Saudi Arabian banking sector’s' generally good financial performance is partly the result of the system's focus on high-margin retail and consumer lending and low-cost deposits, says Moody's Investors Service in a new report on the country's banking system. At the same time, growing competition, together with issues of image and corporate governance remain challenges for the industry.
Moody's views positively the banks' strong emphasis on developing the retail/consumer banking business, driven by a commensurate growth in demand for such products and services. "We believe that the increase in retail banking customers helps the banks develop strong relationships, further deepening and strengthening their domestic business franchises, and making them more defensible against outside competition," says Moody's Senior Vice President and author of the report, Mardig Haladjian. "This also enables the banks to improve their interest margins at a time when returns on other banking business have thinned, due to competition and low interest rates," Haladjian adds.
However, Moody's expects retail banking spreads to gradually reduce as competition intensifies, retail lending books mature and provisioning needs grow. As retail customers become more sophisticated in their dealings with banks, they will better manage their own funds, thus depriving banks of low-cost customer deposits. Non-interest-bearing deposits currently comprise more than one-third of total deposits and provide a good basis for bank revenues, notes the rating agency.
Going forward, Moody's expects to see growing competition both from other banks and via the Internet, and increasing pressures on banks to raise staff Saudization levels, which could challenge their levels of operating efficiency and competence. "Over the medium term, we believe that these trends will principally benefit the larger and better managed banks, while challenging the capabilities of the smaller and weaker banks in the system," says Haladjian.
Despite their good financial performance and franchise development efforts, Moody's believes that Saudi Arabian banks are facing new challenges that they need to address as a system, so as not to become isolated from the global banking arena. The events of 11 September 2001 have brought about the need for higher standards of behavior to be adopted by banks on the global scene.
"Although Saudi banks have uniform reporting standards, they need to further improve their disclosure levels and become more open on corporate governance issues so as to inspire confidence on the part of their foreign counterparts," the analyst explains. Moody's notes that the lack of audited financial disclosure since 1998 by the largest bank and the recent naming of two Saudi Arabian banks in the lawsuit filed by families of the victims of 9/11 for alleged involvement in funding terrorist organizations, have tarnished the image of the Saudi banking industry.
Although the Saudi Arabian authorities are taking positive steps including introducing anti-money-laundering regulations and tightening the controls on currency exchangers, more needs to be done to strengthen outsiders' confidence in the Saudi banking system. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
