Fabrice Susini

TBY talks to Fabrice Susini, CEO of Saudi Real Estate Refinance Company (SRC), about the local market, attracting foreign capital, and strategic goals for the firm.

What key challenges is SRC facing while continuing to consolidate its operations in the local market?

We initially aimed for over SAR40 billion in deployments by the end of 2023, having anticipated that banks and originators would be eager to offload portfolios and seek refinancing from SRC given market conditions, rising rates, and liquidity concerns. While this trend is taking place, it is progressing slightly slower than expected. Our balance sheet is steadily growing, driven by our role as an enabler in a market with relatively limited players. But unlike most developed markets with numerous competitors, a handful of banks constitute majority of the local market in Saudi Arabia. We continue to advocate for a diverse and competitive market as it is beneficial for all stakeholders across the housing ecosystem and beyond SRC’s mission. While we maintain close relationships with all the banks and continue to encourage and incentivize refinancing activities, the decision to sell or transfer home financing remains entirely within their control, influenced by their strategies and objectives. While the market’s volume has significantly increased compared to 2017, the number of market players has dwindled. This concentration is particularly evident with the mergers between SABB and Alawwal and between NCB and Samba, resulting in fewer domestic players. Looking at other markets with a similar profile is telling: in the Dutch market for example, there are a limited number of banks (for a much smaller population), though it is highly diversified due to various originator types competing. In Canada which is closer in terms of population size, the market is very diversified as well, beyond the limited number of banks. In contrast, the US has a large number of banks, but the home financing market is driven by brokers, alternative lenders and community banks, resulting in hundreds of players.
We are collaborating with banks, and they are progressively recognizing the value of proactively managing their balance sheets. The market is aware of its impending importance, and analysts have extensively discussed the situation, with some concerns that need addressing.

How are you working toward entering the international market to attract foreign investors to support SRC’s market expansion?

We are currently engaged in several discussions at the highest level, as we seek opportunities to continue supporting our market expansion, factoring the prevailing profit rate environment. Our company anticipated that 2023 will surpass both 2022 and 2021 in terms of performance even though at a slower pace, still calling for increased liquidity to be channeled. For instance, we are working on addressing international concerns and potential appetite through developing structured products aimed at bolstering the Kingdom’s capital markets attractiveness for foreign investors. These initiatives revolve around real estate refinancing through securitization and one day through covered bonds. As we continue to grow, questions about SRC 2.0 and our growth strategies will be paramount. Our main focus is firmly set on internationalization, and we are actively working towards entering the international market to engage with foreign investors under two main frameworks. This is work in progress and the process has undertaken significant preparatory work. So far, we operate as a quasi-sovereign issuer with the Kingdom’s guarantee, and as we will access the international market, we are working collaboratively to make the necessary adjustments and enhancements to that guarantee. The process, while thorough and involving coordination across various government levels, has been fruitful. Our second focus was on the structural finance market to kickstart securitization in the Kingdom. Aligning various stakeholders for such a significant milestone is a thorough process and we are planning on delivering the inaugural transaction in 2024. These aspects are essential because our company’s success is partly attributable to environmental changes, and we are increasingly engaged with banks, financing to greater demands on our intervention. Expanding refinancing capabilities and access to investors through various channels is imperative. This is vital not just for SRC, but also to ensure ongoing support for the development of the Kingdom. We are a private entity and our role is to facilitate. The best way to achieve that is by ensuring we have the products and consistent access to liquidity. We have a strong pipeline of agreements and purchases, with an upcoming engagement in the domestic market in the coming weeks. If our preparations align, we expect to tap into the international market very soon. Going international is paramount for diversifying our access to liquidity and expanding our support for the primary market.

Looking ahead, what are the key strategic objectives for SRC in the coming year?

Internally, due to our growth, we are undergoing a continued transformation in our operations, focusing on automation and digitization. Managing a portfolio of SAR500 million with a few thousand contracts is different from managing one with 70,000-75,000 contracts. Volumes are calling of an upgrade. Then to efficiently handle asset purchases and refinancing processes, we are prioritizing system upgrades and automation to reduce costs and possible errors. Streamlining information exchange among us and between originators, regulators, and rating agencies will free up our team for value-added tasks, particularly focused on risk assessments. The third aspect falls between our internal operations and the external landscape. Historically, our financing journey was straightforward, primarily involving fixed-rate asset purchases and the issuance of predominantly fixed-rate Sukuks. This approach remains our intention internationally. However, we recognize the need for flexibility in certain circumstances. We are actively enhancing our ALM, pricing process, and risk management tools, enabling us to further expand our collaborations with banks, helping them manage profit rate risks associated with their originated portfolios. Enhancing and diversifying our refinancing products calls for upgrading our ALM tools. We issue Sukuk with various maturities, including both fixed and floating rates. With proper tools and dashboards, we can effectively monitor and manage the risks we face. And from my perspective, the most significant risk for a refinancing company is not primarily credit risk—that is well managed. Home financing, when properly handled and excluding subprime profile, are inherently safe due to their granularity. The key is not to venture into subprime lending. Companies and banks can ensure their success by effectively managing home financing, emphasizing the importance of cash flow and repayment analysis. The more complex challenge with home financing and similar assets is managing profit rate risk. Fixed-rate assets inherently carry duration risk, which requires careful management. Making errors in exposure to profit rate and liquidity risks is a different and more challenging matter. While credit risk plays a role, the key to stability is effectively managing the balance sheet. It’s noteworthy that a loss of SAR500 million due to credit risk would result from considerable home financing defaults or significant macroeconomic events. In comparison, improper balance sheet management can result in similarly substantial losses without such extreme conditions. It is easy to incur substantial losses due to misjudged positions. As we expand our funding sources and grow our balance sheet with a more diversified range of assets, we will continue to develop and refine our risk assessment and management tools. Having observed the challenges faced by numerous banks, often linked to balance sheet management, I understand the critical importance of managing liquidity and profit rate risks. Our focus is on enhancing our existing tools to gain a better understanding of our risk exposures in order to proactively hedge when needed and explore more imaginative positions, always with a solid grasp of risk and control.