Saudi Arabia’s National Transformation Programme (NTP) offers growth opportunities for the banking and finance sector in the kingdom, especially for a retail-focused lender such as Al-Rajhi Bank, says CEO Steve Bertamini.

“Everyone sees it as a net positive,” Bertamini told MEED in an interview in Dubai. “Every board and senior management team has looked at the NTP, and analysed and decided how they are going to play and which role they are going to carve out for themselves.”

Saudi Arabia, the biggest oil exporter in the world, relies on the sale of hydrocarbons for more than 80 per cent of its income. The price of crude has fallen more than 50 per cent from a mid-2014 peak of close to $115 a barrel, denting the kingdom’s financial clout. The economy is slowing and Riyadh’s fiscal deficits are expected to surpass an estimated $118bn in 2016, or about 16 per cent of its GDP, and $97bn in 2017, according to the Washington-based IMF.

Subsequently, Riyadh has been forced to cut spending and put plans into action to transform its economy through further development of its industrial sector, increasing small and medium-sized enterprises’ (SMEs’) contribution to the GDP and job creation in the private sector. Selling shares to the public in some of the state’s crown jewels is also part of government plans to generate alternative revenues, and the listing of Saudi Aramco is at the heart of the country’s privatisation drive.

“In many ways, Vision 2030 and the NTP lay out quite well thought-through goals. They are quite specific set of activities and steps, which the government wants to take,” says Bertamini, adding that the government has tried to take a tough decision, which is logical as “any time you are trying to transform an economy in a meaningful way, it’s not easy”.

“In fairness they have started taking the big steps,” he says of the subsidy reforms in fuel, power, water and gas prices in the kingdom. This, he adds, has increased the cost of doing business, but most industries in the country have very healthy margins, including the banking sector.

Banking growth

Saudi Arabia’s economy is estimated to grow by 1.2-1.3 per cent this year, says Bertamini. GDP grew 3.5 per cent in 2015 and prior to the oil crash, the kingdom’s economy grew by an average of 5 per cent a year, according to the IMF.

However, despite the slowdown, Bertamini sees prospects of growth for the banking sector. “They have very sound balance sheets and they all remain profitable,” he says of Saudi lenders. “The capital position is strong and non-performing loans are still under 2 per cent on average. You have seen low growth, but it is still growth and if you benchmark the banking industry in Saudi Arabia against the global banks, we are still in very good shape.”

Liquidity constraints, however, are getting a lot of attention and remain an area of concern for the banking sector. Riyadh has been selling local currency bonds to financial institutions since the middle of last year to help bridge the budget shortfall. The kingdom has also tapped the international debt market with a $10bn loan earlier in the year. It is looking to raise another $15bn through a debut international bond.

“There is a deficit that has to be financed,” says Bertamini. “There’s a premium on deposits and that’s an area where we are seeing rising costs for banks. “That is going to spill over into higher rates for loans charged, which affects the economy at large.”

However, since the beginning of this year, the overall liquidity in the system is the “same to slightly tighter”, says Bertamini, adding that the trend is evident from Saudi interbank offered rates (Sibor) movement this year. The Saudi Arabian Monetary Agency, or Sama as the kingdom’s central bank is known, is also watching the situation very closely.

In terms of the government’s plans for financing, Bertamini says the Saudi debt-to-GDP ratio is extremely low and… by Riyadh’s own admission, it has a desire to increase it. “I think they are looking for a better balance of financing, which most countries do and again they are coming from a very strong position,” he says.

Retail push

In terms of its growth strategy, Al-Rajhi, the biggest retail bank in Saudi Arabia, is focusing its attention on opportunities arising in the mid-corporate and small and medium-sized enterprise (SME) business as the kingdom implements its broader social reform agenda and the NTP.

“The slowdown at the big corporate financing end affects us much less,” says Bertamini. “We want to focus on retail and grow into the mid-corporate sector of SR100m-SR500m entities and SME [businesses]. It’s an area where we want to disproportionally grow. It is a much better risk and because we have such a good distribution network, it makes it much easier for us to bank those type of customers.”

