KPMG: Saudi banks on the journey of customer endurance based on strong capital and liquidity base

KPMG published the latest edition of its “Banking Pulse,” a quarterly report series, highlighting the latest developments in the Kingdom’s banking sector following the disclosure of third-quarter 2020 financials by listed banks.

The report states that the Saudi banking sector in the third quarter of 2020 experienced a range of regulatory changes, including the value-added tax (VAT) reforms and the institutionalization of the real estate transaction tax (RETT), with mortgage finance continuing to record significant growth.

“The lending space in the Saudi banking sector has been rife with continued growth in mortgage financing throughout the COVID-19 environment. It is an endorsement of the housing demand in the country and testament of government support measures,” commented Khalil Ibrahim Al Sedais, Office Managing Partner – Riyadh KPMG in Saudi Arabia.

As per the latest available statistics, house ownership levels climbed well over 50% which was previously identified as a milestone point by the end of FY 2020 as part of the Vision 2030. In essence, the mortgage loan books across the banking sectors witnessed a period-on-period double-digit growth during the nine months ended September 30, 2020.

“Retail property buyers have welcomed the step-down of the tax rate from 15% back to 5% being a non-claimable component of the purchase cost in general. If these past trends are representative for the last quarter, then the introduction of RETT and sale drives witnessed each year-end, it is quite likely that the overall banking sector will end FY 2020 without major impact on profitability,” Al Sedais noted.

The overall loan growth contributed towards a total asset increase of 9.8% since December 2019 reaching to SAR 2,686 billion (US$716.17 billion). Moreover, the customer deposit base during the same period rose by 5.7% and closed at SAR 1,912 billion (US$509.80 billion)

Overall net profitability declined by 6% for the nine months period, excluding goodwill impairment in SABB, relative to the corresponding period of FY 2019, mainly due to higher expected credit losses of SR 12billion – a period-on-period increase of 41%. At present, the process of loss quantification continues to be a challenge for banks in the absence of ‘days past due (dpd) backstops’ for facilities subject to payment holiday and useful qualitative information of borrowers in general.

Apart from predominant efforts towards customer endurance; another key element gathering swift momentum in the sector is the aspect of Environmental, Social and Corporate Governance (ESG), referring to three central factors in measuring the sustainability and societal impact of a business.

“We foresee that the final quarter of this already eventful year is likely to be a nexus of several divergent themes and in the grand scheme of things the closure would depend on the continued tenacity and resilience of the sector founded on measures already taken by both the the Saudi Central Bank (SAMA) and individual banks,” said Ovais Shahab, Head of Financial Services KPMG in Saudi Arabia.

“We have observed multiple efforts towards customers endurance at the back of the strong capital base and funding structure of the industry. We do not foresee a different proposition for the rest of the year,” he concluded.