RIYADH: Saudi banks aggregate profit reached a 14-month high of SR7.33 billion ($1.96 billion) in May, marking an annual 16 percent rise, newly released data has revealed.
According to the Saudi Central Bank, also known as SAMA, these figures represent profits before zakat and taxes.
Cumulatively, from the beginning of the year to the end of May, banks recorded a total profit of SR34.78 billion, compared to SR31.12 billion during the same period last year.
In June, a McKinsey report highlighted that high hydrocarbon prices, rapid economic expansion, and low unemployment, along with favorable demographics, ambitious public investments, and moderate inflation, have collectively bolstered robust balance sheets and strong margins among Saudi banks.
This region has been enjoying an evolving regulatory environment marked by greater openness, new frameworks for innovation, and measures to improve the ease of doing business.
All Gulf Cooperation Council countries maintain their currencies pegged to the US dollar, causing regional interest rates to closely mirror movements in Washington. In 2023, as the Federal Reserve’s monetary policy increased financing costs in the GCC, both local and global bank profits surged.
Concurrently, headline inflation was moderate, estimated at 2.6 percent in 2023 and projected to decrease to 2.3 percent in 2024 according to McKinsey.
According to the firm, all GCC banks outperformed their counterparts in developed and many emerging markets, remaining on a rapid growth trajectory. They primarily rely on stable domestic deposits, which have proven resilient during economic downturns.
In comparison to April, banks’ profits before zakat and tax rose by 9 percent, marking the highest monthly increase in the past five months.
McKinsey nevertheless highlighted the potential risk to the GCC banking sector if interest rates were to fall and bank managers were to be complacent.
This complacency might deter them from pursuing ambitious transformation initiatives that are crucial for long-term sustainability and growth.
The firm warned that the current high-interest-rate environment, which has bolstered bank profitability, may not persist indefinitely.
If inflationary pressures in the US ease, the Federal Reserve could adjust its monetary policy, potentially lowering interest rates, and thus reduce bank profits.
The advice is for bank executives to not assume that high profits are the new norm and instead prepare for potential future declines in profitability.
It suggests that banks should use their current strong financial position to invest in transformative changes and cost reductions. By doing so, they can enhance efficiency and resilience, ensuring they remain competitive even when interest rates decrease.
The International Monetary Fund praised SAMA’s efforts to safeguard the Kingdom’s financial stability in a June report. It has emphasized that the central bank continues to advance the modernization of regulatory and supervisory frameworks.
Significant progress has been made in developing its financial safety net framework, encompassing bank resolution, emergency liquidity assistance arrangements, and deposit protection fund.
