• Nadim Samna

The most comprehensive analysis of banking distribution in KSA Part 2

Updated: Aug 12, 2019

In our previous article, we plotted the general overview of the banking distribution in the kingdom of Saudi Arabia. We found out that KSA presents the highest density of physical banking distribution in the Middle East, but it was mainly composed of ATM rather than branches. Banks in KSA are counting on ATM to cover the country and be close to their customers. The number of ATM increased 9% faster than the population growth.

We concluded that banking distribution in KSA is fairly developed compared to its neighbors, but there is still room for expansion if compared to mature markets. Europe presents 3 times the banking density of KSA, other similar countries (Turkey, Mexico, Iran, Indonesia) also present 2 to 3 times higher banking density than KSA. We recommended banks in KSA to develop agile branches of smaller size that can best meet expectations of penetration while reducing required financial investments.

In this article, we’ll go deeper in our analysis of the banking distribution in KSA. We focused on the 14 main banks by:

  • Analyzing the growth of branches and ATM in 2017

  • Comparing the net profit per branch to the network size

In 2017, the growth of banking networks was due to few banks

We wanted to focus more on the Saudi Arabian banking market to analyze the strategies of its main players. Due to the economic slowdown following lower oil prices, we would expect that banks would reduce their investments and slowdown their network expansion. For all banks, we compared the growth of their branches to the growth of their ATM between 2016 and 2017.

Stratexis - Growth of branches and ATM in 2017 - KSA

The network rationalization is confirmed by the previous figures with half of the banks closing either branches or ATM. In times of economic slowdown, banks prefer to optimize their costs rather than increasing their investments.

Only 3 banks significantly developed both branches and ATM in their network. NCB, Rajhi and Alinma bank are market leaders and already have the highest number of branches. Alinma bank achieved the 4th largest network in 2017, surpassing ANB. This is the result of a long-term expansion strategy that wasn’t halted during economic slowdown. Alinma bank operated 153 branches at the end of 2017. If Alimna bank continues its aggressive expansion strategy, it can keep its 4th place despite the merger of SABB and Alawwal bank’s networks.

5 banks managed to stabilize their networks, with Samba and Alawwal slightly increasing their network, Riyad bank slightly reducing the number of ATM and Jazira & Bilad slightly reducing the number of branches. To be noted that the result of the merger between SABB and Alawwal is also in this cluster.

We note that BSF increased the number of its branches by 6% and reached 91 branches, without changing the number of its ATM.

SAIB aggressively reduced the number of ATM, while slightly increasing the number of branches, indicating a shift in its strategy. SAIB reduced the ratio ATM/branch to reach 8.5 which remains higher than market average of 7.8 ATM/branch.

A 3rd cluster is composed of only two banks (ANB and SABB) that have clearly chosen to reduce their networks and close more than 5% of their branches in 2017. In addition to closing branches, SABB even closed about 30 ATM in 2017, maybe in preparation of the merger with Alawwal. These banks want to reduce their cost to income ratio by closing non-performing branches even if they remain in the average of banks in KSA.

Banks adapt their distribution based on their target clients and global strategy

The next step in our analysis is to identify the target customers and underlying global strategy. For this purpose, we compare the size of the network to the profitability per branch of each bank. The size of the bubble represents the operational revenues per bank to give an indication on its financial power. To be noted, branches dedicated to ladies that have the same address as other branches were not considered in the branches count. Our objective was to measure the investment effort of each bank, not the number of points of sales.

Stratexis -Net profit per branch versus number of branches - KSA

The first comment on these results is the absence of champions. No bank in KSA succeeds in achieving high net profit per branch with a large network. This means that there’s no dominant player in the Saudi market. The closest to reach this position is NCB that already enjoys the highest market share. We found a similar distribution in the Egyptian market, but with NBE as dominant player.

3 banks clearly follow a growth strategy: El Rajhi bank, NCB and Riyad bank. They developed such large banking networks that no other bank is close to join them in this cluster. Rajhi is particularly focused on this strategy as it has around 600 branches and as we noticed earlier is still growing. The recent announcement of the merger between NCB and Riyad bank will probably change the rankings of banking networks. The underlying global strategy is to target retail clients and become the leader of this segment. 71% of El Rajhi bank loans are borrowed by retail clients. Despite their large networks, NCB and Riyad still privilege corporate clients. Expanding their network will contribute in balancing their revenues between corporate and retail clients. All 3 banks need to increase the profitability of their branches to control their costs, which in turn will allow them to continue investing in their networks.

