#1M Saudi Arabia Banking Pulse Year Ending 31st December 2021 ALVAREZ & MARSAL BEL 6686E 928 TRUSA 60 MED CAN BE ETC 87 40% Fan WIS TYR TO TO S 137 BY'S DAY IN BY TTY KAN VIE#2FOREWORD Alvarez & Marsal Middle East Limited (A&M) is delighted to publish the 2nd annual edition of the Kingdom of Saudi Arabia (KSA) Banking Pulse ("The Pulse"). In this annual series, we share results from our research examining the top ten largest listed KSA banks by assets, and highlight key performance indicators of the KSA banking industry. The Pulse aims to help banking executives and board members stay current on industry trends. All the data used in this report has been obtained from publicly available sources and the methodology for the calculations is discussed in the glossary. Calculation of several metrics will be subject to change based on available information. We hope that you will find our 2nd annual edition of the KSA Banking Pulse useful and informative. 2 M Disclaimer: The information contained in this document is of a general nature and has been obtained from publicly available information plus market insights. The information is not intended to address the specific circumstances of an individual or institution. There is no guarantee that the information is accurate at the date received by the recipient or that it will be accurate in the future. All parties should seek appropriate professional advice to analyze their particular situation before acting on any of the information contained herein#3Pulse: Profitability metrics of top KSA banks witnessed improvement as the economy recovers post COVID pandemic Improved Stable Worsened Metric 2020 2021 2018 2019 2020 2021 Key Trends of 2021 Loans and Advances (L&A) Growth (YoY) 12.8% 14.2% Size Deposits Growth (YoY) 9.2% 7.2% 1 During FY'21, aggregate L&A increased by 14.2% YoY (+1.3% points YoY), supported by mortgages; Deposits growth slowed down to 7.2% (-2.0% points YoY) Liquidity Loan-to-Deposit Ratio (LDR) 86.0% 91.5% 2 Operating Income Growth (YoY) 3.2% 3.5% Operating Income / Assets 3.9% 3.6% 3 Non-Interest Income(NII) / Operating Income 23.4% 23.0% Income & Operating Yield on Credit (YoC) 5.6% 4.9% Efficiency Cost of Funds (CoF) 0.6% 0.4% 4 Net Interest Margin (NIM) 3.1% 2.9% LDR increased to 91.5% during FY'21 as L&A grew at a faster rate compared to deposits Operating income growth increased by 0.4% points in line with higher NII (+4.0% YoY) and fee and commission income (+9.9% YoY) NIM compressed by ~18 bps YoY as the Central Bank holds the interest rates low Operating efficiency (C/I ratio) improved by 0.2% points to 35.2%, as operating income grew at a faster pace compared to the operating expenses Cost-to-Income Ratio (C/I) 35.4% 35.2% 5 Coverage Ratio 148.2% 164.4% Cost of risk decreased by 39 bps YoY, as banks lowered provisions in light of recovering market environment Risk 6 Cost of Risk (COR) 1.1% 0.7% Return on Equity (ROE)* 10.9% 11.4% ROE (+0.6% points YoY) and ROA (0.1% point YoY) increased as aggregate net income expanded by ~15.5% YoY 7 Profitability Return on Assets (ROA)* 1.6% 1.7% Return on Risk-Weighted Assets (RoRWA) 1.9% 2.1% RoRWA improved by 0.1% points YoY to 2.1%; Capital adequacy ratio decreased from 20.3% to 19.9% Capital Capital Adequacy Ratio (CAR) 20.3% 19.9% Note 1: YoY stand for year over year Note 2: Growth in loans & advances and deposits were presented YoY Note 3: Annual income was used in the calculation of operating income growth Source: Financial statements, Investor presentations, A&M analysis, * excludes goodwill impairment charges reported 3 ALVAREZ & MARSAL by SABB in Q2'20#4Net income growth was driven by higher operating income and lower impairments Net income bridge - SAR bn 42.25 3.57 (1.02) 5.04 (0.14) (0.90) 48.79 2020 Operating income Operating expenses Impairments Other Income / Taxes Expenses 2021 Source: Financial statements, Investor presentations, A&M analysis 4 KEY TAKEAWAYS Aggregate net income