Saudi banks to feel ‘impact of new mortgage regulations’ in long-term

Reviewing the partial regulations for the Saudi Mortgage Law published by Saudi Arabian Monetary Agency (SAMA), NCB Capital, described as the GCC’s major wealth manager and the Kingdom’s largest asset manager, believes that, while overall positive, the regulations will impact the banking sector only in the medium to long term, if at all.
“The regulation in its current form does not fully tackle issues related to foreclosures of properties and how Saudi banks are expected to participate in the suggested format stipulated in the laws published so far,” said Mahmood Akbar, equity research analyst at NCB Capital. “Indeed, we believe that some banks actually prefer the current framework (salary-assignments) where they have ownership of the property. Nonetheless, we expect short-term price gains in small-cap banking sector and real estate stocks.”
The final approved draft of three of the five laws forming the Real Estate and Financing Law published by SAMA relate to (1) Real Estate Financing (2) Financial Leasing (3) Supervision of Finance Companies. The laws related to foreclosures in case of non-payments, “The Execution Law,” and the “Registered Real Estate Mortgage Law,” however, are yet to be published.
“The focus is mostly on finance companies and there is limited reference to banks,” said Akbar. “Given the limited reference to commercial banks, coupled with the fact that the laws stipulate that the finance company can only engage in real estate financing, there is limited clarity on whether the laws will apply to commercial banks. This makes it possible, although still uncertain, that the aim of the regulation is to separate mortgage lending function from commercial banks, similar to separating the commercial banks from the securities business. The regulations did not tackle issues related specifically to the banking sector particularly with regards to risk weightings. If the banks need to create separate entities to deal with mortgage lending, the benefit from the proposed law will materialize only in the long-term.”
Financing and re-financing companies will be heavily regulated since SAMA has introduced a set of strict regulations to ensure the stability of the new sector and to protect borrowers. This includes, among others, promoting transparency of activities (Article six and 26, Real Estate Finance Law), preventing speculative real estate investments (Article 23 and 24 of the Real Estate Finance Law) and fair pricing (Article 20 of the Real Estate Finance Law). “We believe this is positive for the Kingdom as it fully tackles many of the issues facing the real estate market,” Akbar added.
A real estate refinancing company called The Saudi Real Estate Refinancing Company is expected to be formed by the Public Investment Fund and will have a paid-up capital of SR 5 billion. This new entity will purchase the mortgages from the real estate companies, securitize them and issue mortgage-backed securities. This will offer investors alternative channels for real estate exposure, which may ‘free up’ some of the undeveloped land owned by wealthy families.
“In our view, the law is part of a long-term vision and not to the short-term benefits of the corporate sector,” said Akbar. “While we believe the proposed law will have medium and long term benefits to the economy, we argue that this is unlikely to have an immediate positive impact either on real estate companies or banks. Indeed, we see the regulations as attempting to establish a stable, efficient and sustainable market for mortgages which should support Saudi’s long-term social reforms.”
Akbar added: “However, we believe the proposed law in its current form does not tackle a key underlying problem — lack of suitable and affordable housing. For example, one of the major banks in Saudi Arabia pointed out that it has more than 400,000 clients eligible (based on salary-assignment) for a mortgage but have yet to find a suitable property (this figure doubled from last year). Therefore, even if the process of mortgage lending was made easier through private property institutions (i.e. the ability of lenders to evict mortgage holders from homes in case of non-payment) middle class borrowers will find a limited supply of suitable housing.”
Akbar said: “In our review we do not factor in additional growth in our banks’ models to incorporate the proposed mortgage law. Indeed we believe the recent increase in consumer real estate financing is related to banks’ “chase for yields” rather than in anticipation of the regulatory changes. Given the recent decline in NIMs in the corporate segment, we see banks gradually changing the asset mix more towards the consumer finance segment and in particular real estate financing which would limit the decline in margins. The management of most banks we met recently indicated that they expect to see higher consumer lending growth in 2013 driven by real estate financing.”