CFO Review/ Performance in 2020
Despite all the headwinds brought about, the Bank managed to register a strong performance in almost all aspects of the business – operational and financial – reflecting the strength of our core business franchise and the robust financial intermediation.
There is no debate that the year under review turned out to be one that is unprecedented in the recent history. The COVID-19 pandemic outbreak coupled with SAIBOR rate drop and declining oil prices, made the year extremely challenging for the banking industry. Adhering to guidelines issued by the health authorities, we were operating at 50% capacity during the lockdown. Various concessions announced by the Saudi Government such as SME payment deferrals and fee waivers to support the industries and stimulate economic growth too impacted our performance. Hence, the performance of the Bank in 2020 should be viewed in the context of the operating environment as elaborated on page 27. Despite all the headwinds brought about by these developments, the Bank managed to register a strong performance in almost all aspects of the business – operational and financial – reflecting the strength of our core business franchise and the robust financial intermediation. Our ABCDE “Back to Basics” strategy immensely contributed to the delivery of these results.
The “Back to Basics” strategy paved the way for our new three-year “Bank Of The Future” (BOTF) strategy. The BOTF strategy is designed to guide the Bank in mitigating risks and capitalising on opportunities as it navigates the challenges of the “next normal” operating environment.
We recorded SAR 10.596 Bn. in net income after Zakat for the year, a 4.3% growth over 2019. Total assets grew to SAR 468.8 Bn. as at 31 December 2020 recording a YoY growth of 22.1%; the main contributory factors being growth in financing portfolio (26.4%) and investment (28.7%) portfolios. Customer deposits grew by 22.5% to SAR 382.6 Bn. funding almost 82% of the asset base.
A detailed review of the Bank’s results of operations and financial position is given below.
The Bank reported net income after Zakat of SAR 10.596 Bn. for the year 2020, reflecting strong momentum in the delivery of the strategy, and resulting in improved financial metrics.
Five-year summary of the Income Statement
|Gross financing and investment income||
| Return on customers’,
banks’ and financial
institutions’ time investments
|Net financing and investment income||
|Fee from banking services, net||
|Exchange income, net||
|Other operating income, net||
|Total operating income||
|Salaries and employees’ related benefits||
|Rent and premises related expenses||
|Depreciation and amortisation||
| Other general and
|Total Operating expenses before credit impairment charge||
|Impairment charge for financing and other financial assets, net||
|Total operating expenses||
|Income for the year before Zakat||
|Zakat for the year||
|Net income for the year||
Accounting for 82% of the total operating income, net financing and investment income for the year grew by 3% to SAR 16.913 Bn. This is consequent to gross financing and investment income growing by 2.45% YoY to SAR 17.378 Bn. mainly due to growth in the financing portfolio, mortgage financing in particular, coupled with the return on time investments of customers, banks and financial institutions decreasing by 10% over 2019.
Net Profit Margin for the year contracted by 51 bps to 4.71% in 2020 compared to 5.22% in 2019. This is due to the impact of SAIBOR contraction and modification loss arising from instalment deferrals being partly offset through management actions. With current accounts representing around 90% of its customer deposits, the Bank continues to support asset growth with non-profit bearing deposits.
The non-yield income representing fees from banking services, exchange income and other operating income grew by 24.6% YoY to SAR 3.808 Bn. and accounted for 18.4% of the total operating income (15.7% in 2019). The growth was mainly driven by payments and digital banking fees as well as the contributions from Al Rajhi Capital, which recorded strong growth in brokerage fee income for the year under review.
Total operating income
Crossing the milestone of SAR 20 Bn. for the first time, the total operating income of the Bank reached SAR 20.721 Bn. for the year 2020 recording a growth of 6.3% compared to 2019, a reflection of the strength across the board in core business activities and strong momentum in the delivery of the strategy.
Total operating expenses rose by nearly 5.6% to SAR 6.742 Bn. largely reflecting the ongoing investments in our digital capabilities. However, various efforts to improve processes, channel migration and centralised activities contributed to improve operational efficiency. This coupled with the higher growth in total operating income contributed to an improved Cost-to-Income Ratio which decreased marginally from 32.8% in 2019 to 32.5% in 2020.
Reflecting the challenging operating environment and the prudent provisioning policy of the Bank, the net impairment charge for the year increased by 22% to SAR 2.166 Bn. compared to SAR 1.772 Bn. in 2019. Accordingly, the cost of risk was 0.75% against 0.71% last year. The Bank continues to monitor its lending portfolios closely for any significant increase in credit risk (SICR) and expected credit losses (ECL) and to reassess the provisioning levels as the situation around COVID-19 evolves; however, management has taken SAR 608 Mn., of COVID overlay in 2020 which is included in the impairment charge, to reflect any potential for further credit deterioration.
Despite the pre-impairment provision income rising by nearly 6.7%, the increase in impairment charge limited the growth in net income (before Zakat) for the year to 4.3%. The Bank’s net income for the year after Zakat totalled SAR 10.596 Bn. compared to SAR 10.159 Bn. in 2019.
