KPMG Q3, 2020 Saudi banking sector analysis report records the sector experiencing a range of regulatory changes, including the value-added tax (VAT) reforms and the institutionalization of the real estate transaction tax (RETT), with mortgage finance continuing to record significant growth for the first time.

KPMG recorded these observations in its latest the “Banking Pulse”, a series of quarterly reports, highlighting the latest developments in the Kingdom’s banking sector following the disclosure of third-quarter 2020 financials by listed banks.

 “The lending space in the Saudi banking sector has been rife with continued growth in mortgage financing throughout the COVID-19 environment. It is an endorsement of the housing demand in the country and testament of government support measures,” commented Khalil Ibrahim Al Sedais, Office Managing Partner - Riyadh KPMG in Saudi Arabia.

As per the latest available statistics, house ownership levels climbed well over 50 per cent which was previously identified as a milestone point by the end of FY 2020 as part of the Vision 2030. In essence, the mortgage loan books across the banking sectors witnessed a period-on-period double-digit growth during the nine months ended September 30, 2020.

“Retail property buyers have welcomed the step-down of the tax rate from 15 per cent back to 5 per cent being a non-claimable component of the purchase cost in general. If these past trends are representative for the last quarter, then the introduction of RETT and sale drives witnessed each year-end, it is quite likely that the overall banking sector will end FY 2020 without major impact on profitability,” Al Sedais noted.

The overall loan growth contributed towards a total asset increase of 9.8 per cent since December 2019 reaching to $716.17 billion. Moreover, the customer deposit base during the same period rose by 5.7 per cent and closed at $509.80 billion.

Overall net profitability declined by 6 per cent for the nine months period, excluding goodwill impairment in SABB, relative to the corresponding period of FY 2019, mainly due to higher expected credit losses of US$3.19 billion - a period-on-period increase of 41 per cent. At present, the process of loss quantification continues to be a challenge for banks in the absence of ‘days past due (dpd) backstops’ for facilities subject to payment holiday and useful qualitative information of borrowers in general.

Apart from predominant efforts towards customer endurance; another key element gathering swift momentum in the sector is the aspect of Environmental, Social and Corporate Governance (ESG), referring to three central factors in measuring the sustainability and societal impact of a business.

“We foresee that the final quarter of this already eventful year is likely to be a nexus of several divergent themes and in the grand scheme of things the closure would depend on the continued tenacity and resilience of the sector founded on measures already taken by both the Saudi Central Bank (SAMA) and individual banks,” said Ovais Shahab, Head of Financial Services KPMG in Saudi Arabia.

“We have observed multiple efforts towards customers’ endurance at the back of the strong capital base and funding structure of the industry. We do not foresee a different proposition for the rest of the year,” he concluded.

Saudi Arabia is vigilant on upgrading and strengthening its regulatory framework to combat money laundering and terrorist financing, especially during the coronavirus pandemic when the number of POS devices has grown by 56 per cent to reach more than 650,000, which resulted in a significant growth reaching more than 72 per cent transactions in comparison with same the period last year, according to the KPMG report.

Saudi Central Bank Governor Ahmed Abdul Karim Al-Kholifey said that the Kingdom has taken strict measures to combat such risks and threats. He was speaking at the virtual “Forum for Compliance and Combating Money Laundering”, jointly organised by the Saudi Central Bank and Rifinitiv, a global provider of financial market data and infrastructure. Al-Kholifey revealed that Saudi Arabia had acted on a number of cases of money laundering, corruption and financial fraud.

Saudi Central Bank and the Central Bank of the UAE jointly released a report about the futuristic Aber, a Distributed Ledger Technology (DLT) based digital currency platform with a view of developing cross-border payment systems in a bid to reduce transfer times and costs between banks. Both regulators expressed satisfaction with the results of the report that are believed to be beneficial to the central bank community and the financial system in general.