Running had: THE SAUDI ARABIAN BANKS 1

TheSaudi Arabian Banks

SaudiArabian Banks

Banksare considered to be the most critical part of the financial system.Therefore, they contribute a lot to the growth of a given economy. Ifthere is a problem with the banking industry, the economy also willexperience a huge problem. Moreover, a banking system that hasefficient systems have sound reflections of intermediate processesthat lead to great contributions towards the growth of the economy.Additionally, the efficient functioning of the commercial banksresults into effective monetary policies. The analysis of theefficiency of the profitability is also an essential factor forevaluating the performance of a given bank. To estimate theperformance and efficiency of different banks, we have to applydifferent methods of analysis such as regression analysis.Furthermore, analysis of the financial indicators is the commonlyused method by the banks. However, at some time, the financialindicators might sometimes be big and make the interpretation of theresult to be difficult.

Inspite of the existence of the financial studies of the banks, theliterature study of the financial performances of Saudi Banking doesnot exist. Therefore, there is the need for great work to study thefinancial performance of the Saudi Arabia banks. Moreover, the studyof the financial performance of the Saudi Arabia banks is alsoimportant to the various group of people that have interests inbanking. An example of such group includes the central bank of SaudiArabia, the community of the Saudi Arabia, Academicians, and theSaudi Arabia government at large. Therefore, the important of mystudy is to address the important issue regarding the financialperformance of the Saudi Arabia banks. The paper is organized in thatit will concentrate on the regression analysis the banks performance.The analysis will also involve the measure of the banksâ€™profitability efficiencies. Therefore, the method of the measure willrequire the use of ROA (return on assets). During the analysis, theoperating income-size of the bank will be used as the dependentvariable while the size of the bank assets, utility management, andoperational efficiency will be used as independent variables. Thenumber of the Saudi Arabia banks that will be asses is five. Theassessment will be carried on the banks for the financial period of(2006 to 2010). Besides, the selected banks for the analysis will becarried quantitatively so as to find the difference based on theirlevel of performance. For the record, the Saudi Arabia banks areranked according to their financial efficiency. Furthermore, thestudy is important in that it also concentrate on the importance ofthe Saudi Arabia banking system to the economy.

Also,the study is anticipated to concentrate on two folds, that is, whatare the relevant contribution of the management decisions to theperformance of the banking system and how the performance of theSaudi Arabia banks have contributed to the academic field. However,the paper will mainly concentrate on the management will it comes tothe field of banking. Therefore, it might help decision makers withattentions regarding the major activities that are associated withbanking. Furthermore, the management team will learn how to improvethe positioning and the ranking of a given bank as compared to itscompeting banks. Besides, the financial information that will begathered in this study will be useful to bank managers when it comesto the aspect of setting up financial strategies and plans.

LiteratureReview

TheRecent investigation regarding the performance of banks Saudi Arabiabanks has been done by a number of people. For example, Al-Faraj didsue data envelopment approach (DEA) to evaluate the technicalefficiency of the Saudi Arabia banks in the year 2002. He eventuallycompares his result with the world scores of the mean efficiency.Al-Faraj and his fellow scholars recommend that the banking industryin Saudi Arabia should continue with their effort of adapting newtechnologies (2006). As a result, they will be able to providesustainable services to their customers and at the same time makingthem have favorable conditions in the competitive market.

Accordingto the research that was done by Akhevein, it is true that there isthe significant and positive relationship between the profitabilityand the size of the bank (2013). In that case, the large size ofscale can result in economy of scale which in turn will reduce thecost of gathering information. Besides, few cost saving can resultinto the increasing of the size of the bank. However, the size of thebank can have some positive impact have to some limits. Beyond thoselimits, the resulting impacts are more of negative than beingpositive. In that case, the relationship between profitability andthe size of the bank has a lot of uncertainty which are contributedby different factors.