increased by 15.5% YoY to SAR 48.8bn • Higher operating income (+3.5% YoY) along with lower impairments (-28.9% YoY) drove the growth in net income • The growth in operating income was driven by: Higher net interest income (+4.0% YoY) and net fee & commission income (+9.9% YoY) ■ However, it was partially offset by 8.3% fall in income from losses due to foreign exchange translation and other expenses ALVAREZ & MARSAL#5L&A growth remain strong led by recovery in consumer spending while deposit mobilization slows down Improved Stable Worsened Total Loans and Advances (L&A) (SAR Bn) 12.8% 14.2% 1,938 11.6% 1,697 1,505 1,348 2018 2019 2020 2021 Total Deposits (SAR Bn) 10.5% 9.2% 7.2% 2,117 1,975 1,809 1,636 Loan-to-Deposit Ratio (%, Yearly) 86.0% 82.4% 83.2% 91.5% A KEY TAKEAWAYS Aggregate L&A grew 14.2% YoY, as all the top ten banks reported a growth in L&A ■ ALRAJHI (+43.4% YoY) reported the highest increase in L&A, supported by strong increase in retail loans (+45.9%), corporate loans (+33.0%) and SME loans (+60.6%) SNB reported 43.0% YoY growth in L&A supported by strong retail financing growth ⚫ Deposits increased by 7.2% YoY, led by strong growth from SNB (41.0%) and ALRAJHI (+33.8%) Consequentially, aggregate LDR rose to 91.5% from 86.0% 2018 2019 2020 2021 2018 2019 2020 2021 Source: Financial statements, investor presentations, A&M analysis 5 ALVAREZ & MARSAL#6SNB & ALRAJHI outperformed its peers on L&A and deposits growth performance L&A Growth YoY (%) 50.0 Gained Financing MS 45.0 | 40.0 I [ I 35.0 I I 30.0 25.0 20.0 15.0 14.2 10.0 مصرف الإنماء | I I I I بانك الرياض alinma bank riyad bank بنك البلاد Bank Albilad البنك السعودي الفرنسي بنك الجزيرة BANK ALJAZIRA مصرف الراجحي Al Rajhi Bank Gained Deposits & Financing MS 2021 Av SNB Deposits Growth YoY (%) KEY TAKEAWAYS L&A of the top ten banks increased by 14.2% YoY in 2021 while aggregate deposits grew by 7.2% ■ L&A (ex-SNB*) grew by 6.7% YOY while the deposits (ex-SNB*) declined by 1.8% YOY • ALRAJHI reported L&A growth of 43.4%, while the deposits grew by 33.8% YoY L&A growth was driven by 45.9% YoY increase in retail loans ■ Deposits grew due to 33.8% YoY as time deposits increased 3.0x SABB was the only bank to report 1.2% YoY fall in deposits in 2021 ساب SABB I العربي J anb I I Banque Saudi Fransi 5.0 البنك السعودي للاستثمار The Saudi Investment Bank | Lost Deposits & Financing MS Gained Deposits MS 0.0 -5.0 0.0 5.0 7.2 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 Note: MS stands for market share ; Data points for SNB are not comparable Source: Financial statements, Investor presentations, A&M analysis 6 ALVAREZ & MARSAL#7LDR has increased for the top ten banks indicating an aggressive lending stance Loans to Deposits Ratio (%) 110 105 بنك البلاد 100 Bank Albilad 95 95 90 البنك السعودي للاستثمار The Saudi Investment Bank 85 55 80 60 75 70 70 0 100 البنك السعودي الفرنسي Banque Fransi مصرف الإنماء alinma bank بنك الجزيرة BANK ALJAZIRA 200 العربي anb Note: The green zone is an area of healthy liquidity Source: Financial statements, A&M analysis بنك الرياض riyad bank ساب SABB مصرف الراجحي Al Rajhi Bank 300 400 500 600 700 800 7 2020 2020 Av 2021 2021 Av 91.5 SNB 86.0 900 1000 Total Asset (SAR Bn) KEY TAKEAWAYS Aggregate LDR has increased by 5.6% points YoY at 91.5% in 2021 • All the banks reported an expansion in LDR, owing to the increase in loans across all the banks • ALINMA reported the highest increase in LDR (+11.2% points YoY) followed by SABB (+8.7% points YoY) ALVAREZ & MARSAL#8NIMs slip further as interest rates fall to a multi-year low Yield On Credit 6.3% 6.8% 5.6% 4.9% 2018 2019 2020 2021 X Loan-to-Deposit Ratio (LDR) 91.5% 86.0% 82.4% 83.2% 2018 2019 2020 2021 Cost of Funds (Yearly) 1.1% 0.9% 0.6% 0.4% 2018 2019 2020 2021 Net Interest Margin (%, Yearly) 3.41 3.25 2018 Note: Relation between elements above represents a functionality and not necessarily an exact mathematical formula Source: Financial statements, Investor