Banks in Saudi Arabia are expected to post high single-digit growth in annual earnings in 2019 as increased government spending and climbing interest rates positively impact the kingdom's lenders, analysts say.
Loans are likely to recover, following a four-year decline in lending, primarily boosted by an increased appetite for mortgages, according to banking analysts. Saudi banks’ loan books could grow up to five per cent this year, according to Bahrain’s Sico bank.
"The Saudi government's budget for 2019 is encouraging and suggests that investment spending will rise, which will be positive for corporate loan growth," Shabbir Malik, banking analyst at EFG-Hermes, said.
The brighter outlook comes as National Commercial Bank, the kingdom's largest lender, revealed on December 24 that is in preliminary talks to merge with rival Riyad Bank in a move that could create the third-biggest bank by assets in the GCC. Bloomberg, even more upbeat, expects earnings at Saudi's 12 listed banks to climb 10.1 per cent in 2019, higher than the 9.8 percent growth recorded in the first nine months of last year, it reported, citing its own data.
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The Saudi government’s 2019 budget increased spending, which should boost business confidence, stimulate the economy and support lending to the private sector especially after the government announced new projects, analysts say.
“A meaningful pick-up in government spending should help lift the confidence of the private sector,” Mr Malik said.
Boosting private sector lending is the Saudi government’s Kafalah, a program which lends to small and medium-sized enterprises (SMEs) in order to stimulate the economy, Mazen Al Sudairi, head of research at Al Rajhi Capital, said.
Saudi lenders are getting a boost from the US Federal Reserve, which foresees two hikes in interest rates in 2019, signalling it hasn’t ended its money tightening cycle. Most Gulf central banks mimic the Fed’s moves because their currency is pegged to the US dollar. This increases the income banks make on loans.
“We are penciling 15-18 basis points pick-up in net interest margin for major Saudi banks, assuming only 2 rate hikes for 2019,” Chiradeep Ghosh, banking analyst at Sico Bank said. Mr Malik said he expects an expansion between 10 to 20 basis points in net interest margin for major lenders in the kingdom.
There will be some challenges ahead as consumers face higher interest rates and the introduction of value-added tax, and some expats are expected to leave the country following rising fees for hiring foreigners, Mr Ghosh said.
While higher interest rates will help bank margins, it takes corporate loans three to six months to reprice while retail loans reprice over a longer term, Aqib Mehboob, analyst at Saudi Fransi Capital in Riyadh, he said.
Another challenge facing banks is the ability of lenders to deploy liquidity, Suha Urgan, director of financial institutions ratings at S&P Global, said.
“The key challenge in the near-term is the deployment of the liquidity given the slow pick-up in economic growth," Ms Urgan said.