Bloomberg/Simon Dawsonby Kudakwashe Muzoriwa
Moody's said that Saudi Arabia's three largest banks, National Commercial Bank (NCB), Al Rajhi Bank and Saudi British Bank (SABB), will maintain strong profitability despite the squeeze on interest margins on their lending narrow due to falling interest rates.
The three banks had a combined share of around 47 per cent of the Kingdom's banking assets but are likely to maintain profitability due to their efficient cost structures.
Ashraf Madani, VP-Senior Analyst at Moody's, said, “SABB will be hardest hit because it must also absorb the costs of its merger with smaller peer Alawwal Bank and NCB will face a similar pressure if its planned merger with Riyad Bank is completed while Al Rajhi's retail focus will provide initial protection, but prolonged low rates will take their toll.”
Moody’s stated that fee-based income will start to stabilise over the coming quarters as fees attached to rising consumer lending and mortgages offset lower trade and foreign-exchange income.
NCB has the largest and most stable non-interest income and the rating agency expects it to maintain its lead. “Nevertheless, sound efficiency and strong capital at all three banks will protect their credit profiles,” said Madani.
NCB is Saudi Arabia's biggest lender by assets, with total assets of SAR 498 billion, Al Rajhi Group has SAR 368.3 billion while SABB has total assets of SAR 257.8 billion according to company filings.
Just like their Arabian Gulf allies, the Saudi financial services industry is witnessing a wave of consolidation as banks seek ways to improve competitiveness and boost capital amid slowing economic growth.
SABB and Alawwal agreed to enter into a binding merger agreement in Q2 2018 having started discussions on a potential merger in April 2017. Alawwal Bank and SABB merger will create Saudi Arabia’s third-largest bank, a top-tier retail and corporate bank with SAR 271 billion in assets.
On completion of the merger, SABB will continue to exist and Alawwal bank will cease to exist as a legal entity and its shares will be cancelled and new shares in SABB will be issued to shareholders of Alawwal bank.
Similarly, NCB and Riyad Bank have reached an advanced stage on the proposed merger that will create the Gulf’s third-largest lender with $182 billion in assets.