Saudi Arabian banks set for 4-year high growth in 2019

Bloomberg

Saudi Arabian banks may report double-digit earnings growth this year as rising interest rates and increased government spending offset the risk of higher bad-debt charges.
Even loans may expand faster after four years of declines led to a contraction in 2017. The government’s 2019 budget increased spending in the face of plunging oil prices.
“More stimulus, business confidence, privatisation and a stronger economy will also support lending to the private sector,” said Edmond Christou, a banking analyst at Bloomberg Intelligence in Dubai.
“Strong mortgage lending is likely to continue into 2019, boosted by government incentives, which may compensate for slower growth in personal loans and car leases as new responsible lending rules take effect.”

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The better outlook comes as the kingdom’s biggest lender, National Commercial Bank, on December 24 announced the start of takeover talks with Riyad Bank. Other firms are also said to be weighing potential mergers as the central bank and sovereign wealth fund, which owns stakes in some Saudi lenders, explore the possibility combining banks to increase their scale.
Combined pre-tax earnings at the country’s 12 listed banks will probably climb 12.4 percent in 2019, higher than the 9.8 percent growth seen in the first nine months of last year, according to data compiled by Bloomberg. That compares with a compounded annual growth rate of 6.2 percent in the five years through 2017, the data show.
The lenders are getting help from the Federal Reserve, which hasn’t yet signalled an end to its tightening cycle. The kingdom’s central bank followed the Fed last month by raising rates 25 basis points because the riyal is pegged to the dollar, lifting the income banks make on loans.

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“We expect the Fed to go for two rate hikes in 2019,” said Chiradeep Ghosh, a financial-institutions analyst at SICO BSC, adding 15-18 basis points in net-interest margins at major Saudi banks.
The Tadawul Banks Index climbed 31 percent in 2018.
The shares were also lifted after earnings statements in October and November sho-wed stronger margins, some pick-up in lending and lower cost of risk, he said. Projects announced by the government added some impetus.
Government spending is central to a meaningful recovery in corporate lending, said Shabbir Malik, a bank analyst at EFG-Hermes Holding SAE in Dubai.
Mehboob of Saudi Fransi Capital, said, “The SABB-Alawwal merger and potential NCB and Riyad Bank merger may drive other banks to evaluate opportunities to gain scale.”
Risk-weighted asset growth in past year should support incrementally higher NIMs. However, one of the most susceptible to challenge from digital upstarts National Commercial Bank Restructuring efforts over last few years should continue to add benefits, while the firm is in the strongest position to participate in project finance opportunities “Lenders like Alinma Bank and Bank Albilad will still grow aggressively as they seek to gain market share, but Samba’s selective risk approach makes it unlikely to be a growth beater,” said Christou of BI. “Al Rajhi is unlikely to compete aggressively on corporate lending as long as margins remain under pressure.”