6 Notes on the performance of the Saudi banking sector in the third quarter

Riyadh: «Gulf»

Alvarez & Marsal issued the latest version of its report “The Performance of the Banking Sector in the Kingdom of Saudi Arabia” for the third quarter of 2022, which confirms the growth in profitability of the ten largest banks in the Kingdom at a significant rate, which was represented by an increase in net profits by 9.3% on a quarterly basis, leading to The return on equity increased by 14.8% during the third quarter of this year. The increase in profitability was attributed to the increase in total interest income by 15.9% qoq and the decrease in impairment charges in the third quarter by 15.4% qoq.

The combined loans and advances ratio also increased by 2.9% on a quarterly basis during the third quarter of this year, continuing to exceed the growth in deposits at a rate of 0.2% on a quarterly basis. In turn, operating income increased by 4.9% on a quarterly basis, mainly driven by the growth in total interest income, which is directly related to the rise in interest rates. On the other hand, cost efficiency continues to improve at the sector level with cost to income ratio decreasing by 0.9% qoq in Q3 2022, and cost of risk declining by 9 basis points qoq to 0.4% driven by lower provisions. depreciation.

Return on assets improved by 12 basis points qoq, with net profit growing faster than the average underlying asset base of 2.8% qoq. With regard to asset quality, the ratio of non-performing loans to net loans improved from 1.6% in the second quarter of 2022 to 1.5% in the third quarter of the same year, while the coverage ratio decreased to 152.0%.

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The report aims to shed light on the performance of the ten largest listed banks in the Kingdom by comparing their performance in the second and third quarters of 2022, based on the quarterly data issued by them. The report, which is based on published market data from independent sources and 16 different metrics, assesses key performance areas for banks, including size, liquidity, income, operating efficiency, risk, profitability and capital.

The list of the ten banks covered in the report included the National Bank of Saudi Arabia, Al-Rajhi Bank, Riyad Bank, The Saudi British Bank (SABB), Banque Saudi Fransi, Arab National Bank, Al-Inma Bank, Al-Bilad Bank, The Saudi Investment Bank, and Al-Jazira Bank.

The most prominent trends in the results of the third quarter of 2022:

1. Consolidated loans and advances increased by 2.9% on a quarterly basis during the third quarter of 2022, while consolidated deposits recorded a much slower growth of 0.2%. Consequently, the loan-to-deposit ratio at the sector level continued to increase for the seventh consecutive quarter by 2.6% on a quarterly basis, to settle at 96.2% during the third quarter of 2022.

2. Operating income growth accelerated during the third quarter of 2022 compared to the second quarter, as it witnessed a moderate growth of 4.9% on a quarterly basis, driven by an increase in net interest income by 5.3% and additional support due to the growth of other operating income by 17.7% on a quarterly basis. The offered interest rate among Saudi banks (SIBOR index) increased by 184 basis points during the third quarter of this year, while the total combined interest costs increased by 67.8% on a quarterly basis.

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3. Net interest margin improved slightly, as higher financing costs put pressure on the improvement in yield on credit. Net interest margin increased by 7 basis points to 3.05%, with combined net interest income increasing by 5.3% qoq. The increase in reference interest rates during the third quarter of this year also contributed to the improvement in the return on credit by 5.9%, in addition to the decline in the cost of syndicated financing by 45 basis points to 1.2% on a quarterly basis, which is mainly attributed to the increase in the SIBOR index. In general, eight of the ten largest banks in the Kingdom recorded growth in net interest margin during the third quarter of 2022.

4. Saudi banks showed an improvement in cost efficiencies for the third consecutive quarter, as the cost to income ratio increased by 88 basis points to 31.9% qoq, driven by operating income growth of 4.9%, which outperformed the growth in operating expenses of 2.1%. quarterly basis. Eight of the ten largest banks recorded improvement in cost efficiency.

5. Six out of the 10 banks experienced a decline in their cost of risk during the third quarter, with the combined cost of risk declining by 9 basis points qoq to 0.4% due to a decline in impairment charges of 15.4% qoq. The Saudi British Bank (SABB) recorded the largest quarterly decline in impairment charges of 72.4%.

6. The return on equity of Saudi banks has improved since the beginning of this year, exceeding the levels recorded before the global health crisis. The consolidated net profits of the ten banks recorded an average growth of 9.3% on a quarterly basis during the third quarter of 2022, outperforming the growth rate of the previous quarter of 2.7%, which contributed to an increase in the total return on equity by 1.3% on a quarterly basis, to settle at 14.8% in the previous quarter. In the third quarter, while the return on assets improved by 0.1% on a quarterly basis to 2.0% in the same quarter, while the return on risk-weighted assets increased by 0.2% on a quarterly basis to 2.6%.

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High interest rates

Commenting on this topic, Asad Ahmed, General Manager and Head of Financial Services at Alvarez & Marsal in the Middle East, said: “The overall strength of the banking sector in Saudi Arabia depends on higher interest rates, improving asset quality and a strong economic recovery. The Central Bank of Saudi Arabia raised its interest rates, in line with the decisions of the US Federal Reserve to increase interest rates by 1.5% during the third quarter of 2022 in order to counter inflation, and we expect the bank to continue to comply with the policies of the US Federal Reserve in terms of increasing interest rates, to ensure support for the net margin Interest at the level of the entire banking sector. It is also expected that the profitability of Saudi banks will continue to grow in conjunction with the continuation of the upward path of interest rates.

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