Download Impact of Interest Rate Changes on Banking Sector

Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
1
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
Contents
2
Executive Summary
4
Changes in interest rates and impact
5
Limited direct impact of Fed rate hike on Saudi economy
8
Impact on global economy could affect Saudi economy
8
Impact of rise in interest rates on treasury income, brokerage services, and investment banking income
12
Changes in interest rates to have mixed impact on business environment
14
APPENDIX
16
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
List of Figures
3
Figure 1: GDP growth (developed markets)
5
Figure 2: GDP growth (emerging markets)
5
Figure 3: Unemployment rate (developed)
5
Figure 4: Unemployment rate (emerging)
5
Figure 5: Inflation (% chg.) (developed)
6
Figure 6: Inflation (% chg.) (emerging)
6
Figure 7: Different currencies versus USD (rebased to 100)
6
Figure 8: Interest (repo) rates (developed)
7
Figure 9: Interest (repo) rates (emerging)
7
Figure 10: Developed stock markets (rebased)
7
Figure 11: Emerging stock markets (rebased)
7
Figure 12: Capital adequacy ratio (2014)
8
Figure 13: Liquidity comparison (2014)
8
Figure 14: Saudi export share (2014)
9
Figure 15: GDP growth rates
9
Figure 16: Saudi Arabia exports
9
Figure 17: Saudi Arabia oil prices and budget
9
Figure 18: Saudi and US interest rates
10
Figure 19: Loan breakdown of Saudi banks as of 1H2015
10
Figure 20: Deposits breakdown of Saudi banks as of 1H2015
11
Figure 21: Loans-to-deposits ratio of Saudi banks
11
Figure 22: Investment banking and brokerage services income as % of income
12
Figure 23: Investment banking and brokerage services income as % of net income
12
Figure 24: Treasury income as % of total income
13
Figure 25: Treasury income as % of net income
14
Figure 26: Domestic credit to private sector (% of GDP)
14
Figure 27: Net FDI inflow (USD bn)
15
Figure 28: Net interest margin
15
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
Executive Summary
4
•
Economic developments across the globe have increased the need for sound domestic macroeconomic
policies. This is important to avoid spillovers from policy decisions of advance economies such as the
tapering of quantitative easing (QE) program by the US. After the closure of the QE program, the US
is now expected to raise interest rates in the future, however judging the timing of the increase is
dependent on a number of factors like inflation, unemployment rate, state of the economy and the
geo political situation. Since the Saudi Arabian Riyal (SAR) is pegged against the US dollar (USD), the
changes in the US interest rates will consequently result in parallel shift in the Saudi interest rates.
•
Historically, interest rates have been used as a tool to influence various economic factors. For instance,
by the beginning of 2009, major economies in the world were going through a recessionary phase.
The GDP growth in all countries declined, while many countries witnessed high unemployment rate.
Also, a few countries such as the US registered negative inflation (deflation). These factors forced
the US government to cut down interest rates to boost economic growth, spur spending, reduce
unemployment rates, and keep inflation at a reasonable level.
•
The direct impact of the hike in interest rate by the US Fed would be limited on Saudi economy. The
liquidity of banks and other financial institutions in Saudi Arabia would factor in the impact of the hike
in interest rates by the US Fed. Moreover, the rate hike will likely be gradual and provide some time to
the economy and the banking sector to adjust. However, in the short term, the rate hike would increase
the interest rates in Saudi Arabia and make investments costlier.
•
Saudi Arabia’s economy relies heavily on exports, which accounted for over 46% of the GDP (oil exports
accounting for 38% of the GDP) in 2014. The decrease in oil prices and a global slowdown will impact
the overall fiscal expenditure.
•
As the US short-term interest rates are close to 0% since 2011 and long-term interest rates is at historical
lows, SAIBOR and asset yield of the banks in Saudi Arabia have remained under pressure. Moreover, stiff
competition in the country’s banking sector further constricted margins. However, due to the issue of
the government bonds SAIBOR rates have started to rise. Along with that the rating cut by S&P (Standard
and Poor) will put upward pressure on the discount rates, given the perceived higher risk profile of the
company. We expect the banking sector’s asset yield to grow with the rate hike. Furthermore, banks
with a higher share of corporate loans, high share or non-interest bearing deposits, and better liquidity
would be benefitted to a greater extent.
