Saudi Banks to Increase their Capital Following Record Profits

Saudi banks have recently increased their capital, and five others on the financial market: al-Inma, al-Jazira, al-Bilad, Arab National, and Saudi Investment Bank announced their plans to increase capital, which will contribute to a total increase of $4.5 billion, according to analysts.

What prompts banks to increase their capital?

The head of asset management at Arbah Capital, Mohamed al-Farraj, indicated that this measure aims to adhere to Basel standards, seeking to enhance the banking sector by ensuring capital adequacy to cover credit and operational risks.

Farraj told Asharq Al-Awsat that the remarkable recovery of the Saudi economy after the COVID-19 pandemic has encouraged banks to expand and invest.

The expert said that the huge bank profits, due to high-interest rates, have strengthened their plans to finance the capital increase from retained profits.

He said that these increases enhance investors’ confidence in the stability of banks and would push towards improving the value of their shares in the financial market, contributing to an increase in shareholders’ profits.

By the end of 2023, Saudi banks witnessed the highest annual profits in their history, reaching about $18.7 billion due to the rise in interest rates and the growth of operating income and investment commissions.

Farraj expected Saudi banks to continue to increase their capital during the current year, with a total increase of 16-25%, and that the capital adequacy ratio would record a noticeable increase by the end of the current year, reaching from 15-18%.

The capital adequacy ratio (CAR) indicates how well a bank can meet its obligations. It compares capital to risk-weighted assets and is watched by regulators to determine a bank’s risk of failure.

The ratio protects depositors and promotes the stability and efficiency of financial systems worldwide.

The capital adequacy ratio calculates a bank’s capital by its risk-weighted assets. Currently, the minimum ratio of capital to risk-weighted assets is 8% under Basel II and 10.5% under Basel III, based on the Basel Committee on Banking Supervision guidelines.

Farraj also indicated that the increase will enhance the banks’ ability to finance major projects, especially those included in “Vision 2030,” and said that banks could find solutions to provide liquidity in foreign currencies by issuing bonds and instruments denominated in different currencies.

He said that credit growth is expected to rise during the current year, supported by economic recovery and capital increases, as the total value of loans in the banking sector equals more than $533 billion.

The expert explained that inflation leads to the erosion of the actual value of assets, noting that the Saudi banking sector faces increasing competition from technical financial companies.

– Lending support

Economic analyst and member of the Saudi Economic Association Saad al-Thagfan believes banks undertook capital increase operations to support their capital, expand their activities, and support lending operations.

Thagfan said that Saudi banks, under the supervision of the Central Bank of Saudi Arabia (SAMA), enjoy an excellent capital adequacy ratio exceeding the required rate.

The expert indicated that no obstacles were preventing the expansion of lending and achieving growth in profits, attributing this to the strength of the Kingdom’s economy.

Meanwhile, Fitch forecasts Saudi banking sector financing growth of 10% in 2024, well above the GCC average (5%) but down from an estimated 12% in 2023 and 14% in 2022.

The cost of funding will remain sensitive to changes in the US Fed rate, but Fitch expects the average net interest margin (NIM) to stay around 3%.

Fitch also forecasts deposit growth of 10% in 2024, mainly from term deposits, with the proportion of demand deposits likely to decrease to below 50% of total deposits.

For its part, Standard & Poor’s expected a robust credit growth of 8%-9% in 2024. The Agency expected the Saudi government and its related entities to continue to inject deposits into the banking system to support the banks’ credit growth.

– Financing challenges

In the same context, Jadwa Investment Company does not expect banks to shoulder the burden of Vision 2030 financing, but they will need to keep diversifying their funding sources to support the private sector.

“Saudi banks have historically been highly liquid, well-capitalized and profitable. This is still broadly the case, but while Vision 2030 has opened up new lending opportunities, funding challenges are becoming more pressing. “

The company noted that it was clear from the loan-deposit ratio (LDR), which measures lending to the private sector against available deposits.

In recent years, buoyant economic growth has propelled brisk credit demand, and although deposits have grown, they have not kept pace with lending.

Consequently, the LDR finished 2023 above 100, an uncomfortable metric for risk managers.

“With deposit growth now softening, pulling this ratio back to acceptable levels will mean putting the brakes on lending growth—unless other funding sources can be captured.”

Source : aawsat

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