Saudi banks are the best in Gulf region

Venkatachari Jagannathan
04 April 2002

Chennai: Saudi Arabian banks rank among the best capitalised financial institutions in the Gulf region. The Saudi banking system is also the largest and the most profitable ones in the region, states a Standard and Poors (S&P) study titled Bank Industry Risk Analysis: Saudi Arabia.

According to the report, due to a combination of factors like wide margins, good efficiency, low costs and cheap deposits as on 30 September 2001, the Saudi banks average annualised ROA and ROE stood at 2.2 per cent and 19.7 per cent, respectively. In this respect, liquidity remains abundant in the kingdoms banking system. Saudi banks aggregate loans-to-deposits (credit deposit ratio) ratio stood at a low of 66 per cent on 30 September 2001.

The study also points out some constraints in the Saudi economy, like: economic reforms pertaining to liberalisation and privatisation are still awaited; the government deficit and debt are currently increasing; and Saudi banks could face a shrinkage in domestic as well as regional business opportunities, while asset quality could suffer from a decline in oil prices.

On the positive side, says S&P analyst Anouar Hassoune of the Financial Institutions Group in Paris and one of the authors of the report, the average quality of financial disclosure in the kingdom has improved over the past decade. Financial disclosure, nevertheless, remains mixed. Although many Saudi banks have attained reasonably high levels of financial transparency, a few have failed to produce interim or even annual financial reports.

The banking environment in Saudi Arabia is relatively protected and strictly regulated by the Saudi Arabian Monetary Agency, which has sensibly been sparing in issuing banking licenses in the past decade, particularly to foreign applicants. Nonetheless, there is a reasonable amount of competition in the domestic banking system, which enjoys minority but active foreign shareholding. However, in the medium to long term, foreign competition could more directly step in, as Saudi Arabia is about to join the World Trade Organisation.

The report also notes that the positive factors driving S&Ps assessment of the largest banking system in the Gulf region and the Arab world are offset by several recurring weaknesses. In spite of major structural reforms either in draft or currently being implemented, aimed at diversifying and liberalising the kingdoms economy, domestic revenues remain dependent on oil-price gyrations.