•
Although investment banking and brokerage services account for a lower share of income for the
banking sector than other services, the segment would get impacted adversely through stock markets.
The efficient treasury operations may negate the impact of the interest rate hike, however the challenge
will be to manage the higher rate from foreign banks in light of the rating cut The bank’s income from
fees could decline due to low transaction volumes.
•
Changes in interest rates would have a mixed effect on the banking sector. The increase in interest
rates would decrease domestic credit in the economy and reduce consumption and output, yet it
would improve foreign investment and balance of trade. It is also expected to improve the net interest
margins of banks. However, we believe that Saudi Arabian Monetary Agency (SAMA) would be cautious
to respond to any such changes in interest rates, keeping in mind that the current decline in oil prices
could weigh on the domestic economy.
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
Changes in interest rates and impact
To promote economic growth
By the beginning of 2009, most countries across the globe were facing a recession due to the global debt
meltdown. The GDP growth rate in all countries plummeted, with developed countries such as the US,
Germany, and France registering negative growth in 2009. Simultaneously, unemployment rate, which
reached a five year high of 5.9% in the US during 2008, soared to over 9.4% by 2009. Additionally, the
US registered negative inflation (deflation) of 0.3% in 2009. These were the major factors forcing the US
government to slash interest rates to propel economic growth, spur spending, reduce unemployment rate,
and keep inflation at a reasonable level.
Figure 2: GDP growth (emerging markets)
Figure 1: GDP growth (developed markets)
6.0%
30.0%
25.0%
4.0%
20.0%
2.0%
15.0%
0.0%
10.0%
-2.0%
5.0%
0.0%
-4.0%
United States
Germany
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
China
France
India
Russia
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
-8.0%
-10.0%
2001
-6.0%
2000
-5.0%
Qatar
Saudi Arabia
Source: IMF, AlJazira Capital Research
Source: IMF, AlJazira Capital Research
Figure 3: Unemployment rate (developed)
Figure 4: Unemployment rate (emerging)
12.0%
12.0%
10.0%
10.0%
8.0%
8.0%
6.0%
4.0%
6.0%
2.0%
4.0%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
United States
France
Germany
Source: World Bank, AlJazira Capital Research
5
© All rights reserved
China
India
Saudi Arabia
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2.0%
2001
2000
0.0%
Russia
Qatar
Source: World Bank, AlJazira Capital Research
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
Figure 6: Inflation (% chg.) (emerging)
Figure 5: Inflation (% chg.) (developed)
4.5%
25.0%
4.0%
20.0%
3.5%
15.0%
3.0%
2.5%
10.0%
2.0%
5.0%
1.5%
0.0%
1.0%
0.5%
-5.0%
0.0%
United States
Germany
China
France
2014
2013
2011
India
Russia
2012
2010
2009
2008
2007
2006
2005
2004
2003
2001
2002
2014
2013
2011
2012
2010
2009
2008
2007
2006
2004
2005
2003
2002
2001
2000
-1.0%
2000
-10.0%
-0.5%
Qatar
Saudi Arabia
Source: IMF, AlJazira Capital Research
Source: IMF, AlJazira Capital Research
Spillover of interest rate changes to currencies
Figure 7: Different currencies versus USD (rebased to 100)
180.0
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
EUR
RUB
CNY
INR
QAR
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
0.0
SAR
Source: Reuter Eikon, AlJazira Capital Research
Currencies such as the SAR and Qatari Riyal (QAR), did not appreciate against the USD, given the pegging
of the currencies against the USD. While other currencies such as the euro (EUR) and Chinese yuan (CNY)
started to appreciate against the USD, as these became the alternative preferred investment destinations.
