RIYADH: Confidence in the outlook for Saudi Arabia’s banking sector is gaining momentum as most leading banks have shown resilience in balance sheet growth and profitability while improving asset quality during the first half of 2017. Banking sector analysts expect the outlook is set further brighten in the second half of the year on improved net interest margins (NIM), lower cost of funds, stronger loan growth and lower impairments.
Bank of America Merrill Lynch (BoAML) analysts expect to see an improved outlook for Saudi banks in to the second half of 2017 and beyond on themes such as NIM expansion accelerating on the back of the three US Federal Reserve rate hikes observed since December 2016, as well as a further four interest rates hikes expected over the next 18 months. Bank results for the full year are also likely to reflect the lower than expected cost of funding, as observed in the second quarter of 2017. Strong cost discipline on the part of banks, which has driven operating costs below expectations, as well as stronger asset quality than originally anticipated, and a potential pick up in asset growth, particularly from 2018, have boosted confidence in the sector. “[The] seven largest Saudi banks increased dividends by an average 67 per cent year on year in the first half of 2017, despite aggregate earnings falling 5 per cent. In our view, this sends a strong signal on management confidence on the outlook for NIM progression as well as asset quality,” said Hootan Yazhari, research analyst at Bank of America Merrill Lynch.