BasicExplanation of Regression Analysis

Regressionanalysis is defined as a statistical tool that is used in theinvestigation of the relationship variables. The variables might beindependent or dependent. In the most occasion, the investigator ismostly concern with the causal effect that one variable has toanother. This may include the effect of increasing the price of agiven product that is on demand or the effect of changing the chainof money supply in case of the inflation rate (Ruppert, 2011).Therefore, such issues can be best investigate by using regressionanalysis. The method helps with the estimation of the measurableeffect the given casual variables to the variables that they may havethe influence on. Consequently, the technique of the regressionanalysis has become important when it comes to the aspect of economicanalysis (Vinod, 1981). In most occasions it founds it application inthe analysis of the performance efficiencies of the banking industry.

Overviewof the Banking System in Saudi Arabia

Accordingto the current trend in the banking market, Saudi Arabia is thecurrently worldâ€™s fastest growing market for the banking business.The national banks are also facing stiff competition from the currentbanking market and are expected to make improvements regardingtechnological advancement. The government is also expected to employfavorable policies regarding the banking business. The Saudi Arabianbanking industry has also been registering positive growth in thebanking business even during the global financial crisis. They haveeven continued to expand their lending activities.

Moreover,their lending activities are in the inclusion of small businessenterprises, households, and non-financial organizations. The bankingsystem in the Kingdom of Saudi Arabia is mostly dominated by theprivate sector. The private sector accounts for the bulk in theextension of their credit and the bulk in the deposit received by thebank (Anouze, 2010). According to the Central Bank of Saudi Arabia,the bank lending had reached SR891.6 billion towards the end ofNovember 2011. It was 15 % more than the lending that was registeredin a year earlier (Lòˆchel, 2011). The positive momentum wasgreatly generated by the rise in giving credit to private sectors. InNovember 2011, the loan extends to private sectors had reachedSR859.4 bn. The total growth of the Saudi Arabia regarding assets hadreached 13.6 % between 2007 and 2010.

Moreover,the banking systems of Saudi Arabia are considered to be one of thesafest in the world, that is, according to the information on theglobal assessment that was published by the Poorâ€™s and Standards.For example, the Gulf Kingdom bank was given a rating of 2. Itimplies that the bank was upgraded from a rating of 3, therefore,making it the bank that has low risk in the Middle East.

Methodology

Toachieve the objective of the analysis, many of the data was gatheredfrom the secondary sources such as the financial statements of banks,that is, between the year 2006 and 2010. The data were very importantwhen it come to the aspect of computing the financial ratios a fewSaudi Arabian Banks. The information was also useful in investigatingthe rate of performance. Moreover, some of the data were gatheredfrom papers, articles, books, the web, and specialized internationaljournals. The study appears to be descriptive as it measures,describes, and compare the financial situations of different banks.

Thestudy mainly concentrates on major banking activities that arecomprised of net income, total assets, operating income, operationalefficiency, return on assets, asset management, operating expenses.The study will also explore on the variance that can result fromdifferent variables. Therefore, it was imperative to used regressionanalysis as one of the methods.

Dataand Results

Name of bank/year | 2006 | 2007 | 2008 | 2009 | 2010 | Growth rate | average |

The Saudi Investment Bank | 40844623 | 46541793 | 53596364 | 50148011 | 51491233 | 26 | 48524405 |

Arab National Bank | 78035383 | 94467561 | 121307142 | 110297320 | 116034765 | 48.7 | 104028434 |

Bank Aljazira | 15712874 | 21563988 | 27519705 | 29976604 | 33018221 | 110 | 25558278 |

Riyadh Bank | 940154845 | 121350825 | 159652525 | 176399258 | 173556430 | -81.5 | 314222777 |

Total | 1074747725 | 283924167 | 362075736 | 289673182 | 37410649 |

Table1: Total assets of Saudi Arabian banks (Ruppert, 2011).

