In 2012 the activities of financing, leasing and installment business became regulated by the Saudi Arabian Monetary Agency (SAMA). This followed on from the regulation of the insurance companies in mid 2000s when the Law for Co-operative Insurance was passed to establish a fully regulated and supervised insurance industry within the Kingdom. As with the insurance companies SAMA set out a clear set of implementing regulations covering the finance and leasing industry and implemented minimum capital requirements of SAR 100 million.

The new rules set out to regularize an industry that already existed albeit supervised by the Ministry of Commerce (MOCI). At that time only Saudi Orix was operating as a fully authorized leasing company. The new laws established a strong compliance framework, prescribing the establishment of supervisory committees for Audit, Credit and Risk, Shariah and most recently Nomination and Remunerations. All companies had to achieve a minimum of 50% Saudisation prior to being granted a license with a commitment to increase this level by 5% per annum. There are various categories of license; Financial lease; Finance of productive assets; SME; Micro finance and Consumer finance. Each new product has to be approved by SAMA who carry out a thorough off site supervisory visit regime. This heavy governance framework and associated reporting requirements has pushed up the operating costs of doing business and increased the demand for high quality Saudi talent.

This increased regulation has coincided with a very challenging economic environment for the majority of Finance companies as revealed by the results for the financial year 2016 which have been published on most companies’ websites. The fall in oil process throughout 2015 resulted in a significant slowdown in government payments on large infrastructure projects, cancellations and delays of projects and the reduction in the scope of others. This caused major liquidity problems for the large contractors which inevitably filtered down to the subcontractors. This started to impact payments of wages and salaries but contractors also started to delay payments to the leasing companies. This commenced in 4 Q 2015 but started to impact the leasing in finance companies from 1 Q 2016 and throughout the rest of the year. The portion of accounts over 90 days past due started to significantly increase and in some cases contractors simply returned the equipment to the Leasing companies. This led to a glut in repossessed equipment and depressed secondary market values. The tightening of the interbank market forced up the cost of credit both to finance companies from banks and from finance companies to their clients. Finance companies had to adapt, slowing down new business acquisition, reducing costs where possible, focusing on collections and rescheduling existing customer’s obligations. New business from the construction and contracting was significantly reduced and companies looked to other more stable sectors of the economy such as transportation, logistics, medical and education.

A closer look at the results for 2016 shows how the various sectors of the Saudi Finance industry have been impacted by the economic situation.

 

 

The above bar graph describes the variation between Net Profit and Provision rate of years 2016 and 2015 consecutively regarding heavy equipment leasing companies:

• ORIX one of the two largest heavy equipment leasing companies saw a 50% drop in 2016 Net Profit from SAR 108 million to SAR 53 million due to an increase in its provision rate by 32% from SAR 25.2 M to Sar 33.1 M
• AJIL, which predominantly finances Caterpillar equipment saw its net profit for 2016 decrease by 36% from SAR 68.5M to SAR 44 M compared to 2015 due to a near doubling of provisions from SAR 36M to SAR 69 Million in 2016.
• Kirnaf Co. saw a reduction of 28% in its net profit from SAR 32.2 million to SAR 23.1 million. We can see an increase in the provision rate of 2016 by 150%.
• Gulf Finance, one of the new entrants to the market witnessed a notable decline in Net Profit from SAR 4.6 million in 2015 to just SAR 200k in 2016 resulting from significant provisions on its contracting and construction portfolio.

Overall the heavy equipment leasing companies, which have traditionally had between 40 and 60% of their portfolios from the contracting and construction sector, suffered in 2016 as their clients struggled to collect payments from the main contractors. SAMA has recently introduced a standardized provision model for finance companies which allows for the secondary market value of the equipment owned by these companies and permits providing for delinquencies over a 24-month period. This should produce more consistency in results going forward making it easier to compare the quality of the underlying portfolios.

 

The above bar graph describes the variation between Net Profit and Provision rate of years 2016 and 2015 consecutively regarding car and fleet leasing companies.

• In 2016, the two largest companies in the sector Abdul Lateef Jamil (ALJ) and Al Yusr both suffered significant reductions in profitability in 2016 as compared to 201. This was predominantly due to an increase in provision levels but also the reduction in income from the securitization of car lease portfolios which have traditionally been seen as source of profits for Finance companies. As delinquencies within portfolios increased and liquidity in the banking sector declined Banks were much less willing in 2016 to securitize lease portfolios across the finance company sector.
• Three car leasing companies are showing consecutive years of losses: Tamwily, AlAmthal and Dar Al Etiman. The lack of securitization revenues has impacted these companies, together with significantly reduced auto sales in 2015 and 2016 as customers either did not renew their vehicles or traded down their models. In 1 Q 2017 sales continue to be behind 2016 levels indicating another tough year for these auto finance companies. Some of these companies have to deal with legacy portfolios and compete with Bank’s, who have significantly lower cost of funds, for the best customers
• These companies must significantly reduce their cost bases to adapt to the new market conditions and look at their business models if they are to be profitable in the future. The key will be automation, improved productivity and providing customers with a genuinely good customer value proposition. The reduction in allowances and salaries for many public sector workers, which has just recently been reversed, has also impacted sales in the first half of the year.
• Many companies will be hoping for a pick-up in sales during Ramadan, which has traditionally been a strong month for the car retailers.

A bright spot for the vehicle finance companies is the fact that banks are reducing their appetite for auto loans and overall the percentage of vehicles finance on credit has been steadily increasing year on year.

 

 

The above bar graph describes the variation between Net Profit and Provision rate of years 2016 and 2015 consecutively regarding consumer finance companies.

• American Express 2016 Net profit have increased compared to the previous year, yet due to the current economic situation its 2016 provision rate have also increased dramatically to reach SAR 19million.
• Al Nayfat also improved its Net Profit in 2016 reaching SAR 127milliom, yet along with a higher provision rate than year 2015.
• Saudi Finance and Morbaha Marina both had a Net Profit of SAR 12million in 2016. However, Morbaha Marina has grown significantly during 2016 (increase in turn over and capital). Saudi Finance company is a key beneficiary of cheap finance provided by its foreign shareholder ADIB.
• National Installment Co. (no records) and Murabaha Financing (didn’t upload 2016 FYE).
• The reduction in public sector workers and allowances in 1Q 2017 is likely to have some impact on the results of this sector in 1 H 2017.

 

 

The above bar graph describes the variation between Net Profit and Provision rate of years 2016 and 2015 consecutively regarding combined services finance companies.

• Al Readah 2016 and 2015 show similar net profit of about SAR 3 million yet with a very high provision rate of SAR 9.7 million in 2016
• Matager has a high provision rate two years in a row of SAR 28 million. The net profit in 2016 decreased by 18% in 2016.
• Osoul Modern ended 2016 with an 11% increase in its net profit, and a much improved provision
• Eastern Province company, Tamweel Aloula, which finances medical equipment, vehicles, SME and retail shows an impressive performance in 2016 with a net profit of SAR 18M
• Al Raya shows two years of losses with a net loss of SR 11 million in 2016.

Summary

The year- end financial statements for the Saudi Finance companies show the impact of the economic situation in the Kingdom. The two sectors most effected are the heavy equipment leasing and the automotive finance where the impact of delayed government payments, cancellation or deferment of projects, and the slowdown in consumer spending have been most felt. Tightening of credit by banks and a reduction in liquidity due to increased Government borrowing made the operating environment very challenging in 2106. Add on to this the increased costs of regulation, the need to continuously improve already high levels of Saudisation and it will be interesting to monitor the performance of these companies in 2017