Changes in interest rates and global impact
Interest rates in the US collapsed from 5.4% in June 2007 to lower than 0.2% by the beginning of 2009. Interest
rates, since then have been near zero levels. Most other economies, both developed and developing, have
mimicked the action by the Fed and reduced the interest rates. Developing countries started increasing the
interest rates by the beginning of 2011, whereas developed countries continued to maintain lower interest
rates. Countries such as Saudi Arabia that in order to maintain the peg have maintained the interest rates .
6
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
United States
Jan-15
Jan-10
-1.0%
Germany
India
France
China
Qatar
Jan-14
0.0%
Jan-13
0.0%
Jan-12
4.0%
Jan-11
1.0%
Jan-10
8.0%
Jan-09
2.0%
Jan-08
12.0%
Jan-14
3.0%
Jan-13
16.0%
Jan-12
4.0%
Jan-11
5.0%
Jan-09
Figure 9: Interest (repo) rates (emerging)
20.0%
Jan-08
Figure 8: Interest (repo) rates (developed)
Russia
Saudi Arabia
Source: Bloomberg, AlJazira Capital Research
Source: Bloomberg, AlJazira Capital Research
Figure 10: Developed stock markets (rebased)
Figure 11: Emerging stock markets (rebased)
200.0
1,400.0
180.0
1,200.0
160.0
Jan-15
Please read Disclaimer on the back
1,000.0
140.0
800.0
120.0
100.0
600.0
80.0
400.0
60.0
200.0
40.0
20.0
DAX
CAC40
Source: Bloomberg, AlJazira Capital Research
Nifty
DSM
SSE
Oct-14
Oct-13
Oct-12
Oct-11
Oct-10
Oct-09
Oct-08
Oct-07
Oct-06
Oct-05
Oct-04
Oct-03
Oct-02
Oct-01
Oct-14
Oct-13
Oct-11
Oct-12
Oct-10
Oct-09
Oct-08
Oct-07
Oct-06
Oct-04
Oct-05
Oct-03
Oct-02
Oct-01
Oct-00
NASDAQ
Oct-00
0.0
0.0
MICEX
TADAWUL
Source: Bloomberg, AlJazira Capital Research
As the investors looking for better returns moved to the emerging markets, the flow of foreign funds (debt
and equity) into the developing markets such as India, Russia, and China increased. This is also evident
from the fact that the developing markets have performed better and provided better returns than the
developed markets. Markets in the GCC region too showcased good performance during the period.
Direct or indirect impact on banking sector
7
Low interest rates prove beneficial to lenders for a short short span of time,given the higher lending activity.
However the deposit rates are decreased at a much slower rate, as the banks try to attract more depositors,
to take advantage of the high lending activity, consequently resulting in lower NIMs. This shrank the net
interest margins (NIM) for banks in the US from around 4.0% in 2008 to around 3.2% in 2013. Countries such
as Saudi Arabia and Qatar that have their currencies pegged against the USD are directly impacted by the
changes in interest rates because these countries have very limited options and have to change interest
rates in tandem with the US to maintain the currency peg. Consequently, the NIM in Saudi Arabia declined
from 3.3% in 2008 to about 2.7% in 2013. The changes in the US interest rates do not impact the emerging
economies (currencies are not pegged to the USD) directly, but it impacts indirectly through capital markets.
As the interest rates in the US and other developed economies decrease, investors seeking higher returns
move to the emerging markets. Furthermore, the NIM in different countries did not showcase any direct
relation due to other factors such as competition among banks, different business models for banks, and
proportion of interest income to the total income earned by banks.
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
Limited direct impact of Fed rate hike on Saudi economy
The direct impact of the hike in interest rate by the US Fed would be limited on Saudi Arabia’s economy.
The liquidity of banks and other financial institutions in Saudi Arabia would factor in the impact of the
hike in interest rates by the US Fed. Moreover, the rate hike will likely be gradual and provide some time to
the economy and the banking sector to adjust. In the short term, the rate hike would increase the interest
rates in Saudi Arabia and make investments costlier. However, the dynamic of the banking sector in terms
of economic activity, the fiscal expenditure and the competition amongst the banks will play a vital role in
deciding in the lending rate.
