2021 marks the start of the investment phase of our strategic plan where we develop the key enablers across the Bank to help accelerate performance, create a sustainable banking organisation, and support the aims of the Kingdom’s Vision 2030 plan.
It is my pleasure to introduce the SABB Annual Report for the year ended 31 December 2021. It is difficult to summarise the past year, a year during which we had to deal with the additional challenges and uncertainties posed by the global COVID-19 pandemic and the related starts and stops of the global economy. However, the tests of dealing with the challenges and uncertainties of 2021 demonstrated the resilience of the Saudi economy, and in particular the banking sector, including SABB. SABB took on those challenges and dealt with the uncertainties from a position of financial and strategic strength, and has now pivoted back to growth mode.
Two key events during 2021 laid the foundation and charted the path to achieving our strategic goals:
Firstly, during March we concluded the final elements of the integration of SABB and Alawwal banks. The importance of the transaction – the first banking merger transaction in the Kingdom – had an impact beyond SABB’s borders. Therefore, our energies and efforts were heavily focused on ensuring the right outcome, which was the culmination of over three years of hard work and effort from dedicated individuals across the organisation and beyond. SABB emerged a stronger entity with a single IT system, a single shared culture and a stronger balance sheet, better enabling us to meet the growing needs of our customers and demands of the Kingdom’s Vision 2030 transformation programme.
Secondly, we committed to our long-term strategic goals and the steps we will take to achieve them. Our strategic plan was put in motion, with an underlying strategy at its core that paves the way to capitalise on the positions of strength we have enjoyed in our rich history.
2021 marked the start of the investment phase of our strategic plan, focused on developing the key enablers across the bank to help accelerate performance, creating a sustainable banking organisation, and supporting the aims of the Kingdom’s Vision 2030 plan. And we have already begun to reap the benefits of that investment, as evidenced by a resilient performance that grew our loan portfolio for the fifth consecutive quarter, improved our asset quality and generated growth in capital.
The COVID-19 pandemic continued to impact our customers and stakeholders throughout 2021, although the Kingdom’s thoughtful and measured programme of support has helped us to weather much of the uncertainty, including the successful vaccination programme and the monetary and fiscal help provided to businesses and individuals. Throughout 2021 demand for mortgage lending remained strong and the sentiment for corporate credit became increasingly more confident.
With energy prices strengthening in the second half of the year and the consensus for increases in benchmark interest rates being brought forward, in part to remedy growing inflation, challenges remain but the outlook for the banking sector looks robust.
The Saudi government’s budget for 2022 was endorsed by the Council of Ministers in December. The budget expects GDP growth of 7%, compared with 3% in 2021, supported by increases in oil revenues. Programmes such as the newly announced National Investment Strategy which will be driven by Shareek, a programme that looks to build partnerships between the public sector and private listed entities, will be key catalysts for the next stage in the evolution of the Saudi economy.
The Kingdom’s commitments to sustainability also culminated in setting a target of net zero emissions by 2060. The desire of the Kingdom to be at the forefront of transitioning to a more sustainable existence is perfectly congruent with SABB’s ambitions and it is exciting to participate in and support this journey.
Our long-term strategic goals aim to reinforce SABB’s position as a leading bank in the Kingdom, and as a provider of great services to customers and attractive returns to our investors.
As noted above, 2021 marked the start of the investment phase and it was pleasing to see solid progress in developing some of the key enablers for our longer-term goals, from setting up an in-house digital office to developing a fuller suite of mortgage products and enhancing our online mortgage offering. While doing that, we also seized the opportunity to participate in some key landmark transactions, including acting as one of the lead arrangers on the SAR 14 bln financing to fund the Red Sea Development project. It was also pleasing to see strong loan origination across all our key product areas, some of which was driven by the investments made although we expect more to come from these investments during 2022.
As you can see, if one word were to sum up our strategy, it is ‘growth.’ And while we are very pleased to have seen the early signs of growth in 2021 resulting from our investments, we expect even greater growth in 2022.
Delivering sustainable financial performance is a key feature of our strategy. SABB’s financial performance during 2021 includes a return to profitability, continued loan growth with improvements in efficiency and asset quality. We generated SAR 3.9 bln of net income before zakat and income tax for the year and SAR 7.9 bln of revenue. Our financial results are robust proof-points of our resilience and progress made in 2021.
SABB has proposed a final dividend of SAR 0.36 per share for the second half of the year, bringing the total dividend relating to 2021 to SAR 1.8 bln in total.
With ESG woven into both our strategy and the long-term transformation goals of Vision 2030, during the year we focused on formulating our ESG strategy. This initiative marks a critical transition for SABB and our customers, because we believe that a firm commitment to ESG, in both word and action, is absolutely necessary to achieve sustainable growth.
