KPMG leaders on Saudi's Q3 banking sector performance

KPMG Saudi banks has released the third quarter edition of its ‘Banking Pulse’, a quarterly study that sheds lights on the key trends and financial developments in the Kingdom’s banking industry. KPMG leaders Khalil Ibrahim Al Sedais and Ovais Shahab reflect on the key findings.

Despite the Covid-19 induced downturn, the lending space in the Saudi banking sector has continued to book growth, in particular in the mortgage financing segment. “This is an endorsement of the housing demand in the country and testament of government support measures,” said Khalil Ibrahim Al Sedais, Managing Partner of KPMG’s office in Riyadh.

Over the past months, house ownership levels in Saudi Arabia climbed well over 50%, “which was previously identified as a milestone point by the end of FY 2020 as part of the Vision 2030,” explained Al Sedais. “So in essence, the mortgage loan books across the banking sectors witnessed a period-on-period double-digit growth during the nine months ended September 30, 2020.”

The overall loan growth contributed towards a total asset increase of 9.8% since December 2019 reaching to SAR 2,686 billion ($716.17 billion). Meanwhile, the customer deposit base grew by around 3% as compared to Q2 2020 and 6% as compared to FY2019, closing at SAR 1,912 billion ($509.80 billion). 

Profitability

Overall net profitability for the nine months period (excluding goodwill impairment in SABB) has “understandably declined” said Al Sedais, by 6% for the year to date period relative to corresponding period of FY 2019. Ovais Shahab, Head of Financial Services at KPMG in Saudi Arabia, said this was mainly the result of “higher than expected credit losses of SR 12 billion”, which represents a period-on-period increase of 41%.

Facing a challenging economic backdrop, a growing number of business and households are defaulting on their payments, forcing banks to ramp up their non-performing loans portfolio, and in some cases, even write off some of their investments entirely.

According to Shahab, banks are struggling with this process , because “the process of loss quantification continues to be a challenge in the absence of ‘days past due (dpd) backstops’ for facilities subject to payment holiday and useful qualitative information of borrowers in general.”

M&A

KPMG’s report further takes note of a major deal that is unfolding in the Kingdom, with the formal agreement between NCB and SAMBA set to create Saudi Arabia’s largest lender in asset value. “This bodes well for the merging entities… [they will be able to] leverage the experience of SABB and Alawwal Bank and focus on cost and revenue synergies,” said Shahab. 

Realising those will however require “timely and effective stakeholder engagement as well as pre-merger planning”, he added.

Regulatory

The report states that the Saudi banking sector in the third quarter of 2020 experienced a range of regulatory changes, including the value-added tax (VAT) reforms and the institutionalisation of the real estate transaction tax (RETT). Commenting on RETT, Al Sedais said: ““Retail property buyers have welcomed the step-down of the tax rate from 15% back to 5% being a non-claimable component of purchase cost in general.” 

ESG

Finally, the KPMG study puts a lens on Environmental, Social and Corporate Governance (ESG), stating that banks in Saudi Arabia are becoming more conscious about their standing with regards to ESG. “With evolving customer and investors expectations, ESG is here to stay and as a result, the topic is rising on the agendas of executives at regulators,” said Shahab.