Mega projects boost for Saudi banking

In 2006, profits of Saudi banks rose more than 30 per cent to some $9.4bn. After the end of the stock market bubble, the sector is focusing more on investment banking, advisory services and mortgages as well as initial public offerings.

Largest and most profitable

Saudi Arabia's banking system is the largest in the Gulf with total deposits in Saudi commercial banks reaching $147bn in 2006. The sector also ranks among the most profitable in the world in spite of opening up to greater foreign competition in the last few years.

Globally operating institutions are bringing in a range of new products as well as financing ideas together with much needed expertise in asset management and mergers and acquisitions. All of these are sectors showing rapid growth.

Dealogic, a US financial data group, says that Saudi Arabia accounted for half of the $900m in investment banking fees generated from the Middle East in 2006.

However, domestic banks are also strengthening their capacity to compete by diversifying into growth activities particularly Islamic financial instruments and investment banking.

Best regulator

Financial disclosure is judged to have improved considerably in recent years while the Saudi Arabian Monetary Authority is described as one of the best regulators among emerging markets.

Sama's approach to banking supervision is seen as a blend of US-style procedures and methods and the Bank of England's model, which relies more on prudential returns and informal meetings with regulated institutions.

The Saudi banking system demonstrated maturity by weathering the effects of the stock market collapse in early 2006 though a fall in real estate values, although not expected, would be a more sever test observers says.

A recent Standard and Poor's report judged that Saudi banks have a bright future. They are said have solid capitalisation and good cost controls and a focus on profitable consumer banking activities. In addition, the analysis notes that commercial banks in the Kingdom tend to be deposit rich and highly liquid.

Room to grow

There is still substantial room for growth in the system. A young and growing population, combined with a fast expanding and diversifying economy, is likely to result in a continued expansion of banks' loan portfolios, which will help to increase margins and income levels.

The Kingdom's economic boom is increasing job opportunities and demand for a range of banking services, particularly in view of the planned new economic cities that are expected to generate one million jobs by 2020.

With nearly $300bn of mega-projects scheduled over the next eight years, the financial sector has ample opportunities in areas such as structured finance and syndication, as the Kingdom aims to become one of the top ten most globally competitive investment destinations by 2010.