Saudi banks’ aggregate profit hits 14-month high; mortgage lending up

Jeddah - Yasmine El Tohamy - RIYADH: Saudi banks aggregate profit reached a 14-month high of SR7.33 billion ($1.96 billion) in May, marking an annual 16 percent rise, newly released data has revealed.

According to the Saudi Central Bank, also known as SAMA, these figures represent profits before zakat and taxes. 

Cumulatively, from the beginning of the year to the end of May, banks recorded a total profit of SR34.78 billion, compared to SR31.12 billion during the same period last year.

In June, a McKinsey report underscored that high hydrocarbon prices, rapid economic expansion, and low unemployment – along with favorable demographics, ambitious public investments, and moderate inflation – has collectively bolstered robust balance sheets and strong margins among these banks.

This region has been enjoying an evolving regulatory environment marked by greater openness, new frameworks for innovation, and measures to improve the ease of doing business.

All Gulf Cooperation Council countries maintain their currencies pegged to the US dollar, causing regional interest rates to closely mirror movements in Washington. In 2023, as the Federal Reserve’s monetary policy increased financing costs in the GCC, both local and global bank profits surged.

Concurrently, headline inflation was moderate, estimated at 2.6 percent in 2023 and projected to decrease to 2.3 percent in 2024 according to McKinsey.

According to the firm, all GCC banks outperformed their counterparts in developed and many emerging markets, remaining on a rapid growth trajectory. They primarily rely on stable domestic deposits, which have proven resilient during economic downturns.

In comparison to April, banks’ profits before zakat and tax rose by 9 percent, marking the highest monthly increase in the past five months. 

Recent data on mortgage figures is a testament to the sustainable demand in housing coupled with an agile and efficient regulatory environment.

Elias Abou Samra, CEO at Rafal Real Estate Development Co.

McKinsey nevertheless highlighted the potential risk to the GCC banking sector if interest rates were to fall and bank managers were to be complacent.

This complacency might deter them from pursuing ambitious transformation initiatives that are crucial for long-term sustainability and growth.

The firm warned that the current high-interest-rate environment, which has bolstered bank profitability, may not persist indefinitely. 

If inflationary pressures in the US ease, the Federal Reserve could adjust its monetary policy, potentially lowering interest rates, and thus reduce bank profits.

The advice is for bank executives to not assume that high profits are the new norm and instead prepare for potential future declines in profitability.

It suggests that banks should use their current strong financial position to invest in transformative changes and cost reductions. By doing so, they can enhance efficiency and resilience, ensuring they remain competitive even when interest rates decrease.

The International Monetary Fund praised SAMA’s efforts to safeguard the Kingdom’s financial stability in a June report. It has emphasized that the central bank continues to advance the modernization of regulatory and supervisory frameworks.

Significant progress has been made in developing its financial safety net framework, encompassing bank resolution, emergency liquidity assistance arrangements, and deposit protection fund.

Mortgage lending up

Banks’ profits come against a backdrop of increased mortgage lending in May, with the sector seeing an annual 13 percent rise in new home loans.

Figures released by SAMA  showed that the SR7.67 billion signed off in the fifth month of the year marked a 16-month high.

Lending for houses accounted for 67 percent of total new bank mortgages, a decrease from 69 percent compared to the same month last year.

Meanwhile, loans for apartments increased to 28 percent from 25 percent, while land constituted the smallest portion at 5 percent, down from 6 percent.

Elias Abou Samra, the CEO at Rafal Real Estate Development Co., said: “Recent data on mortgage figures is a testament to the sustainable demand in housing coupled with an agile and efficient regulatory environment.”

He added: “We believe that the market has priced in higher-for-longer interest rates and the buyers are convinced that waiting for normalization of interest rates to buy new homes could be offset by a larger increase in prices.” 

Abou Samra added that after a period of wait-and-see, the housing market in the Kingdom is now beginning to regain some of the momentum and activity it had shown before interest rates rose. 

Essentially, potential buyers have overcome their initial hesitancy, likely influenced by elevated borrowing costs, and are now actively pursuing homeownership, thereby boosting their demand for bank credit.

The highest growth rate during this period was observed in apartment lending rising by 24.15 percent. In comparison, house lending grew by 9.17 percent, while land saw a growth of 6.54 percent.

“Another important factor is the availability of new products and typologies, particularly in the multi-family segment, that meets the aspiration of young Saudi families and resident expats. We are moving into a higher level of sophistication on the demand and supply side of the equation,” Abou Samra said.

A survey conducted by global property consultancy Knight Frank revealed in a March report a notable shift in expat preferences, with 68 percent expressing a strong inclination towards owning an apartment rather than a villa. This preference is particularly strong among those aged 35-55.

The firm also noted that many respondents are moving from villas to apartments, influenced by factors like the higher costs of the former, affordability concerns, and potentially differing cultural preferences compared to Saudi nationals.

Additionally, the appeal is further highlighted by the fact that 53 percent of surveyed expats expressed a preference for owning a two- or three-bedroom apartment. This inclination is likely due to the smaller family sizes typically found among them compared to Saudi nationals.

A 2024 study by Deloitte revealed that in Riyadh, around 80 percent of apartment transactions the previous year fell within the SR250,000 to SR1 million range, primarily serving the low to mid-income segments.

It noted that north Riyadh has become a prominent residential area, while the south zone has seen significant transaction growth due to affordable housing options.

In Jeddah, there is increasing demand for upper-middle to high-end residential properties, particularly in the northern part, which has experienced notable price increases.

In the Dammam metropolitan area, the report indicated that the residential supply is concentrated in the northern regions, targeting the midscale population segment with apartments priced mostly below SR930,000.

When asked about the potential risks of increased demand further driving up prices, especially given the lack of foreseeable interest rate reductions, Abou Samra said that he believes his real estate company has navigated through the challenges posed by high interest rates, noting a slowdown in growth over the past 18 months.

He expressed confidence in the sustainability of current demand levels, stating that a slowdown is not anticipated in the near future. The CEO also emphasized the importance of maintaining a balanced market to prevent excessive increases in land prices.