Excel Model to assess interest rate impact on Saudi Banks

U.S. consumer prices rose solidly in January 2022 (7.5%, YoY), leading to the biggest annual increase in inflation in 40 years, fueling financial markets speculation for a hefty 50 basis points interest rate hike from the Federal Reserve next month, which would be first since 2018. There are concerns that the US central bank would be more aggressive in its intensity of rate hikes and Goldman Sachs expects the Federal Reserve would be raising interest rates seven times this year with a 25 basis-point hike in each of the remaining meetings. The Bank of England raised interest rates for the first time in more than three years in December 2021, followed by another increase this month taking bank rate to 0.5%.

The central banks of GCC countries generally tweak their interest rate alongside the changes in the US Federal Reserve Rate, considering the pegged exchange rate regimes. GCC banks are expected to be positively geared to increase in interest rates. During 2015-19 there was an interest rate hike cycle which witnessed a substantial increase in market capitalization of certain GCC banks.

Saudi Arabia’s banks, including the Saudi Digital Bank, are expected to gain from the interest rate increase because of their higher proportion of non-interest bearing deposits and current and savings account deposits that carry marginal or no interest costs. These types of deposits comprise about 70 to 75 per cent of total Saudi bank deposits (based on data from 2016 to 2020) versus a GCC average of 45 per cent, and an emerging market average of about 35 per cent.

Based on our initial analysis of KSA banks’ financials, interest rate hike is expected to have a positive impact for the banks. An increase of 100 bps of interest rate with 50% pass through rate for loans and 100% pass through rate for deposits would result in an incremental profit of SAR 3.4 bn for 2022f which is 6.6% of increase to the forecasted net income for 2022F and change in ROE of +0.7%. An increase of 150 bps of interest rate with 50% pass through rate for loans and 100% pass through rate for deposits would result in an incremental profit of SAR 8.2 bn for 2022f which is 15.8% of increase to the forecasted net income for 2022F and change in ROE of +1.7%.

For further analysis of impact on interest rate change on KSA banks, please download our Interest Rate Sensitivity Model here