Figure 13: Liquidity comparison (2014)
Figure 12: Capital adequacy ratio (2014)
19.0%
18.0%
16.0%
15.3%
14.4%
15.0%
13.0%
15.8%
13.0% 13.2%
12.0%
11.0%
y
a
an
m
er
Germany
30%
China
25%
Saudi
Arabia
20%
15%
10%
US
5%
0%
India
5%
G
iA
ra
bi
ar
at
35%
Sa
ud
Q
ce
an
Fr
S
U
na
hi
C
In
di
a
10.0%
France
40%
Liquid Assets to Total Assets
17.0%
14.0%
45%
17.9% 18.0%
Source: IMF, AlJazira Capital Research
7%
9%
11%
13%
15%
Capital to Total Assets
Source: IMF, AlJazira Capital Research
Impact on global economy could affect Saudi economy
Saudi Arabia’s economy relies heavily on exports, which account for over 46% of the GDP. Of this, oil exports
accounted for a major share (38% of the GDP) in 2014. The global slowdown may lower demand for goods
from Saudi Arabia and decline exports. Hence, the economy may be substantially impacted by the global
slowdown.
Fed rate hike to impact emerging economies
Europe’s economy and the slowdown in emerging economies such as China and Brazil are weighing on the
overall economic conditions. With growth in China slowing down and the US data showing mixed results,
the pressure on Saudi exports and trade balance is expected to be high. US and China are the largest
exports markets for Saudi goods, accounting for about 25% of the exports. The IMF expects the world GDP
growth rate to slow down to 2.5% in 2015 from 2.7% in 2014, reflecting a drop in global trade and demand.
This in turn would impact trade in Saudi Arabia.
8
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
Figure 14: Saudi export share (2014)
Figure 15: GDP growth rates
9%
8%
7%
US, 12.7%
6%
5%
China,
12.5%
Others,
44.1%
4%
3%
2%
1%
Japan,
12.2%
0%
2013 2014 2015
South
Korea,
India,
9.6%
8.9%
China
2016 2017 2018 2019 2020
India
Saudi Arabia
World
United States
Source: SAMA, AlJazira Capital Research
Source: IMF, AlJazira Capital Research
Stressed oil price may dent financial stability of Saudi Arabia
Oil prices have slumped after 1H2014 from above USD 100 per barrel to below USD 50 per barrel due to the
supply glut and relatively lower demand. The rate hike by the US Fed would put further pressure on economic
growth and demand for oil. Lower demand would further keep growth in oil prices muted for some time.
Saudi Arabia is an oil-driven economy, where oil revenue account for 87.5% of the total government revenue.
Thus, any further decline in oil prices would weigh on revenue and impact financial stability of the country.
The government has already accounted for a budget deficit of around SAR 140bn for 2015, however given
the continuous weakness in oil prices, we expect the deficit to be higher then SAR 250bn.
Figure 17: Saudi Arabia oil prices and budget
Figure 16: Saudi Arabia exports
2011
87.1%
47.4%
2012
86.9%
46.0%
2013
85.7%
43.3%
2014
83.1%
38.2%
0%
20%
40%
60%
80%
100%
20
135
-
120
(20)
105
(40)
90
(60)
75
(80)
60
(100)
45
(120)
30
(140)
15
(160)
2011
2012
2013
2014
2015
Oil exports as a % of total exports
Budget surplus/defict (SAR bn)
Exports as a % of GDP
Brent spot prices (USD/barrel) RHS
Source: IMF, AlJazira Capital Research
-
Source: IMF, AlJazira Capital Research
NIM to improve on the back of rising rates
Given that the SAR is pegged against the USD, lending rates in Saudi Arabia are linked to the movement in
interest rates in the US. The primary factors that influence Saudi domestic interest rates (Saudi Interbank
Offered Rate [SAIBOR]) are policy rates in the US, domestic credit demand, and London Interbank Offered
Rate (LIBOR), with the first two being the most influential.
9
Historically, Saudi Arabia has revised interest rates shortly after the Fed rates change With the US holding its
short-term interest rates close to 0% since 2011 and long-term interest rates reaching historical lows, SAIBOR
and the asset yield of Saudi banks remained stressed. Moreover, stiff competition in the banking sector in
Saudi Arabia dampened margins.