4 banks are looking for profitability more than growth: Samba, SABB, BSF and SAIB. Samba is particularly successful in its strategy as it reached SAR 69Mn per branch during 2017. Samba is also very performing in terms of operations as its Cost to Income Ratio (CIR) is only 35%, the lowest among all banks in KSA. Worth mentioning, all 4 banks have foreign origins, which might explain why they privilege the profitability strategy that limits their exposure to the Saudi market. The future entity resulting from the merger between the SAudi British Bank (SABB) and Saudi Hollandi bank (Alawwal) will also fall in this cluster. Banks in this cluster target selected clients either corporate or high net worth individuals. The success of the profitability strategy on the long term is conditioned by the rapid shift of clients to digital channels. The commercial workforce needs to spend more time acquiring new clients than handling daily banking operations.

Banks in the 3rd cluster need to select a specific strategy, otherwise they will not be able to compete with other banks in the Saudi market. The aggressive expansion strategy followed by Alinma bank reveals its growth strategy. The bank is still mainly targeting corporate clients (81% of its loans), but the development of its retail network will contribute in balancing its revenues between corporate and retail. The relatively young presence of Alinma in the KSA (open in 2006) might also explain the low profitability of its branches. Alinma needs to become the primary bank for its clients to increase its profitability, which can take several years.

Saudi banks opened an average of 3 branches per city

The last analysis to be conducted on banking distribution in KSA concerns the geographical distribution of banking branches in KSA. We wanted to evaluate the weight of each region in terms of presence. It appears that 3 regions: central, eastern and western corner the highest % of branches thanks to the presence of the 10 main urban centers in these 3 regions. We also discovered that banks follow 2 different strategies, either they invest only in specific regions such as Aljazirah which focuses on central and western regions or distribute evenly their branches over the 5 regions such as NCB.

Following these findings, we plotted a figure to compare between the number of branches of each bank and the average number of branches per city, which we call the geographical concentration ratio (GCR).

Stratexis - Average number of branches per city - KSA

We found 3 distinct clusters:

  1. Again, El Rajhi, NCB and Riyad bank seem to follow the steps of each other. They succeed in keeping their CGR quite low despite large networks. Al Rajhi presents the lowest GCR among all banks which proves the willingness of its management to cover a maximal area of Saudi Arabia. Al Rajhi also has the largest network, which means that it is the only bank to open branches in many cities. Maybe this dominant position pushed NCB and Riyad bank to announce a merger.

  2. Alinma, Aljazirah and BSF are highly concentrated in terms of distribution. Concentration offers the advantage of reducing operational costs. Opening branches in distant cities such as Tabouk incur expensive costs to distribute and collect cash, in addition to other logistical and maintenance costs. On the other hand, highly concentrated banks miss underserved clients. Alinma bank in particular, may find its expansion strategy inefficient if it doesn't enlarge its footprint in the kingdom.

  3. The 3rd cluster includes all other banks with an average of 2.8 branches per city. Surprisingly, it’s very close to the average GCR in Egypt.​

Actually, the similarities between the Saudi and the Egyptian markets are buzzling. The strategy of El Rajhi bank is the Saudi parallel of Banque Misr; NCB is to Saudi Arabia what the National bank of Egypt is to Egypt. The highly profitable branches of Samba that target corporate clients have a lot in common with the branches of the Arab African International Bank in Egypt. It is a sign of success to apply the same business models in several markets.

We offered in this article a very wide overview of the Saudi banking market. It’s a very promising market that offers room for a lot of growth and banks deploy different strategies to catch this growth. The 3 largest banks seem to follow the same strategy with a higher focus on retail for El Rajhi. If the merger between NCB and Riyad bank is realized, it will also mean that the management of these 2 banks are looking to expand their retail activity. Alinma bank wants to compete in the market and is expanding quickly at the expense of lower profits. Albilad bank is struggling in KSA, it enjoys the highest CIR amongst all banks (69%) which hampers its future development. Samba bank is very successful in deploying a profitability strategy by targeting corporate clients. BSF and SABB have similar strategies but are lagging behind Samba. These banks need to review their strategy in light of the development of retail activity

To sum up, applying diversified strategies is a good sign for the health of the Saudi market because banks are looking for untapped growth potential, which will ultimately contribute to the market’s growth and sustainability.

Digital banking distribution channels are an important cornerstone in all distribution strategies. Digital can be used as a complement or a support for physical distribution until banking penetration reaches saturation at 100% of adult population. At this stage, physical distribution will serve primarily to conduct high added value services such as mortgage loans.


Stratexis - Nadim Samna

Nadim Samna

Managing Partner

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