presentations, A&M analysis 3.07 2.88 2019 2020 2021 8 KEY TAKEAWAYS NIM further dropped by 18 bps to 2.88% during FY'21, due to the broader low interest rate environment Saudi's central bank had cut repo rates by 125 bps in March'20 to c. 1.0% to support the economy during the pandemic SABB (-51 bps YoY) reported the highest decrease in NIM, followed by BALB (-29 bps YoY) Aggregate yield on credit declined by 74 bps YoY, while cost of funds fell 23 bps YoY UTT ALVAREZ & MARSAL#93.21 3.18 -0.03 4.13 3.86 Improved Major banks have reported contraction in NIM Stable Worsened Net Interest Margin (%, Quarterly) 2.88 2.63 -0.26 مصرف الراجحي SNB Al Rajhi Bank riyad bank ساب SABB بنك الرياض -0.25 2.71 2.20 Note: Some numbers might not add up due to rounding Source: Financial statements, investor presentations, A&M analysis 2.88 +3 Banque 2020 2021 2020 Av 2021 Av -0.12 -0.19 -0.17 -0.51 + 2.68 2.77 2.60 3.30 3.18 3.76 3.47 مصرف الإنماء العربي anb alinma bank بنك البلاد Bank Albilad 9 2.74 2.76 بنك الجزيرة BANK ALJAZIRA -0.29 2.36 2.39 البنك السعودي للاستثمار The Saudi Investment Bank 0.02 0.03 3.07% 2.88% KEY TAKEAWAYS Seven of the top ten banks have reported contraction in NIM with aggregate NIM decreasing by 18 bps YOY • SABB (-51 bps YoY) reported the highest fall in NIM during the period mainly due to 16.7% decline in the net interest income NIM's for BJAZ and SIBC have remained largely flat, increasing marginally by 2 bps and 3 bps, respectively ALVAREZ & MARSAL#1030.3 34.7 Improved Stable Worsened Aggregate C/I ratio improved for five of the top ten KSA banks led by ALRAJHI Cost to Income Ratio (%, Quarterly) 4.4 -5.6 32.5 26.9 32.4 34.3 1.8 مصرف الراجحي بنك الرياض ساب SABB SNB Al Rajhi Bank riyad bank 47.5 46.8 Note: Scaling and some numbers might not add up due to rounding Source: Financial statements, investor presentations, A&M analysis *Comparison on YoY basis 33.6 34.0 السعو دين الف العيد -0.7 0.5 35.1 38.2 anb 3.1 36.4 35.5 مصرف الإنماء العربي 2020 2021 - 2020 Av 2021 Av -0.9 48.5 46.6 alinma bank Bank Albilad 10 بنك البلاد 51.6 49.9 بنك الجزيرة BANK ALJAZIRA -1.9 -1.7 5.2 - 36.8% 35.2% KEY TAKEAWAYS Five of the top ten banks witnessed improvement in cost to income ratio • C/I ratio for ALRAJHI improved the most by 5.6% points YoY due to higher yield income (+20.6% YoY) and fee and commission income (+47.9% YoY) BALB has shown the highest cost efficiencies in the previous five years with C/I ratio falling from 59.5% in 2016 to 46.6% in 2021 ■The bank reported 1.9% points YoY contraction in C/I ratio as yield income and fee and commission income increased 6.0% and 16.6% respectively SNB reported deterioration in C/I ratio by 4.4% points, as the operating costs decreased by 52% YoY due to higher communications and IT related costs 42.7 46.4 البنك السعودي للاستثمار The Saudi Investment Bank ALVAREZ & MARSAL#11Aggregate cost of risk across the sector has decreased with all the banks except SNB reporting higher cost of risk Improved Stable Worsened - Cost of Risk (bps) – Net of Reversals -30.8 -15.0 -69.9 -141.8 -75.3 مصرف الراجحي SNB Al Rajhi Bank riyad bank البنك السعودي الشرعية بنك الرياض ساب SABB Note: Scaling and some numbers might not add up due to rounding Source: Financial statements, investor presentations, A&M analysis 2020 2021 2020 Av 2021 Av -184.2 -23.6 -30.4 -31.9 Dangus Fransl anb مصرف الإنماء العربي بنك البلاد alinma bank Bank Albilad 11 بنك الجزيرة BANK ALJAZIRA -30.8 البنك السعودي للاستثمار The Saudi Investment Bank 105.95 66.47 KEY TAKEAWAYS Cost of risk decreased for all the banks except for SNB in 2021 • BSFR reported a significant fall in cost of risk (141.8 bps YoY) to 0.71% in 2021 driven by: ■ Moderation in impairment charge from SAR 2,670mn in 2020 to SAR 904mn in 2021 due to improved macro-economic scenario Cost of risk for SNB increased by 30.8 bps to 0.9% as the provisions increased by 104% YoY ■ However, on a normalized basis the SNB's cost of risk is 0.61% ALVAREZ & MARSAL#12Coverage ratio and the asset quality improved for most of the banks Coverage Ratio, % NPL/Net loans, % Coverage Ratio¹ and NPL / Net Loans Ratio (%, Quarterly) SNB مصرف الراجحي بنك الرياض Al Rajhi Bank riyad bank 143 142 143 138 135 342 314 177 303 306 306 151 148 ساب SABB 143 159 141 133 124 124 3.5 3.0 2.8 1.9 2.0 1.9 1.0 0.9 1.8 0.8 0.8 1.9 1.6 0.7 1.7 1.6 1.0 1.0 0.9 179 161 العربي anb مصرف الإنماء alinma bank 185 180 بنك الجزيرة 125 123 112 109 100 3.0 2.9 2.8 2.7 2.6 2.5 بنك البلاد البنك السعودي للاستثمار BANK ALJAZIRA The Saudi Investment Bank Bank Albilad 167 177 177 280 280 151 170 179 191 139 177 159 4.2 101 136 3.6 142 140 114 1.4 1.2 99 1.2 250 235 2.6 235 2.1 1.9 1.7 1.8 1.5 1.2 1.2 1.0 1.6 1.3 1.4 1.8 % 2.3 2.2 1.3 2.1 1.9 KEY TAKEAWAYS Asset quality improved further as NPLs/Net Loan ratio decreased to 1.6% in 2021 compared to 2.0% in 2020 Aggregate coverage ratio increased to 164.4% (+16.2% points YoY) Six of the top ten banks reported an increase in coverage ratio, highlighting the risk averseness of the banks ALINMA reported a substantial increase in coverage ratio, +62.6% points YoY to 177.1% ■ ALINMA's coverage ratio increased as the NPL fell 20% YoY mainly as NPL's for corporate sector decreased by 16% YOY On the other hand, SNB reported the highest decrease in coverage ratio by 8.0% points to 135.5% Note: Scaling and some numbers might not add up due to rounding Source: Financial statements, investor presentations, A&M analysis, 1 accumulated allowance for impairment / NPL 12 ALVAREZ & MARSAL#13Return ratios improved in line with overall increase in profitability Return on Equity (%) 25 20 20 15 نك البلاد Bank Abilad 10 LO 5 بنك الجزيرة BANI ALJAZIRA مصرف الإنماء alinma bank البنك السعودي للاستثمار The Saudi Investment Bank العربي anb البند السعودي الفرنسي Banque Saudi Fransi بنك الرياض riyad bank SABB ساب. مصرف الراجحي Al Rajhi Bank 0 200 400 600 800 Source: Financial statements, Investor presentations, A&M analysis 13 2020 2021 SNB -- 2020 Av 2021 Av 1,000 Asset Size (SAR Bn) 11.4% 10.9% KEY TAKEAWAYS ■ Combined RoE of KSA banks increased marginally by 0.5% points YoY to 11.4%, largely due to 15.5% YoY increase in aggregate profitability of the top ten banks ■ ALRAJHI reported a YoY expansion of 413 bps in RoE to 23.5% in 2021 ■ BSFR's RoE grew from 4.5% in 2020 to 9.5% in 2021 due to: - 123% YoY improvement in net profit due to lower provisions T ALVAREZ & MARSAL#14Improved Stable Worsened Higher profitability despite lower NIM showcase the higher efficiency of the broader KSA banking sector Return on Equity (%) Assets/Equity (x) 6.5 6.4 6.7 6.4 12.9 9.7 10.9 11.4 Return on Assets (%) 2018 2019 1.9 1.6 1.7 1.4 Note: All the charts above are based on FY numbers Op Income stands for Operating Income; Scaling and some numbers might not add up due to rounding Source: Financial statements, Investor presentations, A&M analysis 2018 0.6 2019 2018 2018 4.1 4.2 22.1 3.9 3.6 21.6 Op. Income / Assets (%) Non-Interest Income / Op. Income (%) Yield On Credit (%) KEY TAKEAWAYS 23.4 6.8 23.0 6.3 5.6 4.9 35.4 35.4 35.3 Cost / Income Ratio (%) Net Interest Margin (%) Cost of Funds (%) Cost of Risk (%) 0.9 1.1 2020 2021 0.7 35.2 14 2018 3.3 3.4 3.1 2.9 1.1 0.9 0.6 2018 82.4 2019 2019 2020 LDR (%) 83.2 86.0 2021 0.4 2021 91.5 Aggregate RoE improved during FY'21, supported by higher net profit (+15.5% YoY), as operating income increased (+3.5%) along with lower impairment allowance (-28.9%) Aggregate L&A increased at a faster pace compared to deposits, as economy rebounds alongside improvement in consumer spending We expect SAMA to match policy rate hike by the US Federal Reserve, which will help boost the overall banking sectors NIM's and in turn its profitability The outlook for asset quality and cost of risk remains negative as the loan deferral program ends by Q1'22 ALVAREZ & MARSAL#15Glossary Metric Abbreviation Definition Size Loans and Advances Growth Deposits Growth L&A