Banks provision for loan loss

Saudi Arabia's banks are pursuing plans to bolster their financial position by allocating more funds for loan loss provisions which increased by around 17.5 per cent to SR300 billion at the end of 2012, according to Saudi Arabia’s largest bank.

The Gulf Kingdom’s 12 commercial banks appear to be adopting a “better safe than sorry” policy in their financial operations to strengthen their position after they were jolted by the 2008 global financial distress and the ensuing bad debt crisis that hit two major Saudi business conglomerates in 2009.

The banks are buoyed by a surge in profits in 2012 and in the first months of 2013 thanks to a surge in domestic credit and investment.
“Better safe than sorry’ can sum up the provisioning process by banks during last year,” National Commercial Bank (NCB) said in a study sent to Emirates 24/7.

“In order to shield themselves from bad debts and avoid risky repercussions when financing businesses, local banks have been increasing the collaterals held against loans. Industry-wide collaterals in the form of real estate, equity, cash, and other forms of financial securities against loans have increased to around SR237.1 billion, a gain of nearly 17.5% during 2012. Due to lack of full disclosure from all banks in our coverage universe, we believe the total figure have reached over SR300 billion last year on a continuation of amassing assets.”

The report noted that a tendency by the Saudi Arabian Monetary Agency (SAMA), central bank, to encourage banks to reshape their portfolios and balance sheets in order to withstand external shocks has been “very apparent.”

It said the initiative to mitigate risk by directing banks to maintain a Non-Performing Loans’ (NPL) coverage ratio of 150% continue to be the defining pillar of SAMA’s supervisory framework. It showed that during 1Q2013, the cover-age ratio edged higher to 147.4% following 2012’s 145.1%, a substantial improvement over 2009 at 89.8%.
“Given that Saudi banks have implemented more effective risk control measures in the aftermath of the 2008 global financial crisis, recently, the improvement in NPLs has become rather limited,” the report said.

It showed the commerce sector holds a share of 30.6% of total NPLs, albeit falling by 24.3% in 2012 from the previous year.
The consumer and services sectors’ NPLs increased by 97.5% and 44.3% annually, accounting for a combined share of 30.0% of total NPLs.
By the end of the first quarter of 2013, NPLs contracted by 3.8% as banks opt to stricter risk rating criteria even though credit levels have been expanding steadily, NCB said. The figures showed NPLs amounted to 2.6% of total loans in the first quarter of 2013. “We expect the NPLs to inch higher by the end of the year given the double-digit growth in loans, yet it will remain around the SAR20 billion mark.”

Turning to performance, the report showed Saudi banks recorded a gain in profitability levels as net income increased by 11.2% in 2012.

“Moving forward, the banking system managed to expand their net profits during the first quarter of 2013 by 3.7%, supported by strong credit growth.”

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