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
We expect the asset yield from the banking sector in Saudi Arabia to grow with the Fed rate hike. However,
the growth rate and the extent of benefits would depend on the following parameters:
• Bank’s loan mix
• Non-interest bearing (NIB) loans contribution
• Balance sheet liquidity
With the US expected to raise interest rates in the near future, Saudi Banks could benefit from the move.
Figure 18: Saudi and US interest rates
8%
7%
6%
5%
4%
3%
2%
1%
0%
Saudi
US
Source: Bloomberg, AlJazira Capital Research
Higher corporate loan share — A strength
The US Fed rate hike could benefit all banks. However, banks with a higher share of corporate loans would
benefit more than banks with a higher share of retail loans. Banks that have their loan books dominated
by corporate loans would register quicker adjustments in asset prices than banks with higher exposure to
retail clients. Thus, Al Rajhi Bank, with the highest share of retail loans (74% of the total loans), is expected
to record the slowest rise in yield on assets and NIM in case of a rate hike. Riyad Bank is best placed in terms
of higher corporate exposure and would benefit the most.
Figure 19: Loan breakdown of Saudi banks as of 1H2015
26%
92%
85%
81%
79%
79%
76%
76%
72%
67%
65%
63%
74%
8%
Fransi
15%
SAMBA
21%
21%
24%
24%
28%
33%
35%
Hollandi SAIB
SABB
ANB
Alinma
Riyad
NCB
AlBilad
19%
Retail Loans
10
37%
Aljazira Al Rajhi
Corporate Loans
Source: Company Financials, AlJazira Capital Research
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
NIB deposits to help improve margins
The deposits in banks are generally classified into demand deposits, time deposits, savings deposits, and
other deposits. Demand deposits are the cheapest source of funds for banks. Hence, margins for banks with
a larger share of demand deposits would be better than others in case of an interest rate hike. As of 1H2015,
Al Rajhi Bank is best placed among Saudi Banks with 95% deposits being demand deposits. The Saudi
Investment Bank will likely register the lowest improvement in margins, as its share of demand deposits in
the total deposits is the lowest among the Saudi banks.
Figure 20: Deposits breakdown of Saudi banks as of 1H2015
2%
2%
1%
1%
67%
30%
SAIB
58%
40%
Hollandi
2%
6%
0%
50%
48%
Aljazira
0%
38%
4%
0%
39%
1%
0%
39%
2%
5%
5%
4%
28%
24%
56%
57%
60%
65%
Riyad
ANB
Alinma
SABB
Demand Deposits
Time Deposits
68%
SAMBA
Savigns Deposits
3%
5%
2%
0%
0%
9%
18%
11%
75%
77%
78%
Fransi
NCB
AlBilad
22%
2%
0%
3%
95%
Al Rajhi
Other Deposits
Source: Company Financials, AlJazira Capital Research
Balance sheet liquidity
The higher the liquidity in the balance sheet, the better it is for the banks in case the interest rates are raised,
as these liquid assets can be reinvested in higher yielding assets. The loans-to-deposits ratio of banks is the
primary indicator of liquidity for banks. The National Commercial Bank (NCB) is best placed among the
Saudi banks with the least loans-to-deposits ratio of 66% at the end of 1H2015. Banque Saudi Fransi had
the highest ratio of 89% in the same group.
Figure 21: Loans-to-deposits ratio of Saudi banks
77%
78%
Aljazira
SAMBA
81%
82%
83%
Al Rajhi
SAIB
Riyadh
85%
85%
86%
Albilad
SABB
ANB
89%
87%
Hollandi Alinma
89%
66%
NCB
Fransi
Source: Company Financials, AlJazira Capital Research
11
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
Impact of rise in interest rates on treasury income, brokerage services, and investment
banking income
In 2014, the banking sector in Saudi Arabia generated about 73% of its income from consumer (retail) and
corporate loans, while the remaining was earned from treasury operations, brokerage services, investment
banking services, and other services. We have discussed the impact of the rising interest rates on the NIM.