YoY growth in EOP net loans and advances for the top 10 YoY growth in EOP customer deposits for the top 10 Liquidity Loan-to-Deposit Ratio LDR Income & Operating Income Growth Operating Income / Assets Non-Interest Income / Operating Income Net Interest Margin (Net EOP loans and advances / EOP customer deposits) for the top 10 YoY growth in aggregate annual operating income generated by the top 10 (Annual operating income / annual average assets) for the top 10 (Annual non-interest income / annual operating income) for the top 10 (Aggregate annual net interest income) / (annual average earning assets) for the top 10 Operating NIM Earnings assets are defined as total assets excluding goodwill, intangible assets, and property and equipment Efficiency Yield on Credit YOC (Annual gross interest income / annual average loans & advances) for the top 10 Cost of Funds COF (Annual interest expense + annual capital notes & tier I sukuk interest) / (annual average interest bearing liabilities + annual average capital notes & tier I sukuk interest) for the top 10 Cost-to-Income Ratio C/I (Annual operating expenses / annual operating income) for the top 10 Coverage Ratio (Loan loss reserves / non-performing loans) for the top 10 Risk Cost of Risk COR (Annual provision expenses net of recoveries / annual average gross loans) for the top 10 Return on Equity RoE (Annual net profit attributable to the equity holders of the banks - annual capital notes & tier I sukuk interest) / (annual average equity excluding capital notes) for the top 10 Profitability Return on Assets ROA (Annual net profit/ annual average assets) for the top 10 Capital Return on Risk-Weighted Assets Capital Adequacy Ratio RoRWA (Annual net profit generated / annual average risk-weighted assets) for the top 10 CAR (EOP tier I capital + tier II capital) / (EOP risk-weighted assets) for the top 10 Note: LTM and EOP stand for last twelve months and end of period respectively 15 ALVAREZ & MARSAL#16Glossary (cont'd.) Bank Assets (SAR Bn)* Abbreviation Saudi National Bank 914.1 SNB Logo SNB Al Rajhi Bank 623.7 ALRAJHI مصرف الراجحي Al Rajhi Bank Riyad Bank 325.7 RIBL بنك الرياض riyad bank Saudi British Bank 272.4 SABB SABB ساب Banque Saudi Fransi البلد السعودي الفرنسي 215.8 BSF Banque Saudi Fransi Arab National Bank 192.5 ANB A العربي änb Alinma Bank مصرف الإنماء 173.5 ALINMA alinma bank Bank Albilad 110.9 BALB بنك البلاد Bank Albilad Bank Aljazeera 102.8 BJAZ بنك الجزيرة BANK ALJAZIRA Saudi Investment Bank البنك السعودي للاستثمار 101.6 SIB The Saudi Investment Bank Note: Banks are sorted by assets size *As on 31st December 2021 16 ALVAREZ & MARSAL#17Co-Authors • Asad Ahmed Co-Author, Managing Director Head of ME Financial Services 30+ years of experience in banking Focuses on performance improvement, turn- around, credit management, and formulating and managing strategic and operational changes in financial institutions Former CEO of banks in the UAE & Kenya [email protected] M: +971 50 181 0047 Tariq Hameed Co-Author, Managing Director EMEA Financial Services 25+ years experience in financial services, consulting and real estate sectors across multiple markets • Key focus and experience is in developing and implementing transformation and performance improvement programs for financial services sector, particularly in digital transformation, real estate finance, retail banking and transaction banking [email protected] M: +971 55 842 6333 M: +44 776 960 520 Sumit Mittal Co-Author, Senior Director ME Financial Services • 12+ years of experience in consulting and banking • Focuses on strategy formulation & implementation, operating model design & execution, performance improvement and cost transformation [email protected] M: +971 55 448 0577 ALVAREZ & MARSAL#18Copyright 2022, Alvarez & Marsal Holdings, LLC All rights reserved Alvarez & Marsal Middle East Limited Dubai, United Arab Emirates A & M ® and A&M® are trademarks of Alvarez & Marsal Holdings, LLC