Saudi banks to face margin pressure in the face of US rate hike

FE Team | Published: April 13, 2014 00:00:00 | Updated: November 30, 2026 06:01:00

DUBAI, Apr 13 (Gulf News): Saudi Arabia's bank's performed better than their global peers in profitability and low risk profile, but with the rising global interest rates posing a risk to interest margins, banks will be forced to improve their profitability from higher lending volumes and fee incomes, according to credit rating agency Standard & Poor's.
Saudi banks now face a budding threat to its historically strong profitability as further compression in net interest margins from potential increase in US interest rates. Previously, the biggest threat to banks' profits has been the higher cost of risk since 2008 and the global financial crisis. But with the cost of funds now near a low tide and the spectre of the US Federal Reserve beginning a move to higher interest rates, possibly in 2015, Saudi banks are likely to look for ways to squeeze higher profits from expanding their balance sheet.
The prevalence of low-cost funding (non-interest-bearing demand deposits which accounted for 59.7 per cent of total domestic deposits as at the end of 2013) and strong operational efficiency contributed to the strong profitability of Saudi banks in the past.
The falling and low rates on deposits that have prevailed since 2008 effectively neutered any reward for depositors. Although high deposit concentrations, primarily from the public-sector gives solid funding base, asset and liability maturity mismatches are expected to remain a key structural challenge for banks.
"The structural mismatch between the short-term nature of Saudi banks' funding - overwhelmingly customer deposits - and the longer tenors of their lending will likely translate into a temporary pincer effect that further compresses margins," said Paul-Henri M. Pruvost, an analyst with S & P.
Rising interest rates could give depositors incentives to move away from the non-remunerated deposits that helped banks buffer falling yields on lending since 2008.