In this section, we would analyze the same impact on other avenues of income. To understand the impact
of the rise in interest rates on treasury income, brokerage services, and investment banking services (IB)
income of Saudi Arabia-based banks, we analyzed data from the financial reports (2014) of the Saudi banks.
Relatively lower contribution from investment banking and brokerage services to
bank’s income
Figure 22: Investment banking and brokerage services income as % of income
15.6%
10.2%
6.3%
4.1%
3.4%
2.5%
4.7%
3.8%
5.2%
5.1%
4.9%
2.6%
Total
SAIB
Hollandi
SABB*
SAMBA
Riyad
NCB
Fransi
Aljazira
AlBilad
ANB
Alinma
Al Rajhi
0.0%
Source: Company Financials, AlJazira Capital Research
* Brokerage and Investment banking are provided by HSBC Capital Saudi Arabia
In 2014, the Saudi banking sector generated SAR 75.7bn in revenue. Of this, SAR 3.7bn was generated by
investment banking and brokerage services (IB and B services), accounting for 4.9% of the total.
The distribution of income among Saudi banks was skewed, with Bank AlJazira earning the highest (15.6%
of income from IB and B services) and Saudi British Bank earning the lowest (0.0%). During the same period,
large Saudi banks such as the NCB and Al Rajhi Bank earned 4.7% and 4.1% of the income from IB and B
services, respectively.
Figure 23: Investment banking and brokerage services income as % of net income
34.3%
12
2.1%
Hollandi
3.7%
SAIB
2.6%
SABB
SAMBA
5.8%
Riyad
ANB
3.8%
NCB
Alinma
Fransi
2.1%
5.0%
4.4%
Aljazira
2.8%
AlBilad
2.9%
Al Rajhi
11.3%
Source: Company Financials, AlJazira Capital Research
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
In 2014, the Saudi banking sector generated a net income of SAR 25.7bn. Of this, IB and B services accounted
for SAR 1.3bn or 3.7%.
Samba Financial Group (SAMBA) earned the highest (11.3% of its net income was from IB and B services)
and Bank AlJazira was an outlier.
Table 1: Bank fee income – May get impacted
2014 (SAR ’000)
Al Rajhi Bank
Income head
Fee income, 2014
Share trading
531,817
Alinma Bank
Corporate finance, advisory, trade, fund
management and other services
320,009
Arab National Bank
Share trading and fund management
122,771
Bank Albilad
Brokerage
47,472
Bank AlJazira
Local share trading
364,476
Banque Saudi Fransi
Share trading, brokerage, fund management,
and corporate finance
360,015
National Commercial Bank
Share Brokerage and Fund Management
466,813
Riyad Bank
Share brokerage and fund management
416,505
Samba Financial Group
Share trading and fund management
594,770
Saudi British Bank
Corporate finance, advisory, fund management
282,630
Saudi Hollandi Bank
Share brokerage and fund management
66,297
Saudi Investment Bank
Share trading and fund management
134,347
Total
3,707,922
Source: Company Financials, AlJazira Capital Research
Most brokerage firms generate revenue through commissions and fees charged on transactions including
the buying and selling of stocks. For instance, Samba’s fees from share trading and fund management
reached SAR 594.8mn in 2014. Similarly, the NCB earned SAR 466.8mn from fees charged from share
brokerage and fund management services.. After the interest rate hike, the likely shift from equities to fixed
income (debt securities), where the risk is lower, may impact revenue from the brokerage services segment
of the banks. However, the underdeveloped fixed income market, might not be able to attract a lot of
inflows. Traditionally, real estate has been considered the most attractive alternate investment opportunity,
however given the rising rates, that might also see some limited inflow. The weakness in oil price and the
rising interest rates will adversely impact the brokerage income, given the long only position in the market.
