The Banking Executive Magazine - November 2022 Issue

higher interest rates. The sector con- tinued to see improvement in cost ef- ficiency with decline in cost-to-income (C/I) ratio by 0.9 per- cent QoQ in Q3’22. The cost of risk (CoR) declined by 9bps QoQ to 0.4 percent due to reduction in impair- ment charges. Furthermore, return on assets (RoA) improved 12bps QoQ as net profit grew faster than the underlying aver- age asset base of 2.8 percent QoQ. In terms of asset quality, non-per- forming loans (NPL) / net loan ratio improved from 1.6 percent in Q2’22 to 1.5 percent in Q3’22 while cover- age ratio declined to 152.0 percent. A&M’s KSA Banking Pulse examines data of the 10 largest listed banks in KSA, comparing the Q3’22 results against Q2’22 results. Using inde- pendently sourced published market data and 16 different metrics, the re- port assesses banks’ key performance areas, including size, liquidity, in- come, operating efficiency, risk, prof- itability, and capital. The country’s 10 largest listed banks analyzed in A&M’s KSA Banking Pulse are Saudi National Bank (SNB), Al Rajhi Bank, Riyad Bank (RIBL), Saudi British Bank (SABB), Banque Saudi Fransi (BSF), Arab National Bank (ANB), Alinma Bank, Bank Al- bilad (BALB), Saudi Investment Bank (SIB) and Bank Aljazira (BJAZ). The prevailing trends identified for Q3 2022 are as follows: 1. Aggregate L&A increased by 2.9 percent QoQ in Q3’22, whereas aggregate deposits grew at a much slower pace of 0.2 percent QoQ. Consequently, industry wide loan-to-deposit ratio (LDR) continued to increase for the sev- enth consecutive quarter by 2.6 percent QoQ to settle at 96.2 per- cent in Q3’22. 2. Operating income grew at a faster pace in Q3’22 than the previous quarter. The moderate growth of 4.9 percent QoQ is driven by the increase in net interest income of 5.3 percent QoQ and was further supported by growth in other op- erating income of 17.7 percent QoQ. As SAIBOR increased by 184bps in Q3’22, the aggregate total interest cost increased by 67.8 percent QoQ. 3. Net interest margin (NIMs) ex- panded marginally as higher funding costs offset improvement in credit yield. NIM improved marginally by 7bps QoQ to 3.05 percent as aggregate net interest income increased by 5.3 percent QoQ. The rising benchmark rates in Q3’22 led to an improved yield on credit to 5.9 percent. Ag- gregate cost of funds deteriorated by 45bps QoQ to 1.2 percent, primarily due to increased SAI- BOR. Eight out of the top 10 banks in KSA reported an expan- sion in NIM for Q3’22. 4. Saudi banks exhibited improved cost efficiency for the third con- secutive quarter. C/I ratio im- proved 88bps QoQ to reach 31.9 percent. The drop in C/I ratio stemmed from growth in operat- ing income of 4.9 percent QoQ which outpaced the growth in operating expense of 2.1 percent QoQ. Eight out of 10 banks saw improvement in cost efficiency. 5. Six out of top 10 banks reported a decline in CoR during the quar- ter. The aggregate CoR declined by 9bps QoQ to settle at 0.4 per- cent due to a substantial drop in impairment charges of 15.4 per- cent QoQ. SABB reported the highest decline in impairment charges of 72.4 percent QoQ. 6. RoE for KSA banks improved over the past three quarters to reach above the pre-pandemic level. Aggregate net profit of the top 10 banks grew moderately by 9.3 percent QoQ in Q3’22, faster than the previous quarter of 2.7 percent QoQ. This resulted in an increase of 1.3 percent QoQ in the aggregate RoE to settle at 14.8 percent for Q3’22. Similarly, RoA improved by 0.1 percent QoQ to 2.0 percent in Q3’22 and return on risk-weighted assets (RoRWA) improved by 0.2 percent QoQ to 2.6 percent in Q3’22. Asad Ahmed, Managing Director and Head of Middle East financial services at A&M commented: “Over- all, rising interest rates, improvement in asset quality and strong economic rebound are positives for the banking sector in Saudi Arabia. The Saudi Central Bank (SAMA) has increased its interest rates in line with the US Federal Reserve with a hike of 1.5 percent in Q3’22 to curb inflation. “We expect SAMA to continue matching policy rate hike by the US Federal Reserve, which will help boost the overall banking sectors NIMs. The profitability growth is ex- pected to continue for KSA banks as the interest rate outlook remains in an upward trajectory.” ISSUE 167 NOVEMBER 2022 the BANKING EXECUTIVE 19