KPMG: Saudi Arabia’s banking sector resilient despite economic headwinds

KPMG, a leading provider of audit, tax and advisory services, released the first edition of its Kingdom of Saudi Arabia Banking Perspectives 2020 report, and based on the evaluation of the key financial indicators suggested a positive outlook for the banking environment, with promising profit growth fueled by a proactive government and a range of initiatives driven by the regulators. The report is the first major publication to include an analysis of the 2019 performance of all eleven Tadawul-listed banks.

The first edition of the annual series covers pertinent trends in the global banking industry, and their possible impact on the sector in Saudi Arabia. Amongst key topics addressed are the emergence of fintech, M&A activities, focus on SME lending, debt restructuring and regulatory developments in the space of anti-money laundering and counter-terrorism financing, and value-added tax.

“The Saudi government is committed to building a stronger financial sector, which is underpinned by the Financial Sector Development Program of Vision 2030, defining specific targets for the industry and providing incentives and infrastructure support to achieve these,” commented Khalil Al Sedais, Office Managing Partner in Riyadh, KPMG in Saudi Arabia.

“Despite subdued growth in recent years across credit underwriting and deposit acquisition, banks in Saudi Arabia continue to be well-positioned to take advantage of the improving economic outlook and an evolving technological landscape,” he concluded. 

Ovais Shahab, Head of Financial Services, at KPMG in Saudi Arabia, commented: 
“Regardless of a challenging global and regional environment, Saudi banks performed reasonably well in 2019. The aggregate net profit before Zakat and tax of banks rose 4.5 percent last year, reflecting impressive growth in bottomline and demonstrating the sector’s resilience despite prevailing global challenges. Total assets edged up 12 percent to $652 billion fueled by strong growth in loan book.”

Total expected credit losses (ECL), however, registered an increase of 12 percent due to organic growth in loan book and certain merger and acquisition (M&A) activities. Capital adequacy ratios reduced marginally by 0.9 percent, but continue to be well above minimum regulatory requirements. In addition, the coverage ratio witnessed a decline from 168% to 160% as a result of improving credit quality.

Furthermore, the Saudi Arabian Monetary Authority (SAMA) on Saturday launched an SAR 50 billion financing package to support the private sector, especially the small and medium-sized enterprises cope with the economic impacts of the coronavirus outbreak.

In addition, the anticipated increase in overall credit growth in 2020 is supported by an increase in both project lending and the mortgage market that should counter any adverse effects to overall profits coming from margin compression and zakat taxes.

Capitalization levels are above regulators’ stringent requirements, leaving potential for increased lending, while retail mortgages are likely to remain a key driver of credit, the KPMG report concluded.