Saudi banks to lead the sector’s post-pandemic recovery

JEDDAH: The profitability of Saudi banks will surpass those of its GCC peers in 2021, despite low interest rates and the elevated cost of risk, according to Roman Rybalkin, associate director at S&P Global Ratings.

“After the shocks witnessed in 2020, the Saudi economy is expected to recover in 2021-2022 due to an increase in global demand for oil and increase of private consumption. By 2022, we expect the expiry of OPEC+ quotas and higher oil prices to boost economic activity to close to 3 percent,” he told Arab News.

While he believed that real gross domestic product (GDP) will not return to pre-pandemic levels until next year, he said the size of the economy, conservative regulation and lack of aggressive growth pre-2020 will help the Kingdom’s banking sector begin to return to normal over the next 12 to 24 months.

Last year, the Kingdom’s banking sector witnessed increased credit growth, on the back of stronger mortgage and small loan lending, and Rybalkin has forecast that this trend will remain strong into 2021-2022.

“The Public Investment Fund is expected to launch new programs and make additional domestic investments. This could increase the demand for corporate lending in the years to come as PIF will continue to award contracts for businesses and boost corporate credit growth in 2021-2022,” he said.

At the same time, a new report by consultancy firm Boston Consulting Group (BCG) found that the revenue outlook for retail banks over the next few year in key GCC economies, which includes the UAE, Saudi Arabia and Kuwait, will be relatively subdued compared to previous years.

“The pandemic has taken a toll on the retail banking sector, and we believe that a slow-recovery scenario is most likely to occur for GCC retail banks,” said Godfrey Sullivan, managing director and partner, BCG. “In this scenario, the revenue pool of regional retail banks will approximately reach the 2019 level only by 2024, essentially a flat market.”

According to the findings of the BCG study, consumer loans and deposit revenues are the most affected retail banking items in regional banks as a result of the pandemic.

Although loans (mortgages and consumer loans) and deposits accounted for 80 percent of retail banking revenue in 2019, recent events suggest that payment, mortgage and investment products will now be the primary drivers of retail banking revenue growth.

Sullivan believes that the reduced revenue growth will be good for consumer as lenders “compete by providing more appealing and relevant offerings, which is better for the end-users.”

“With shifting consumer preferences and increasing population growth, a lot more focus on better implementation of data and analytics in the organization and cross-selling their full breadth of products to their existing customer base is key to remain competitive,” he said.