BrazilSaudi Arabia’s banking sector set for further gains
Following a boom last year, Saudi Arabia’s banking sector is set for further gains in the coming years, according to a forecast by Boston Consulting Group.
The market assessment by Boston Consulting Group found that banking revenue hit SAR 57 billion last year, up from SAR 50 billion the year previous. While operating expenses did rise as well, they grew at a (much) slower pace than revenue, leading to a profit windfall. Combined, Saudi’s banks recorded a 14% rise in profits compared to the previous 12 months.
The researchers note that profits after taxes in the Kingdom have grown at an average of 7.9% CAGR per year since 2016 – although there are huge variations within that time frame due to global events such as the pandemic.
The report attributes last year’s revenue and profit hike to a number of converging factors. “The economic climate in the Gulf Cooperation Council (GCC) countries is noticeably brighter than the global backdrop,” said Markus Massi, managing director and senior partner at Boston Consulting Group.
“Elevated energy prices and an increase in tourism resulting from major global events have precipitated what by all accounts would be classified as an economic boom.”
“Additionally, Saudi Arabia is accelerating the transformation of its economy in line with its ambitious Vision 2030 initiative. As part of the plan, the Kingdom is proceeding full steam ahead with the development of a raft of mega-projects, modernisation initiatives, as well as reforms and development plans that will diversify its economy and open the country up to the world in a way that it has not attempted before.”
“These developments are being mirrored in the performance of the banking sector in Saudi Arabia, which is experiencing a period of much-welcomed profitability,” Massi said.
Throughout the 2016-2022 period, the retail banking segment registered the highest revenue increase, with loans (mortgages, credit cards, and corporate loans), payments, and investment products being the biggest drivers of growth.
Meanwhile, non-performing loans (NPL), which obviously increased during the pandemic due to pandemic-induced default risks, have declined over the last two years given the rapid economic recovery.
The outlook
Looking ahead, Boston Consulting Group says that the Kingdom’s banking sector is “well-positioned for growth in the coming years.”
Overall loan volumes are forecast to grow at 8.5% CAGR from 2022-2027, with retail loans (11.3% CAGR) mainly driven by mortgage, outpacing corporate (6.2% CAGR) and public sector (6.2% CAGR) volumes.
The second largest share of the market, corporate borrowing, is forecast to be strong as improving economic conditions, high oil prices, progress towards Vision 2030, and the launch of major construction projects drive overall credit growth.
The mortgages segment will benefit strongly from phase 2 of Saudi’s Housing Program, which will run until 2025, and the Real Estate Development Fund’s plans to provide financial support to more than 420,000 mortgage contracts. The segment is estimated to grow at 16.3% CAGR from 2022-2027.
Credit card loans are expected to account for the second largest driver of retail loan volumes. Growth is expected at 10.2% CAGR given the product’s low market penetration rate. Installment loans are also expected to continue to grow as consumer spending picks up.
“The Kingdom's Vision 2030 initiative, along with high energy prices and an increase in tourism, are driving an economic boom in the GCC, and Saudi Arabia is at the forefront of this trend. This, coupled with the Kingdom's efforts to diversify its oil-based economy, bodes well for the future of the banking sector,” said Massi.
For banks seeking to further strengthen their position, the report identifies four opportunities to consider. “Saudi banks should manage their funding effectively, revisit and re-balance their product strategies, invest for growth and leverage partnerships, noted the authors.
