Wednesday 09, May 2018 by Jessica Combes

KSA’s first bank looks to the future


In a conversation with Banker Middle East, Soren Kring Nikolajsen, Managing Director of Saudi Arabia’s first operating bank, Alawwal Bank, an establishment that was founded in 1926, talks about his vision for the future.

The bank rebranded to Alawwal Bank [‘the first bank’] from Saudi Hollandi Bank in November 2016—what have been the benefits of this exercise?
We wanted a fresh look and feel that reflected both the modern outlook of the organisation, as well as our proud legacy of being the first bank in the Kingdom. The rebranding has been extremely wellreceived by our customers, with positive feedback from both the younger and the older generations.

You’ve been a director of the bank since December 2013 but became Managing Director in January 2017—what do you feel you have achieved over the course of last year and what goals have you set for the bank for this year?
Alawwal Bank has a history of leading positive change in the financial services industry, that is a tradition we want to continue. Over the past year we’ve focused a lot of energy into the continued development of our market leading range of online and mobile services. Digital is fast becoming the channel of choice for our customers, so it’s an area where we can add a lot of value if we keep investing. We’ve tried some things that are new to banking in the Kingdom and I’m pleased to say they’ve proven incredibly popular with our customers.

As Saudi Arabia’s oldest bank, one of our goals is to be a good corporate citizen and give back to the communities we serve. We support many charities helping the less privileged in society, we’ve also participated in various initiatives to help young Saudi entrepreneurs. As a major employer in the Kingdom, I’m also very proud of our staff training programmes, some of which are aimed specifically at helping our female colleagues to achieve good careers on equal terms. This is something we will do more off in the future.

You’re on record in May last year as saying that Alawwal Bank had roughly doubled its market share within retail banking over the previous three years— can you keep up that pace of growth?
We made some smart investments that paid off, but we started from a relatively low base, so that level of growth is kind of a one off. We wanted to expand our retail channel into a more complete proposition, to improve our business mix and reach more customers. To a large extent we have reached our goal. We now have a good quality retail business, offering market-leading products to better support our customers. We have a great platform to build on in 2018 and beyond.

How do you see real estate financing evolving and what are you likely to be doing to assist in raising home ownership in KSA?
The mortgage market in Saudi Arabia is relatively young. There is still some work to do from a regulatory and legal infrastructure perspective to bring it in line with more mature markets but it is evolving fast. Promoting home ownership is a key focus for the Government, with ambitious plans outlined in Vision 2030. Relative to our size, Alawwal Bank is amongst the biggest mortgage lenders in the Kingdom, so we’re well-placed to play our part in this important market.

You posted record operating profit for 2017 at SAR 2,446 million, up 4.1 per cent. It was a very challenging year— how did you manage this outcome?
A combination of slightly higher revenue and well-controlled cost. Yes, it was a challenging year, resulting in lower nonfunded income, offset by better than expected funding conditions. The results showed the strength of the bank’s core businesses, solid relationships and good service.

What is your view of the banking and finance landscape in KSA as we come to the end of Q1 2018? Overall, I would describe the banking landscape in the Kingdom as safe and sound. Banks are well-capitalised, liquidity is healthy and we have good and proactive regulators. 2017 was somewhat of a tough year and I think most banks will agree the current level of economic activity is a little slower than we would like it to be. I suspect we will see that continue throughout most of the year.

Alawwal Bank was indeed the first bank operating in KSA—how has it shaped Saudi Arabia’s financial landscape? What is the bank’s focus for 2018 and how does this fit into the Kingdom’s economic growth agendas?
The history of Alawwal Bank is rich enough to fill a whole book, going all the way back to a young Prince Faisal’s visit to the Netherlands in 1926. From helping the Kingdom to issue its first currency, to facilitating the first payment for an oil transaction, there have been many historical moments where the bank has played a key role.

I’m proud to say our spirit of innovation is just as strong today, evidenced by our support for many of the country’s largest companies, to playing a leading role in the digital evolution of the Kingdom’s banks. That focus will not change in the year ahead.

What are your long-term plans to align the bank with the Government’s Vision 2030 programme?
Aligning with Vision 2030 isn’t just about the long-term, it’s also about the here and now. Vision 2030 looks at many aspects of society and business that we can, and will, play an active part in. Vision 2030 creates exciting opportunities for our business. As a bank, it is our role to provide financial tools to support business growth and the economy, so it is critical we get behind these initiatives. Take the entertainment sector as an example, a total of $64 billion is being invested over the next 10 years—we need to be ready to support the business growth this will generate. Creating a savings culture and improving financial literacy are other areas of focus.

The Government is absolutely right to make personal savings part of their agenda. With such a young population as in the Kingdom, we need to do more to encourage young people to save for the future. It’s in everyone’s interests to make sure they do not face financial difficulties in the future. We also see huge value in increasing women’s participation in the workplace. This is something we are already doing at Alawwal Bank and are seeing the benefits of. It makes good business sense to encourage diversity in any workforce.

I strongly believe that with more gender balance we will have better decision making in business. For a bank, I also think it is vital our organisation mirrors the diversity of our customer base to stay in tune with their needs.

The IMF is expecting GDP growth in KSA to be close to zero for 2017 and looking to the whole of 2018, credit demand is expected to weaken in KSA, partly on the back of reduced Government spending. Do you foresee any issues as a result of this?
Lower economic activity means fewer business opportunities for the banking industry. We will have to watch our cost base and of course pay very close attention to credit performance in an environment of slower economic activity. We will only maintain our value as a bank, and to our customers, if we maintain our position as a responsible lender.

The Saudi Arabian Monetary Authority joined AAOIFI as an institutional member in October last year. Is the likely adoption of AAOIFI standards going to create more opportunities for Alawwal Bank in Shari’ah-compliant finance both nationally and internationally?
Common standards for Islamic finance products would be very helpful. A wide range of standards and interpretations is a significant road block for a broader acceptance of Islamic finance globally in my view. As for Alawwal Bank’s business in the Kingdom I would welcome a common set of standards.

In September last year, Fitch Ratings affirmed Alawwal Bank’s long-term issuer default rating (IDR) at ‘BBB+’ with a stable outlook. But Fitch also said that the bank’s viability rating was ‘constrained by the bank’s limited core capital buffers and uncertainty over its ability to raise new equity due to the foreign shareholder’s desire to exit its shareholding.’ How do you react to that?
Alawwal Bank’s capital level is strong and more than sufficient to support any current growth ambition. At 2017 year-end the bank had a Core Tier 1 equity ratio of 16.2 per cent and total capital of 20.3 per cent. We are not constrained by capital in any way.

What can you say, if anything, regarding the merger talks with SABB [that could create the third largest bank in KSA] that were revealed in April last year—is there a clear timetable for conclusion?
I cannot comment on the ongoing discussions. This is an extremely important decision for the two banks and a potentially transformational event for financial services in the Kingdom. It is therefore very important that whatever we decide is done for the right reasons.

Being in a “new era” [in all its meaning for the sector and market], how do you envision the business of banking changing in Saudi Arabia over the next five years?
I see changes from two aspects. Firstly, technology will play a big role in changing banking. That goes for the customer facing side as well as on internal processes. With the right use of technology, we become more efficient and can lower our cost base in the process. Second, are the economic changes in the Kingdom with Vision 2030 and the move towards a private sector led economy. That represents challenges but also significant opportunities for Saudi banks.

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