I am always amazed at how decision makers in the Arab world, in most cases knowingly, take lightly the process of environmentally scanning their economy/business in order to analyze the factors at play and structural limitations, if any.
For some, economic analysis and strategic planning are oratory contests that deviates from the real work at hand, which is operational in nature, and for others they are fancy statements that are embedded in top management speeches for public relations purpose. As such, it should not come as a surprise that during the ever recurring business cycles, such policy making practices lead to disasters, given the fact that such entities find themselves behind the curve, overwhelmed by a changing world, with no worse-case scenario in place.
Fortunately, the aforementioned issue has not burdened Saudi banks that can be characterized as conservative, conventional and domestically oriented, operating within a tightly and prudently regulated market.
Yet, it is imperative to dissect the structure of the Saudi banking industry to shed some light on long-term market dynamics and accordingly the strategic options that can be adopted. A task that will surely take more than one article.
The asset-liability mix of Saudi banks did not show a marked shift in form since 2008 and, in my opinion, the composition will show minor structural adjustments over the medium-term.
In contrast to the last decade, there are little prospects for sizable stimuli that can act as catalysts for a dramatic change.
On the asset side, growth from consumer and corporate credit during the 2002-2008 had propelled the credit facilities’ share in total assets from 39.8 percent to a significant 61.4 percent, at the expense of investments that had slid substantially from 43.2 percent to 22.7 percent, and foreign assets that fell from 18.8 percent to 11.5 percent.
On the liability side, the funding base are dependent on deposits that continue to constitute more than 70 percent of total liabilities. In fact, by the end of the Q3 2013, deposits have reached 76.6 percent, which is higher than the registered level in 2002.
This contrasts with the developed financial systems, whereby deposits comprise around 30 percent to 50 percent of total liabilities, and bond financing and trading is more dominant.
Clearly, the above-mentioned figures on the structure is a testimony on the relatively lower risk of the industry, with growth hinging more on domestic economic activity and government fiscal spending. The need for active portfolio management through regional or international acquisitions is taking a backseat for now, especially that there are ample credit opportunities at home.
Finally, if the Saudi economy had largely decoupled from the world economy for most of the crisis, domestic banks had also diverged from international counterparts, supported by substantial loss-absorbing capital buffers.
In this turbulent economic environment, conventional is good, it saved the financial system and depositors’ money.
— Twitter: @ZeEconomist. Email: [email protected] [email protected]
