The funding from Saudi Real Estate Refinance Co. will help bolster smaller lenders in Saudi Arabia’s emerging but highly concentrated mortgage market, which is dominated by three banks.
Al Rajhi Banking & Investment Corp., National Commercial Bank, and Riyad Bank have an estimated market share of over 60%, according to a report by Al Rajhi Capital. The country’s banks wrote residential real estate mortgage loans worth 26.50 billion Saudi Arabian riyals in the fourth quarter of 2019, roughly equivalent to the total of residential real estate mortgage loans issued throughout the first half of 2019 and more than all of 2018, according to the Saudi – Arab Monetary Authority. That rate is expected to slow in the second quarter as movement restrictions apply due to the pandemic.
Saudi Real Estate Refinance Co., or SRC, which is often compared to the US-based Fannie Mae, is a public mortgage refinancing company. The goal is to refinance 10% of the total Saudi Arabian mortgage market and reach 20% of the total market by the end of 2020, but CEO Fabrice Susini admits that these goals are due in part to “dynamic growth in the mortgage market over the past year.”
“We are happy about that [growth], but we [as a refinancer] are not where we want to be, “Susini said in an interview. He added that the company is targeting total assets of Riyal 23.5 billion by the end of this year, which will include mortgage portfolio acquisitions, warehousing and other fundraising.
The SRC was founded in 2017 with an equity base of 5 billion rials from the Public Investment Fund, the country’s largest sovereign wealth fund, from which 1.5 billion rials will be deposited, said Susini. To date, it has deployed around 2.8 billion rials, 70% of which is portfolio purchases, he said. Additional funding will come from the domestic sukuk – an Islamic loan certificate similar to a bond – valued at 750 million riyals, which is part of a domestic sukuk program valued at up to 11 billion riyals. It is also planned to enter international markets in 2020, he said.
Susini said the SRC has a broader goal of increasing home ownership across the country in line with the 2030 vision, especially for low-income Saudis.
Despite the rapid growth of the mortgage market, most analysts consider it underdeveloped, with around 200,000 residential mortgage contracts in a country of around 33 million people. “We are at the very beginning of the growth of this market,” said Susini.
This is reflected in high mortgage profit rates, some of which serve to encourage banks to develop the sector, Susini said.
“A loan for a washing machine or a car is much cheaper than a house loan, which is unusual compared to other G-20 countries or countries in the region,” said Susini.
“As the volume picks up, we try to compete with lower prices for borrowers, but also with the sustainability of the system, including the budget, as many of these loans are government sponsored,” he said.
Much of the home loan was granted to workers in the public sector and only a small proportion in the private sector. One benefit is that banks should not see an increased risk cost on their mortgage loan books this year – as banks are exposed to wage risk rather than wealth risk, as the risk of job losses in the public sector is limited, said Mohamed Damak, an analyst at S&P Global ratings in Dubai.
However, banks need to lend to a wider cross-section of the population to meet the target of 70% home ownership by 2030 from 50% in 2018.
The challenge for banks will be to move their model away from a high-margin residential mortgage loan model, “to a lower margin per unit of issue,” said Susini.
Targeting mortgage financiers, smaller banks
When the SRK started lending in 2018, its first clients were mortgage financiers, which account for around 5 to 6% of the residential mortgage market. They had traditionally relied on banks – major competitors – for liquidity, which “can seem a bit strange,” said Susini.
The SRC’s focus shifted to banks in 2019, particularly smaller banks that do not have access to the various sources of funding that larger banks have at their disposal, he said
Five mortgage financiers and three banks – Banque Saudi Fransi, Bank AlJazira and Saudi British Bank, majority owned by HSBC Holdings PLC – have signed agreements with the SRC.
However, the SRC will also acquire portfolios from each bank to allow them to diversify their funding sources and remove loans from their balance sheets, Susini said. The SRC assumes the duration and interest rate risk of long-term fixed-term loans in a portfolio it has acquired and has access to a broader range of hedging instruments than domestic banks.
Additional funding is not enough
While finance houses that have signed contracts with the SRC have expanded their mortgage loan portfolios, the sector has lost market share to banks as a whole.
That partly reflects the importance of salary assignments in lending, said Mohamed Badat, chief commercial officer at Bidaya Home Finance Co., a finance firm that has received SRC funding.
“That is the deciding factor in who actually has market share in the financial services sector because any bank that has signed the salary has the option to sell all of its credit products to the consumer,” Badat said. He estimates that mortgage houses had a market share of around 6% to 8% of incremental mortgage growth in 2019, compared to around 10% previously.
To compete with banks, financial firms need to be more efficient with the mortgage process, including using digital onboarding, Badat said.
The salary allocation also highlights the difficulties faced by smaller banks and challengers.
Although Emirates NBD Bank PJSC is the second largest lender in the UAE, it is practically a challenger bank in Saudi Arabia, where it has four branches and permission to open another 20 in 2019 and Naser Yousef, the CEO of Emirates NBD KSA , identified home equity financing products as “a crucial pillar of our broader expansion and growth in the Kingdom”.
“The leading banks have a strategic advantage because they have a large customer base, but that’s nothing new to us,” Yousef said in 2007.
On June 1, US $ 1 was equal to 3.75 Saudi Arabian rials.