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Saudi Arabia Commercial Banking Report Q3 2008
Business Monitor International, Sep 2008, Pages: 38
Over the last year, the crisis in the inter-bank market, and the soaring prices of oil and other raw materials, tended to obscure several other important trends. In most of the developing world (i.e. the vast majority of the countries whose banking industries are surveyed by BMI), lending has been growing quickly. In many emerging markets, inflationary pressures have been boosted by a rapid increase in credit. In a number of emerging markets, macro-economic imbalances are evident. The figures provide a snapshot of the banking sector in Saudi and the changes that have taken place within it over the last year.
To place the figures in context, it may be useful to bear in mind certain aspects of the 59 countries whose banking sectors are currently surveyed by BMI. Across this sample, the median growth in assets in local currency terms was 21.3% (in Colombia). The median loan growth was 21.6% (in India). The median growth in deposits was 17.9% (in Brazil). On their own, the ratios of loans to deposits, assets, and GDP mean little: however, they can provide useful hints when combined with other data. Across the 59 countries, the median loan/deposit ratio is 92.3% (in Greece). The median loan/asset ratio is 56.0% (in Poland). The median loan/GDP ratio was 63.9% in India. From Q308, we have included a new section that examines the risks associated with each country’s banking sector in a new way. We have essentially sought to ask this question: to what extent will the banking sector likely need to source funding from banks in the rest of the world over the course of 2008.
Given that the answer is not necessarily, on its own, meaningful, we have looked at other key issues such as the size and recent movement in the loan/deposit ratio, macro-economic developments and recent movements in financial markets. Booming oil prices – and, in Iran at least, highly inflationary monetary policies – have led to a surge in bank lending in much of the Middle East and North Africa. It is not clear that all of this lending has been prudent. Nevertheless, the massive current account surpluses being achieved by many of the countries in the region indicate that – quite unlike Southeast and East Asia in 1997-8, for instance – the currencies are undervalued. There is no reason why the boom should stop anytime soon. The Middle East and North Africa should, collectively, continue to be a significant supplier of capital to the rest of the world. However, in part because of the relative underdevelopment of financial services and banking in most countries, relatively little of this money should come directly through the local banks.
As in previous reports, we include a SWOT analysis for Saudi Arabia. Overall, the report highlights aspects that can be considered to be strengths. By Middle Eastern standards, the banking sector is large, rapidly growing and well trusted by the country’s middle class. The main constraints come from the lack of competition that has prevailed in the past. Also, it remains to be seen how the Saudi Arabian Monetary Authority (SAMA) deals with mounting inflationary pressures. Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed.
The CBBER includes an assessment of the limits of potential returns: it does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns: this reflects BMI’s assessments of overall country risk, together with the regulatory and competitive environment. Saudi Arabia’s overall CBBER is 63.4. Within the limits to potential return, the banking elements and the country elements are rated relatively evenly – with scores of 56.3 and 63.6 respectively. Within the risks to the realisation of potential returns, the banking elements and the country elements are rated more distinctly– with respective scores of 65.0 and 78.8.
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