BrazilHow banks and insurers in Saudi Arabia are faring during Covid
While Covid-19 has understandably had a significant impact on Saudi Arabia’s financial services industry, the banking and insurance sectors have proven resilient this year. This is according to new analysis by KPMG.
The Big Four accounting and advisory firm conducted a half yearly roundup of the insurance and banking segments in Saudi Arabia, to find that the sectors so far performed reasonably well in 2020 – considering the circumstances. Proactive government intervention helped tide over the worst of the Covid-19 crisis, although each segment faced its own ups and downs.
Insurance sector
Given the widespread healthcare crisis, the first half of this year could have been disastrous for the insurance sector – riddled with heavy claims. Thankfully for the sector, the government very quickly took the financial burden for the pandemic off the insurance industry, covering treatment costs for citizens and residents in the country. In fact, the Kingdom’s government even extended its coverage to those living illegally in the Saudi Arabia.
Healthcare payouts aside, motor claims are also dominant in the Saudi insurance sector, and things have been quiet even on that front this year. The lockdown created favourable conditions, with restricted movements leading to less motor accidents and malfunctions. What resulted is a counter-intuitive scenario, where the Saudi insurance sector has actually posted stellar growth figures in the first half of this year, amid a global pandemic.
Gross premiums have grown by nearly 6% when compared to the first half of last year. Add to this the fact that net profits after tax and zakat – the mandatory religious contribution in the Saudi market – grew by a staggering 200%, driven by a lack of claims. The same factors have caused the loss ratio in net income to fall by well over 12%. Amid strong financials, the sector has seen its assets and investments also spike in 2020 so far.
According to KPMG Saudi Arabia’s Head of Financial Services Ovais Shahab, the goal now is to use this strong base to power forward. “Looking ahead, the focus of the Saudi insurance market is consistent with the global one; pursuing the journey of regulatory and accounting change, product innovation, and enhancing distribution channels and efficiencies in the conduct of business.”
Despite being protected, the sector will not be immune to the fundamental social and economic changes that Covid-19 has sparked. “As we emerge from this crisis into a new reality with varied challenges and opportunities – agility and financial resilience will be the new intonation for the insurance sector,” added Shahab.
Banking sector
Banking has had a slightly more torrid time in the same period. Interest rates in Saudi Arabia plummeted to a record low of 1% in March this year, while economic uncertainty has drawn out the tendency to save. Banks stand to lose from heavier savings accounts a liquidity crunch – a scenario that has reflected in their profitability to date.
Net profits after tax and zakat fell by more than 7% year-on-year for the second quarter, while credit losses have jumped by more than 40% for the same period. At the same time, things could have been much worse for the sector if the Saudi Arabian Monetary Authority (SAMA) – the Saudi central bank – hadn’t injected liquidity of more than SR 70 billion in the second quarter alone.
By June, the total SAMA deposit in the banking sector had reached nearly SR 90 billion, and banks had managed to generate nearly SR 1.5 billion on this deposit. No doubt, SAMA’s efforts to protect the small and medium enterprises sector through credit payment deferrals dented banking incomes. Nevertheless, the measures have been positively received.
Banks will have to continue to rely on regulatory support for the imminent future at least, as they continue to build resilience. KPMG’s report details how the banking sector will have to toe the line between substantially cutting costs and reevaluating priorities on the one hand, while simultaneously investing in future resilience by complying with evolving regulatory & reporting frameworks, building trust and loyalty among consumers, and maintaining the ever burgeoning investment in the FinTech landscape.
“It is evident that future sustainability and success of the sector essentially depends on taking decisive actions vis-à-vis optimization of non-interest cost base, enhancement of digital capabilities, capital protection and investment in imperative technologies such as advanced data analytics and cyber security. Moreover, considerations related to environmental, social and governance issues are expected to be central to the agenda of banks,” said Shahab.