Operationally during 2021, SABB made positive contributions to this area by making the first ever ‘green’ deposit and working with our HSBC partners to provide our customers with the opportunity to invest in ESG-compliant funds. The genuineness of our commitment and success of our efforts were recognized when we were deemed to be ‘The Leading Bank in Financing Sustainable Projects in the Middle East’ by Global Finance Magazine, the award demonstrating SABB’s growing strengths in this area.
We are proud of the calibre and broad experience of both our board and senior management team. In February, our previous Managing Director David Dew took the decision to retire after 11 years as Managing Director. The Board is extremely grateful to David for his contribution and commitment to SABB’s journey. Tony Cripps joined the Board and succeeded David as Managing Director, and I am extremely excited about the future of the bank under Tony’s leadership. Tony brings a wealth of experience, having worked in a number of growth-oriented geographies during his time at HSBC. Mathew Pearce also ended his tenure as Chief Financial Officer, and we welcomed Lama Ghazzaoui, a much seasoned Saudi CFO, to SABB.
I am especially grateful for the diligence and professionalism of my Board colleagues. They each devoted much time and effort to meeting regularly and discussing key matters, such as integration, strategy, risk management, culture, talent and customer experience, all while dealing with the continued challenges brought by the pandemic.
I also extend a sincere note of gratitude to our staff at all levels, who are the driving force behind the accomplishments of the bank during 2021. Both the Board and senior management are very proud of, and grateful for, their devotion, empathy, resilience, expertise and professionalism in these continued challenging and unprecedented times.
And, finally, I extend our gratitude for the guidance and support of the Saudi government, especially our regulators at SAMA and the CMA.
My remit for SABB is simple – execute on the long-term growth-focused strategy and enable SABB to regain its positions of strength that it previously enjoyed throughout its rich and diverse history. Delivering our strategic goals will also strengthen SABB’s sustainability, ensuring we remain relevant for our customers far off into the future.
We completed Customer Day 1, the point of time at which we are a single fully-integrated bank in March. This was completed before my tenure commenced however, I would like to express my congratulations to the SABB family for achieving this milestone, within agreed timescales and costs. Since Customer Day 1, we have continued to review our processes and systems in order to investigate and achieve further efficiencies, and it is particularly pleasing to announce that we have increased our cost synergies to c. SAR 0.7 bln or 20% of the combined pre-merger cost bases of SABB and Alawwal banks. Total cumulative integration costs were SAR 1.1 bln. Both these metrics are ahead of our original guidance. The Bank is now stronger and with increased capacity to serve our customers and clients.
Our strategy is clear and straightforward: build on our positions of strength and participate more in areas of growth connected to the Kingdom’s Vision 2030 plans. SABB possesses a number of strengths and competitive advantages that sets us apart from our peers. We are the number one international bank in the Kingdom – we provide our customers with access to a global banking ecosystem through our partnership with HSBC. We possess strengths in corporate and trade-related banking services, and also provide a diverse retail banking operation with a wealth-focused agenda.
During 2021, as we completed the final stages of the integration, we began our investment phase. This is the start of an extended programme of investment where we will look to invest over SAR 1.5 bln to modernise and transform our IT infrastructure, develop new capabilities and skillsets among our employees, and digitise our processes and operations enabling an end-to-end digital customer experience. The rewards for this investment will begin to materialise during 2022, although we would expect the bulk of the return to be after 2022.
Joining SABB in May of this year, I’ve been struck by the energy that I’ve witnessed across the Bank from transitioning from ‘integration-mode’ straight into ‘growth-mode’ and I am excited for the future.
Looking back on 2021 in its entirety, both before my joining and after, the sheer volume of accomplishments that SABB has made is astounding. Our corporate business has grown sustainably over the year with lending increasing 9%, and despite the heightened liquidity levels during the year leading to increased levels of repayments, our corporate business used their strong relationships, products and services to support our customers whilst growing the balance sheet. With our large corporate and multinational strengths, we were successful in winning one of the key Red Sea Development Company mandates earlier in the year, which will be the first Riyal denominated green loan in the Kingdom.
Our retail business accelerated its involvement in the mortgage industry by enhancing our online sales capability and developing a fuller suite of REDF mortgages. This was the first step in the investment phase for the retail business. It was very pleasing to see the near doubling of mortgage originations during 2021, despite the full suite not being available during the year. We remain very optimistic that we can accelerate mortgage growth further in 2022, given the investment made during the past year.
Our financial performance was incredibly resilient despite the continued uncertainty driven by the global pandemic and competitive pressures. We returned to profit in 2021, compared with 2020, generating SAR 7.9 bln of revenue and SAR 3.9 bln of net income before Zakat and income tax. Gross lending increased for the fifth consecutive quarter closing 2021 with SAR 174.3 bln of lending and we finished the year with SAR 186.8 bln of customer deposits and an 82% demand deposit ratio. Capital, funding and liquidity metrics remain strong and we have the capacity to support future growth.