Name of the bank/ year | 2006 | 2007 | 2008 | 2009 | 2010 | Growth rate | Average |

The Saudi Investment Bank | 2006258 | 822185 | 513229 | 521626 | 429335 | -78.6 | 858527 |

Arab National Bank | 2504725 | 2461202 | 2486124 | 2370012 | 1911089 | -23.7 | 2346630 |

Bank Aljazira | 1973951 | 805203 | 222339 | 12407 | 61940 | -96.9 | 615168 |

Riyadh Bank | 2908554 | 3011246 | 2638757 | 3030485 | 2824627 | -2.9 | 2882734 |

Total | 9393488 | 7099836 | 5860449 | 5934530 | 5226991 |

Table2: Table showing the total net income (Ruppert, 2011

name of the bank/ year | 2006 | 2007 | 2008 | 2009 | 2010 | Growth rate | average |

The Saudi investment Bank | 2556266 | 1635345 | 1938087 | 1517158 | 1749258 | 68.4 | 1879223 |

The Arab National Bank | 3855372 | 3956259 | 4135183 | 4493459 | 4503781 | 116.8 | 4188811 |

Bank Aljazira | 2615396 | 1446792 | 1136544 | 1171036 | 276261 | 10.6 | 1329206 |

Riyadh Bank | 4886136 | 5181023 | 5248362 | 5960109 | 5980452 | 122.4 | 5451216 |

Total | 13913170 | 12219419 | 12458176 | 13141782 | 12509752 |

Table3: A table showing the total operating income of Saud (Ruppert,2011).

Name of the bank/ year | 2006 | 2007 | 2008 | 2009 | 2010 | Growth Rate | Average |

The Saudi investment bank | 550008 | 813160 | 1408071 | 7098835 | 1404277 | 155.3 | 1053898.4 |

The Arab National Bank | 1350647 | 1495057 | 1642107 | 1093976 | 2608879 | 93.16 | 1844947.6 |

Bank Aljazira | 543101 | 644626 | 914739 | 2128048 | 214321 | -60.5 | 521895.4 |

Riyadh Bank | 1977585 | 2169777 | 2609605 | 292690 | 3155825 | 59.6 | 2568483.2 |

Total | 4421314 | 5122620 | 6574522 | 6444338 | 7383302 |

Table4: Total operating expense (Faraj et al., 2006).

Name of the bank/ year | 2006 | 20007 | 2008 | 2009 | 2010 | Average |

The Saudi investment bank | 4.9 | 1.8 | 1.0 | 1.0 | 0.8 | 1.9 |

The Arab National Bank | 3.2 | 2.6 | 2.0 | 2.1 | 1.6 | 2.3 |

Bank Aljazira | 12.6 | 3.7 | 0.8 | 0.00 | 0.2 | 3.5 |

Riyadh Bank | 0.3 | 2.5 | 1.7 | 1.7 | 1.6 | 1.6 |

Total |

Table5: A table showing the return on Assets (Akhavein, 2013).

Analysisof the Results

Fromthe tables and the regression analysis, it is clear that the netincome of all of the banks was negative. Moreover, in the year 2010Riyadh Bank registered a negative growth rate of -2.9%. Similarly,Bank Aljazira registered the lowest growth rate of -96.9 it was thelowest among all of the banks. According to the table of the totaloperating income, all of the banks registered high values apart fromthe BJ bank. Comparing the banks concerning the growth of totalexpenses Saudi Investment Bank did register the highest value ascompared to the other banks. It had a percentage growth rate of155.3%. On the other hand, Bank Aljazira still maintained the lowestregistration.

ROA(Return on Assets) is defined as the financial ratio that measuresthe relationship between earnings or profits and the total assets.Furthermore, it assesses the performance of the profitable of thetotal asset of the bank. And according to this study, it was treatedas the measure of the financial performances of banks. From the tableand regression analysis, it is observed that the ROA contain twoelements which are effectiveness and efficiency. Effectiveness canalso be referred to as profit margin while efficiency can be referredto as total assets turnover. The table of ROA reflects on themanagement ability of banks. It implies that their ability togenerate more income profits with the available assets. According tothe table analysis, BJ bank was the best with a percentage of 3.5%.It implies that the management team of the bank had the ability touse the available resources to generate profits.

RegressionModel

Theregression model of the study is as follows:

Y=B_0+B_(1 ) X_1+B_2 X_2+B_3 X_3+B_4 X_4+B_5 X_5+B_6 X_6+B_7 X_7+u

Where,Y is the dependent variable, ROA is the return on asset while ROE isreturn on Equity. The independent variables are represented by (X).

X1=Capital adequacy.