The lender, which added 10 new branches in 2015, plans to increase its branch network by close to 20 per cent by 2020. “Right now, we are sitting on 535 branches and we think over the next four years we probably will add at least another 100 branches,” says its CEO.

The government is trying to increase the participation of females in the workforce as part of its social reform agenda and Al-Rajhi sees the initiative playing in its favour going forward. “We have about 120 female-only branches already,” says Bertamini. “Every new branch we do also has a female section, so that is a good place for us to invest and grow into.” 

Mortgage deal

Home financing is another area of growth for Al-Rajhi, which already holds an 18 per cent share of the mortgage market in the country. That number is expected to grow further as the bank has signed an agreement with the Housing Ministry to exclusively offer mortgages in the kingdom as part of the government’s agenda to increase homeownership.

“We have signed an exclusive arrangement with the Housing Ministry and we want to be in the prime position to help the kingdom achieve its goal,” says Bertamini.

Vision 2030 and the NTP have ambitious targets to address the housing shortage in the biggest Middle Eastern economy. The Housing Ministry in June said it is planning to spend up to SR59.2bn ($15.8bn) over the next five years to build affordable homes.

In a May statement, the ministry also said it wanted to ensure 75 per cent of Saudi citizens own houses by 2020. This amounts to homes for about 1.5 million families in the country and the authorities hope to develop and deliver 100,000 units this year, in addition to 300,000 over the next few years.

“First of all, it [NTP] will increase homeownership and as the largest retail bank in the country, we want to be the bank to finance these purchases. We want to be in the prime position to help the kingdom achieve that goal,’’ says Bertamini, adding that the agreement with the ministry is “not a long-term exclusive agreement, but we get to go first, which is always a good place to be in”.

Al-Rajhi will offer mortgages under a scheme where the government effectively sets aside part of the down payment on the buyer’s behalf, according to Bertamini. “It’s quite a clever idea to make housing more affordable for people,” he says.

Earlier this year, Sama launched an affordable mortgage scheme to fund the purchase of residential real estate by Saudi citizens. In a February statement, the regulator said it has started the scheme in coordination with the housing and finance ministries, but it did not give the size of funds to be allocated, or when the programme will start.

Under the mortgage structure, homebuyers had to pay 15 per cent of the property value as an advance, while the lenders were to contribute 70 per cent of the total value. The additional 15 per cent was guaranteed by the Finance Ministry, according to a Sama statement at that time.

Future plans

Al-Rajhi, which also has operations in Malaysia, Kuwait and Jordan, has no immediate plans to raise funds or expand its footprint in other regional or international markets as it aims to further strengthen its position within the kingdom.

“Where we sit today we have a very strong capital position, an enviable position to be in from where we can grow,” says Bertamini.

The bank’s first-half income rose by 18 per cent compared with 1 or 2 per cent for the rest of the banking sector, while its asset growth for the period was 6.6 per cent. Al-Rajhi’s loan growth for the first six months of this year was pretty much in line with the industry.

“We are better than pretty much all the banks on our deposit liability side and we are growing at a faster rate in terms of profitability,” says Bertamini. “We are outperforming and disproportionally growing in deposits. We have actually managed to hold deposits and our share of current accounts has gone up.”

The bank is remodelling its business ethos and is pursuing the strategy called “ABCDE”. Accelerated growth through diversification of income, becoming an employer of choice, maintaining customer focus, advancements in digital platforms and execution excellence are the five pillars of Al-Rajhi’s new business strategy.

“There are 57 separate projects that support these five letters as we have started to build much more discipline into the business,” says Bertamini, adding that it is still early days in terms of implementation, but the “financial results have started to come through better than the rest of the market so that gives us encouragement”.

“This is something really simple, but it gives you a very clear roadmap,” he says. “We can use this for several years to come.”