As reported by Intesa Sanpaolo, the Saudi banking system appears very solid, liquid and well capitalised. The country's economy is still focused on oil, but notable are the efforts of the central authorities for greater diversification. The evolution of loans, linked to the trend of oil revenues and therefore of public spending, is now slowing down, after years of sustained growth. Banks can however rely on a strong deposit base, partly at no cost, while recourse to external sources is very limited. Also as a result of an adequate supervisory and control action by the central authorities, and of legislation increasingly in line with international provisions, the degree of risk coverage is very prudent and the degree of capitalization is in fact well above the minimums.
Almost all national banks (12 credit institutions) have public shares in their capital. There are 12 other international banks, but entry barriers are very high. The banking system has grown in recent years, without significant changes in market shares. The country's largest bank, National Commercial Bank, with a 20% market share, was nationalized in 2009 following the bankruptcy of two large industrial conglomerates. The supervision and control activity is exercised by SAMA (Saudi Arabian Monetary Authority, the Central Bank of the country) in a particularly stringent manner, also favored by the low number of institutions. In recent years, the regulation has aligned itself with international provisions and significant efforts are aimed at favoring the diversification of the economy, as well as the financing of SMEs and the mortgage sector.
However, the evolution of loans, linked to the trend of oil revenues and therefore of public spending, is now slowing down. After the sharp deceleration of 2009, bank lending resumed growth at significant rates up to +14% in 2014. A deceleration is expected in 2015, which should also be confirmed next year. Consumer credit increased by 8,9% in 2014, supported both by the greater participation of the young population in the world of work and by low interest ratesas well as by a greater willingness of banks to grant credit to households by making use of new technological tools and the new credit bureau set up in 2002, which allows for a more accurate assessment of risks. In this context, home loans have grown by 30% for two consecutive years, in 2013 and 2014; and in order to guarantee an orderly development of the sector, SAMA has introduced a limit on Loan to value (LTV) of 70%. From this point of view, the sector offers considerable growth opportunities, taking into account the fact that many residents still live in houses of very modest quality.
The degree of risk in the portfolio is very limited, also thanks to the legislation which sets various limits on the disbursement of loans to the retail sector, in relation to income capacity and the LTV, and operating limits, such as loans/deposits and large exposures. Non-performing loans amounted to 1,1% of total loans in December 2014. The degree of coverage is very high, with provisions equal to 160% of non-performing loans, which can be explained by the very prudent supervision of the central authorities (there have been no bank failures since 1999). A significant risk factor is given by the high degree of risk concentration, due to the limited number of borrowers, large conglomerates often of a family nature.
Furthermore, the degree of liquidity is very high. Banks can count on a strong deposit base, partly at no cost. Deposits recorded sustained growth in 2014, equal to +15%, slowing down during 2015 (+7,7% in August compared to the same period of the previous year), mainly fueled by businesses and the government sector. The funding process could then be affected by the drop in public spending.
At the same time, the use of external sources is very limited, so that the financial system is not exposed to international volatility. Foreign assets are equal to 12% of total assets. Hence, also as a result of legislation increasingly in line with international provisions, the degree of capitalization is above the minimum (the CAR is equal to 17,8%) and profitability is very high, with ROE rising to 18% at the end of 2014.