Treasury income – Large income source for Saudi banking sector
Figure 24: Treasury income as % of total income
27.6%
21.8%
25.6%
25.1%
23.4%
19.4%
18.9%
16.0%
18.5%
16.6%
14.9%
9.6%
Total
SAIB
Hollandi
SABB
SAMBA
Riyad
NCB
Fransi
Aljazira
AlBilad
ANB
Alinma
Al Rajhi
6.6%
Source: Company Financials, AlJazira Capital Research
13
In 2014, the Saudi banking sector’s total income stood at SAR 75.7bn. Of this, treasury operations accounted
for SAR 14.0bn or 18.5%. Treasury income constitutes a substantial part of the total income for Saudi banks.
Almost all banks earned 15.0–20.0% of the income from treasury operations. Bank AlJazira earned the highest
share (27.6%) and Bank Albilad earned the lowest share (6.6%) of the total income from treasury operations.
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
Figure 25: Treasury income as % of net income 2014
85.6%
43.6%
36.0%
25.3%
18.2%
34.5%
26.2%
26.1%
24.2%
SAIB
Hollandi
SABB
SAMBA
Riyad
NCB
Fransi
Aljazira
AlBilad
ANB
12.2%
Alinma
Al Rajhi
28.6%
27.7%
Source: Company Financials, AlJazira Capital Research
In 2014, treasury operations were a large source of net income for the Saudi banking sector, which earned
SAR 8.2bn of net income, accounting for 32.0% of the total net income of SAR 25.7bn.
Saudi Investment Bank earned the highest share (43.6%) from treasury operations and Bank AlJazira was an
outlier. Most banks earned 25.0–30.0% of the net income from treasury operations.
Changes in interest rates to have mixed impact on business environment
An increase in Saudi interest rate (SAIBOR) would adversely affect the GDP and non-oil GDP of the country.
Higher interest rates would discourage consumption and investments. This could decrease the demand
for local credit and ultimately reduce the potential growth in the non-oil sector. This would reduce the
aggregate demand, and thus the output.
During the period of decline in interest rates between 2008 and 2009, domestic credit to the private sector
improved from 37.7% of the GDP in 2008 to about 45.6% in 2009. If SAMA decides to raise interest rates
following the increase in the US Fed fund rates, it would proportionally decrease credit supply to the private
sector, which will add new pressure on the sector.
Figure 26: Domestic credit to private sector (% of GDP)
50.0%
40.0%
2013
2012
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
20.0%
2011
30.0%
Source: World Bank , AlJazira Capital Research
14
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
On the positive side, higher interest rates would attract higher foreign investments (FDI) into the country.
This can be affirmed from the fact that the lowering of the interest rate reduced the FDI in Saudi from USD
39bn in 2008 to about USD 8.9bn in 2013. As Saudi Arabia has an oil-driven economy and the majority of the
revenue comes from oil exports, these revenues are in USD (as oil contracts are signed in USD). Higher interest
rates would mean higher value for the USD earned. This in turn would help increase the trade balance of
Saudi Arabia. It is evident from the fact that there was a sharp decline in the balance of trade from 28.1% of
the GDP in 2008 to 9.1% of the GDP in 2009 (period when the interest rates declined). The increase in interest
rates would also help improve the NIM of Saudi banks, which declined from 3.3% in 2008 to 2.7% in 2013.
Figure 27: Net FDI inflow (USD bn)
Figure 28: Net interest margin
45.0
4.0%
40.0
35.0
30.0
3.5%
25.0
20.0
15.0
3.0%
10.0
Source: World Bank, AlJazira Capital Research
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
04
20
03
20
02
20
01
20
20
00
2.5%
20
-5.0
Jan-00
0.0
Jan-99
5.0
Source: Federal Reserve Bank of St. Louis, AlJazira Capital Research
The slow global recovery and falling import costs (ascribed to a strengthening USD) compels us to believe
that the inflationary pressure would be muted by external influences and interest rate hikes would further
pull down prices. However, we believe that SAMA would be cautious to respond to any such changes in
interest rates, keeping in mind that the current decline in oil prices is likely to slow down the domestic
economy.