In line with the increase in net income, Earnings per Share increased to SAR 4.24 in 2020 compared to SAR 4.06 for the year 2019. ROA and ROE for 2020 were 2.56% and 19.94% for the year compared to 2.76% and 20.49% respectively in 2019.
Statement of Financial Position
Al Rajhi Bank recorded a strong growth in assets and liabilities during the year 2020. With significantly improved Non-Performing Loans (NPL) and coverage ratios, the Bank has a strong balance sheet that is well-provisioned and capital unencumbered. With capital funding 12.4% of the total assets, on-balance sheet gearing remains at a healthy eight times.
Five-year summary of the Statement of Financial Position
|Cash in SAMA and other central banks||
|Dues from banks and other financial institutions||
|Property and equipment, net||
|Investment properties, net||
|Other assets, net||
|Dues to banks and other financial institutions||
|Proposed gross dividends||
|Total shareholders’ equity||
|Total liabilities and shareholders’equity||
Asset growth was driven by a solid financing landscape led by mortgage financing along with further optimisation and growth in the treasury investment portfolio.
Robust growth in business volumes helped the asset base to cross SAR 400 Bn. during the year. Accordingly, total assets recorded a strong growth of 22.1% to end the year at SAR 468.8 Bn. as at 31 December 2020 compared to SAR 384.1 Bn. a year ago.
Financing and investments
Compared to an estimated 14.2% growth in industry average, our net financing increased by 26% to SAR 315.7 Bn., as continued growth in retail financing offset limited corporate financing opportunities and loan repayments. The overall financing mix remained predominantly Retail, with 79% of net exposure. Mortgages made the biggest contribution, having grown by SAR 49.5 Bn. YoY – a growth of around 90%. Outstanding mortgages amounted to SAR 104.5 Bn. at the year’s end which represented 41% of the retail portfolio and close to 32% of the overall financing portfolio. Net investments too increased by 29% to SAR 60.3 Bn. Short-term placements with the Saudi Central Bank (SAMA) too increased by SAR 8.1 Bn. YoY.
Al Rajhi Bank follows a prudent approach to growth and a conservative approach to provisioning for NPLs. Despite the challenges, asset quality continued to improve during the year with the NPL ratio reducing to 0.76% compared to 0.90% in 2019, making this the second consecutive year that the Bank has recorded an improvement in this important KPI. The Bank’s Retail portfolio had a very low NPL ratio of 0.30% and 2.5% for the corporate portfolio. Net impairment provision increased almost 22%, improving the coverage ratio to a healthy 306%, well above the industry average. Reflecting the quality of stringent credit evaluation and post disbursement monitoring process, stage one represented 96% of the total financing portfolio as at the year end.
Deposits and Other Liabilities
Total customer deposits funding 82% of the total assets, increased by SAR 70 Bn., a 22.5% growth during the year to SAR 382.6 Bn. as at 31 December 2020, mainly through current accounts which grew by 15%. Our growth compares well with the industry average growth for 2020 of 8.2%. Consequently, total liabilities grew by 23.4%.
Strength of the balance sheet in terms of superior asset quality, optimum liquidity, and comfortable levels of capital ratios coupled with the support of a loyal shareholder base that takes a long-term view of the business bear testimony to the stability of the Bank.
Al Rajhi Bank continued to maintain a strong capitalisation profile comfortably above the regulatory minimum requirements with core equity Tier 1 and total capital adequacy ratios of 18.0% and 19.1% respectively as at 31 December 2020. These ratios were marginally lower than those in 2019 which were 18.8% and 19.9% due to a 19% increase in risk-weighted assets arising primarily from growth in the financing portfolio.
The Bank’s liquidity position remained healthy with a Loan to Deposits ratio of 79%, Liquidity Coverage Ratio of 155%, Net Stable Funding Ratio at 123% and High Quality Liquid Assets standing at SAR 81.4 Bn. as at 31 December 2020, all well above the minimum regulatory requirements.
|Geographical analysis of the total income of the bank and its subsidiaries||
|Activity Type Revenue||
|Al Rajhi Capital – KSA||
|Al Rajhi Development Company – KSA||
|Al Rajhi Takaful Agency||
|Al Rajhi Company for Management Services – KSA||
|Emkan Finance Company – KSA||
|Tawtheeq Company – KSA||
|Al Rajhi Bank – Jordan||
|Al Rajhi Bank – Kuwait||
|Al Rajhi Limited Company – Malaysia||
Competition from banks in the region as well as fintechs, regulatory developments such as Open Banking Policy, a low interest rate environment and COVID-19 will have a direct bearing on our performance in the ensuing years. Nevertheless, we have devised strategies to build on the core by expanding reach across all the segments for our core business, outperform the market in terms of customer experience and profitable market share, transform technology by investing more in our IT and digital infrastructure and fulfil more customer needs by providing innovative banking solutions and offerings, in our roadmap to be the Bank Of The Future (BOTF).