Saudi Arabia’s banks are expected to recover in 2011 as domestic economic conditions begin to improve and the banks have built up enough provisions against non performing loans, a local investment firm has said.
Profits by the Gulf Kingdom’s 12 commercial banks have been stifled over the past three years by soaring non-performing loans because of the 2008 global fiscal distress and regional debt default problems, the Riyadh-based Jadwa Investments said in a study sent to Emirates 24/7.
Between the end of 2008 and end of 2010, non-performing loans of listed banks jumped by nearly SR10.2 billion or around 132 percent after being relatively stable over the previous five years, its figures showed.
Total bad loans of listed banks jumped from a low of 1.1 per cent of overall outstanding loans at the end of 2008 to 3.2 per cent at end of 2009, the highest level since 2003, before dropping to 2.7 per cent at end-2010.
The study said massive provisions for credit losses have distorted the earnings of banks over the past three years following years of high earnings.
“We think that banks have now cleaned their loan portfolios and that the share prices of banks are generally well positioned for a healthy recovery this year.
If listed banks’ financial performance was unchanged on last year, but provisions for credit losses normalized, earnings per share would be 35 per cent higher this year than in 2010. With additional profit growth, banking sector earnings per share should grow by 42 per cent in 2011,”the study said.
“Owing to improved economic conditions we think that the amount of new non-performing loans should fall significantly. Furthermore, it appears that bulk of the provisioning for the debt built up over the previous few years is complete.”
The report showed provisions for credit losses covered 109 per cent of bad loans at the end of last year, compared to 86 per cent at end-2009, which was the first year the loan-loss coverage ratio was below 100 per cent since 2001.
“Historically, loan-loss coverage for the sector has been much higher, averaging around 153 per cent between 2004 and 2008. However, the Saudi Arabian Monetary Agency (SAMA) has stated that it is content with the total level of provisioning and that it is keen to see banks step up their lending,” it said.
“Simply stripping out the effect of the large provisions for credit losses would have an important impact on bank profits. Applying the average level of provisioning from 2000 to 2010 earnings per share would mean much greater profits across the sector.”
The report noted that dealing with rising non-performing loans has had a significant impact on the financial performance of listed banks in recent years. It said that provisions meant that net income of the sector was SR21 billion lower over 2008 to 2010 than would otherwise have been the case. For 2010 alone, provisions for credit losses reduced the profits of the sector by 26 per cent.
It said the banks’ capital has also come under pressure from the heavy provisioning over the last two years. From an average of over 20 per cent between 2000 and 2008, growth in bank shareholders’ equity declined to eight percent over the past two years. its figures showed.
“A few banks have already replenished their resources by increasing capital. Statutory reserves were also affected, growing by an average of 11 per cent over the last two years, compared to growth of 15 per cent for the whole of the past decade….nonetheless, the high tier one capital ratios indicate that the Kingdom’s banks enjoy comfortable capital adequacy and have plenty of room to sustain bad loan write-offs before needing to raise new capital,” it said.
“Dividend distributions were also affected, declining by 5.4 per cent last year, as banks retained cash to shore-up capital. As cash distributions tend to lag bank results, we think lower dividends are likely this year too. Banks could increase their dividend distributions to support their share prices as they did in 2006 and 2008, though this may come at the expense of slower capital growth.”
SAMA’s figures showed the net income of Saudi banks stood at around 26.1 billion in 2010, slightly lower than the 2009 earnings of nearly SR26.8 billion. The profits totalled SR29.9 billion in 2008 and peaked at SR30.2 billion in 2007.
Besides expectations of lower provisions, experts believe the banks’ performance would improve because of higher economic growth, which is forecast at more than five per cent in 2011. Another factor is a projected pick up in lending following a slowdown of nearly two years because of the 2008 global fiscal crisis and regional debt default problems.
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