It was a great honour to be asked to lead SABB on the next stage of its journey. I am hugely grateful to my predecessor David Dew for a smooth transition – David was a great ambassador for SABB for over 11 years as Managing Director and we wish him well for his retirement.
As mentioned earlier, I am greatly excited about our Bank’s prospects as we look to accelerate our growth, and my thanks go to the Board, Executive Management and all SABB employees for the energy and vigour that I have witnessed in abundance since I started in May – there is no doubt in my mind that this energy will translate into success for the Bank for years to come.
"Looking back on the year, it is great to see the return to consistent loan growth, revenue stabilisation and a return to profitability, a marked improvement in asset quality metrics, and exceeding our delivery of cost synergies. Clearly the low rate environment has had its impact on our revenue, but the current consensus on global benchmark interest rate expectations for 2022 should hopefully start the process of normalisation in both rates and our revenue base. A resilient set of financials and a more positive outlook means we are very optimistic for the future."
Following a challenging year in 2020, SABB has delivered a robust set of financials for 2021 with a return to profit and strong progress across a number of financial indicators. Gross customer lending grew 9% and asset quality continued to make its steady improvement. We extracted further synergies having now achieved SAR 0.7 bln of annualised synergies ahead of original expectations. Progress has been solid, and we are optimistic that we can build on these foundations.
We reported net income before Zakat and income tax of SAR 3.9 bln in 2021 which compared with a loss in 2020 of SAR 4.3 bln. We generated SAR 7.9 bln of revenue during the year of which SAR 5.7 bln was net special commission income, and we incurred SAR 3.7 bln of expenses. We completed our integration in the first half of the year, and with this came some additional integration related expenses of SAR 0.1 bln in the year, however the cumulative investment made via integration expenses of SAR 1.1 bln has been to generate over SAR 0.7 bln of annualised synergies – it is pleasing to have delivered cost synergies and savings at the upper end of our guidance having delivered c. 20% of the combined SABB and Alawwal 2017 cost base.
Excluding merger-related costs in 2021 and 2020, together with the goodwill impairment in 2020, in order to give a more comparable view of performance, underlying net income before Zakat and income tax of SAR 4.0 bln was SAR 0.4 bln higher than 2020 mainly from lower expected credit losses and costs, partly offset by lower revenue.
Revenue fell compared with 2020, due to the effect of the lower benchmark interest rates that occurred at the start of 2020 and the increasing competitive environment in the sector. With our corporate focused loan book, that is largely on a floating rate, we are generally sensitive to movements in benchmark rates, resulting in lower net special commission income during 2021. Non-funds income performed with resilience and was 10% higher compared with 2020 from increased trading and exchange income from improving customer flows, together with disposals from our investments portfolio. Net fee income fell 7% although this was in part driven by a remapping of certain revenue-related expenses. Trade fee income remained resilient throughout the year which drives approximately half of our fee income.
Costs excluding integration-related expenses were SAR 0.1 bln lower compared with 2020 continuing the strong trajectory from the last few years. We incurred SAR 0.1 bln of integration expenses during 2021 and some of this occurred post Customer Day 1 as we continued to drill into our cost base seeking further opportunities for rationalisation. We are firmly into our investment cycle in order to deliver on our strategy, and with this also comes tighter control of our cost base as we approve business cases and monitor the productivity of our investments.
Expected credit losses of SAR 0.5 bln were SAR 1.2 bln lower than 2020. The 2021 charge represents a cost of risk of 27 bps which is at the lower end of our through-the-cycle guidance, and reflects the early action taken following the merger and also our conservative approach to risk. Asset quality metrics continued their improvement throughout 2021 in line with our expectations, with an NPL ratio on SABB originated loans of 2.4% and a total NPL ratio including purchased or originated credit impaired loans of 4.6%.
Our balance sheet remains healthy, with gross lending balances of SAR 174.3 bln and deposit balances of SAR 186.8 bln at the end of the year. Loan growth has accelerated in 2021 with 9% growth in the year with progress made across both corporate and retail portfolios. Participation in the Kingdom’s landmark giga-projects and a swift increase in mortgage originations was welcome, and we remain optimistic on growth into 2022 with a healthy pipeline.
We ended the year with a strong capital position reporting a common equity tier 1 ratio of 19.29% and a total capital ratio of 21.84%. The Bank has a stable and low cost funding base, with 82% of our deposit base in the form of demand deposits.
Looking back on the year, it is great to see the return to consistent loan growth, revenue stabilisation and a return to profitability, a marked improvement in asset quality metrics, and exceeding our delivery of cost synergies. Clearly the low rate environment has had its impact on our revenue, but the current consensus on global benchmark interest rate expectations for 2022 should hopefully start the process of normalisation in both rates and our revenue base. A resilient set of financials and a more positive outlook means we are very optimistic for the future.