15
© All rights reserved
Impact of Interest Rate Changes on
Banking Sector in Saudi Arabia
Please read Disclaimer on the back
Appendix
Saudi banks total income
2014 (SAR ’000)
Consumer
Corporate
Treasury
IB*
Other
Total
Al Rajhi Bank
10,240,130
1,557,091
1,310,474
559,279
0
13,666,974
Alinma Bank
840,322
1,194,981
495,333
89,203
0
2,619,839
Arab National Bank
2,178,012
2,105,068
883,757
135,150
205,175
5,507,162
Bank Albilad
1,135,830
636,194
138,094
79,208
107,726
2,097,052
Bank Aljazira
739,724
558,507
614,794
346,388
-33,168
2,226,245
Banque Saudi Fransi
1,419,493
2,740,813
1,263,336
362,394
0
5,786,036
National Commercial Bank
5,644,465
3,779,562
3,790,261
761,838
2,252,514
16,228,640
Riyad Bank
2,502,060
3,621,563
1,196,691
408,636
282,816
8,011,766
Samba Financial Group
2,175,112
2,604,962
1,851,888
752,875
0
7,384,837
Saudi British Bank
2,247,934
2,993,006
1,261,269
0
0
6,502,209
Saudi Hollandi Bank
917,518
2,016,523
527,941
82,760
-362,591
3,182,151
Saudi Investment Bank
922,886
827,742
648,816
131,732
0
2,531,176
30,963,486
24,636,012
13,982,654
3,709,463
2,452,472
75,744,087
Total
Source: Company Financials, AlJazira Capital Research
*Investment Banking and Brokerage
Saudi banks net income
2014 (SAR ’000)
Consumer
Corporate
Treasury
IB*
Other
Total
Al Rajhi
5,191,226
206,011
1,241,436
197,499
0
6,836,172
Alinma
158,980
750,177
319,614
35,660
0
1,264,431
ARNB
603,946
1,244,746
796,158
61,239
168,961
2,875,050
Al Bilad
245567
268222
88870
31972
94537
729168
BAJ
-21,458
-42,770
490,049
196,153
-49,507
572,467
Saudi Fransi
168894
2163527
1006314
176606
0
3516341
NCB
1,227,972
3,687,856
3,169,374
333,015
374,974
8,793,191
RIBL
1,263,482
2,796,391
1,139,102
254,602
-1,101,169
4,352,408
SAMBA
721,764
1,996,560
1,726,194
565,938
0
5,010,456
SABB
894650
2149090
1112868
109453
0
4266061
Saudi Hollandi
309546
1399361
440917
38116
-362591
1825349
Saudi Investment Bank
Total
317,538
439,804
625,870
53,267
0
1,436,479
4,734,952
12,469,062
8,214,325
1,354,391
1,088,786
25,683,944
Source: Company Financials, AlJazira Capital Research
*Investment Banking and Brokerage
16
© All rights reserved
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi
+966 11 2256250
[email protected]
Analyst
Sultan Al Kadi
+966 11 2256115
[email protected]
+966 11 2256374
[email protected]
General manager - brokerage services and sales
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
Ala’a Al-Yousef
brokerage
Brokerage
+966 11 2256000
[email protected]
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256277
[email protected]
+966 12 6618400
[email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
+966 16 3617547
[email protected]
+966 1 225 6352
[email protected]
Jassim Al-Jubran
+966 11 2256248
[email protected]
BROKERAGE AND INVESTMENT
CENTERS DIVISION
RESEARCH
DIVISION
Talha Nazar
Analyst
+966 11 2256364
[email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and
operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct
securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory,
and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied
the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira
Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and
International markets, as well as offering a full suite of securities business.
1.
RATING
TERMINOLOGY
Senior Analyst
2.
3.
4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target.
Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels
over next twelve months.
Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target.
Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve
months.
Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks
rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve
months.
Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further
analysis of a material change in the fundamentals of the company.
Disclaimer
The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for
any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation
to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake
risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on
his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or
microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face
some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by
Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be
condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness
or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or
otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price
targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might
increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might
get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special
circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees
in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the
time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities
mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research
Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except
for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by
Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more
of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting
or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or
executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies.
No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report
should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory
Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37