Business Portfolio Review
The role of Treasury encompasses the management of the Bank’s liquidity and market risks which include profit rate risk, foreign exchange risk and commodity price risk, playing a critically important role in managing the Bank’s balance sheet. As banking continues to grow at an accelerated pace, the technology, systems and financial instruments used within the marketplace in turn must grow quickly and this is an area that the Bank will continue to focus on.
The environmental context
Conditions for foreign exchange (FX) remittance business and cross-border activities changed rapidly in early 2020 as the world struggled against the impact of the COVID-19 pandemic and the region in particular faced the challenge of low oil prices. In the Kingdom, tough fiscal discipline is expected to benefit the economy in the long term, though recovery may be slow and unemployment more entrenched. An uptick will depend on oil prices increasing and global demand picking up in 2021. The Government stimulus package will also contribute towards strengthening the economy.
Against this backdrop, the Bank also faced competition and disruption from new entrants offering digital banking services. This development further challenged market share and the profitability of the remittances business.
In spite of these hurdles, the Bank’s Treasury Services continued to build on its dynamic strategies throughout the year to push sales and grow market share. A drop in economic confidence globally also affected individual FX flows and demand further declined. The FX price campaign combined with the Tahweel network expansion helped strengthen the Bank’s FX remittance market share within the Kingdom. Treasury Services continued to improve the yield of its portfolio by seeking opportunities in a volatile market, and introducing high yielding assets. The Bank’s FX remittance business performed well thanks to stronger market share as foreign worker exits and job and pay cuts continued to impact FX flows.
Despite significant compressions in yields and low interest rate environment, Investment portfolio grew by SAR 13 Bn. (28.7% increase YoY) and the overall spread of the portfolio against 3M SAIBOR has improved materially as compared to the previous year. In addition, the investment portfolio continue to be focus more on sovereigns and top tier corporate names while enhancing portfolio diversification, yield and maturity profile. This highlights the continuous efforts of Treasury Group to better manage and optimise the bank balance sheet and improving the yield income.
Diversifying sources of funding
During the year under review a number of Sharia-compliant products and services were launched to diversify the Bank’s funding sources and strengthen its Treasury function. For example, the Bank launched a new profit-bearing account, Hassad, as part of its plans to diversify sources of funding. Hassad is an innovative Sharia-compliant savings account which provides returns and flexibility to customers.
The Bank also launched Gold-i, a physical gold business catering to its mass customer segment. The product provides customers with a useful avenue to preserve their wealth over time; a demand that tends to grow stronger in uncertain times when precious metal is valued for asset diversification. Gold is easy to buy and sell, making it popular as a long-term store of value, and customers are able to convert their gold to cash immediately when they trade with the Bank.
The Treasury team succeeded in entering the rates hedging market, and positioning itself as a new competitor in the local market. Rate hedging products allow customers to hedge the rate risk against their financings to better manage fluctuations in interest rates. The launch of the multi-currency card also created an alternative space for physical foreign currency notes.
Prudent growth in the face of challenges
The Treasury Group Operating Income reflected a lower growth rate during 2020 driven by low oil prices and a decrease in business activity due to restrictions related to the COVID-19 pandemic. Total operating income increased by 36% and net income 53% year-on-year by end 2020, while total Treasury assets grew by 15% year-on-year in line with the Bank’s overall asset expansion.
Total Treasury liabilities grew by 49% compared to the previous year in line with the Bank’s overall liabilities expansion. Overall, the FX business grew by 1.3% over the previous year. In contrast, the Bank was able to increase its overall market share of the remittance business in 2020.
In the first quarter of 2020, the Bank successfully launched the new Treasury system, considered a top-of-the-line Treasury management system. Investment in this system was a result of the Bank’s digitalisation strategy and its goal to enhance systems in order to improve its products and services while deepening the customer experience. The full commissioning of the FX pricing engine has improved Treasury’s pricing capabilities, enabling an improved capacity to serve its multi-class customer base through various business lines, channels and online platforms.
In light of the lasting effects of COVID-19, the main objective of Treasury Services will be to manage the Bank’s overall liquidity position while persevering and building on current yield, and increasing the efficiency of funding while retaining a robust mix of funding sources.
The Bank will also forge ahead with plans to optimise its Commercial Banking customer base through the launch of new products, grow market share and maximise cross-selling opportunities across business lines. In alignment with its BOTF Strategy (refer page 41), the Bank will build on its Treasury investment book to improve its yield and maturity profile. In addition, the Bank’s plans to provide wealth management solutions which will leverage the Bank’s Treasury services.