawul, an irresistible combination for the newcomers expected to enter the market next year.