Saudi loan growth to private sector ‘sustainable’
Riyadh, October 2, 2013
High loan growth to the private sector in Saudi Arabia is likely to continue in the next two to three years as government spending supports a surging economy, said the managing director of Saudi British Bank (SABB).
According to central bank data, bank lending to the private sector was up 15 percent in August against the same period in 2012, growth that will likely push SABB to raise its own capital as it loan book grows, David Dew told Reuters on Tuesday.
"We do see that range (of loan growth) in the mid teens as sustainable over the next two-three years because of the underlying growth of the economy and government revenues," he said in a rare interview with a head of a Saudi bank.
Real gross domestic product growth in Saudi Arabia, the world's top oil exporter, was 5.1 percent last year and 8.5 percent in 2011 when government spending surged to help avert protests during the Arab Spring.
"If you're going to maintain your capital adequacy ratios, which we are, you've got to grow your capital at least at the same rate as your loans," Dew said.
SABB, the kingdom's fourth-largest listed bank by market capital and 40 percent owned by HSBC, has one of the lowest capital ratios of any Saudi bank, but one that is still nearly double the minimum 8 percent mandated by the central bank.
While Dew said he would not discuss specific plans to raise capital, banking sources told Reuters in August SABB was aiming to sell a riyal-denominated sukuk by the year-end to boost its Tier 2 capital position.
However, he said other options were also available.
"Instruments such as convertible bonds that will convert to equity or be written down in the event of breaches of ratios and so on, those are being issued with increasing regularity around the world and I think you will see them in Saudi Arabia," he said.
Saudi banks are well provisioned against non-performing loans thanks to very conservative regulation by the Saudi Arabian Monetary Agency (SAMA-central bank), Dew said.
"From a capital perspective the Saudi banks are pretty much qualified for Basel III already ... given the positive economic environment, we don't expect to see any material changes in provisioning levels in the next two-three years," he said.
LITTLE CHANGE WITH MORTGAGE LAWS
Saudi Arabia introduced a long-awaited package of new mortgage laws last year aimed at addressing a chronic shortage of affordable housing and regulating an existing market in home loans.
However, Dew said expectations voiced by some analysts that the changes would revolutionise the sector were misplaced.
"The (lack of) mortgage laws did not stop us introducing a home loan product and growing a product and getting the second largest market share. And I don't think the mortgage laws will significantly change our approach to that part of the business, which we are keen to develop," he said.
SABB was the first Saudi bank to introduce a dedicated home loan product and its mortgage business is growing in the 15-20 percent range each year, Dew added, saying that growth rate would likely continue.
He said Saudi banks would need to develop ways to hedge against interest rates rising above the historically low levels they are at now, and that it would be important to develop a securitisation market in the kingdom.
"Clearly if you've got a large fixed interest rate loan or investment portfolio that's going to hurt you when rates start to rise. So you've got to have a better ability to hedge against that risk," he said.
"A strong securitisation market in the kingdom, at least for home loans ... is going to be an important part of the overall solution," he added.
Many Saudi investors are keenly anticipating plans to open the kingdom's stock market up to more direct foreign investment. At present foreign institutions can only invest in the Saudi bourse via swap deals, something the Capital Market Authority has said may change.
However, Dew said he did not see any need to open the market quickly and that it was important to reduce the risk of destabilisation.
"I certainly don't see any particular need for urgency. The country does not need additional funds. The fiscal position is unbelievably strong," he said.
"There is no point opening up any economy including the Saudi economy to potentially destabilising capital flows. So I expect any continuing opening up to be gradual and to take place over an extended period of time," he added.
Dew said SABB's main focus in the next two years would likely be on its corporate business, rather than in retail.
"Our strategic objective is to be the leading international bank in Saudi Arabia so our corporate and international business is relatively more important to SABB than to some of the other Saudi banks," he said.
SABB is based in Riyadh, listed on the Saudi stock market and regulated by SAMA, but like some other banks in the kingdom that are partly owned by foreign lenders, it is seen as international because of its affiliation with HSBC.
Comparing SABB to its peers, Dew said the lender had outperformed the market in net earnings and margins in recent years.
"If you look at market share of corporate business, you've got five or six banks that are broadly similar. If you look at retail, it's a very different story with over half the market accounted for by the two largest banks," he said.
Al-Rajhi Bank and National Commercial Bank, which is not listed, boast more than half of all Saudi retail customers between them.
"If you're devising a sensible overall strategy you wouldn't necessarily want to take on the big two in the retail mass market," Dew said. – Reuters