X2=Infllation

X3= Deposit

X4= Earning Quality

X5=Macroeconomic variable

X6= Size of the bank

X7=Loan

B0to B7 are the coefficient of the independent variables.

Explanationsof the tables in Excel

Thetable in sheet 1 represent average asset of each bank versus theaverage net income of each bank. Sheet 2 represent the output of theregression analysis of the average asset versus the average netincome of each bank. Sheet 3 represent the table of average operatingincome versus average expenses. Sheet 4 represent the output of theregression analysis of the average operating of each bank versus theaverage expenses of each bank. Sheet 5 represent the table of theaverage assets, average net income, average operating income, averageoperating expenses, ROA, management efficiency ratio, and assetsmanagement ratio of each bank. Sheet 7 and 8 are the same. Thedifference is that sheet 8 shows the residual output of the analysisin terms of graph. They both represent the regression analysis of theROA and assets management ratio. Sheet 10 represent the sum of Xwhich are the independent variables according to the model. The sumof the variables include average assets, average net income, averageoperating income, and, average operating expenses. However, from thedata there was no ROE so the regression analysis was done using thesum of X versus the ROA.

Explanationof the Excel Results

Accordingto excel, the regression analysis was done on between two variables.The first set of the regression analysis was based on average assetsand average net income. In this case, the average assets of each bankwas used as the independent variables while the average net incomewas being used as the dependent variables.

Regressionanalysis of the model was done in parts depending on the availabledata. In that case, the ROA was taken to be part of the dependentvariable. Since there was data relating to ROE, its values wereconsidered to be zero. The independent variables (X) were representedby the sum of the average income, average assets, average net income,and average operating. According to the result of the excel whileusing average operating income as the independent variable and theaverage expenses for each bank as the dependent variable, thecorrelation is significant at the 0.05 level (2-tailed). R-square isequal to 0.978187. The value of F is at 89. 68966 while thesignificance of F is at 0.010966, t-start at the intercept is0.157371 and P-value is 0.889405. Other elements such as mean square,regression, sum of square, regression factor F, and significance aresummarized in the ANOVA table.

Conclusion

Inconclusion, the regression analysis and table analysis of thecollected data shows that Saudi Arabia is the fastest growing marketfor banking business. The banks are operating in an environment thatappears to be very competitive. Therefore, the analysis predicts thatSaudi Arabia will be a more efficient place for the future bankingbusiness. Banks have also proven to be the most critical part of afinancial system. They play important roles when it comes to theeconomic growth of a given nation. Therefore, the paper focuses onthe banking business as one of the critical parts of an economy.

Basedon the regression analysis and table analysis, it does not imply thatbank with a lot of assets will always have good profitabilityperformance. The regression analysis also shows that there exist ahuge impact on assets management, operational efficiency, and thetotal size of the bank on the efficiency of profitability. From theregression analysis, it was observed that some of the independent donot affect the efficiency of profitability. Moreover, the informationregarding this analysis is also relevant to bank managers. They canuse the information to improve their management policies. As aresult, effective financial system.

References

Almazari,A., & Alumani, M. (2012). Measuring Profitability Efficiency ofSaudi National Banks. Retrieve from:__http://www.ijbssnet.com/jornals/Vpl_3No_14_Special_Issue_July2012/19.pdf__

Anouze,A., & University of Aston in Birmingham, (2010). Evaluatingproductive efficiency: Comparative study of commercial banks in Gulfcountries.

Akhavein,J. D. (2013). Finance and economics discussion series: The effects ofmegamergers on efficiency and prices. Place of publication notidentified: Bibliogov.

Faraj,T. N. A., Bshait, K. A. B., & Muhammad, W. A. A. (January 01,2006). Evaluating the efficiency of Saudi commercial banks using datadevelopment analysis. International Journal of Financial ServicesManagement, 1, 4, 466

Lòˆchel,H., & Li, H. X. (2011). Understanding the high profitability ofChinese banks. Frankfurt, M: Frankfurt School of Finance &Management.

Ruppert,D. (2011). Statistics and data analysis for financial engineering.New York: Springer.

Vinod,H. D., & Ullah, A. (1981). Recent advances in regression methods.New York: M. Dekker.