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29 March 2024

Saudi banks poised for strong recovery

Published
By Nadim Kawach
Saudi banks are expected to rebound sharply into profit growth as domestic credit is expected to pick up and the banks have amassed sufficient provisions against bad debt, a key Saudi bank has said.
 
Lending could further gain momentum in case the long-awaited mortgage law is approved by Saudi authorities this year although this remains unlikely, Saudi American Bank Group (Samba) said.
 
After a period of slow growth, turbulent performance and lower profits by some units, Saudi banks will likely regain vigor as they are well capitalized and their non-performing loans are relatively low, it said.
 
“Having weathered the global financial crisis with comparatively moderate distress, the Saudi banking sector is set for a period of strong growth. The sector is well capitalized, and banks have upgraded their risk management culture in recent years aided by Basel II and now Basel III requirements,” Samba said.
 
“Its stability is further supported by strict regulations, close monitoring and systemic government support… NPLs remain low and provisioning (in most cases) is more than adequate.”
 
Samba’s figures showed Saudi banks are in the main conservative, with the average loan-deposit ratio currently standing at around 85 as opposed to 100 per cent or more in other parts of the Gulf.
 
It said lending by the Gulf Kingdom’s 12 commercial banks was weak through 2010, mainly reflecting a lack of corporate demand.
 
It said the weakness in demand stems, in turn, from the more liquid positions of contractors, who in many cases are receiving advance payments from government and therefore have less call for bridging finance. Another reason is that traders and manufacturers are still working down their inventories built up before the onset of the 2008 global financial crisis, the report added.
 
“Lending growth is expected to gather pace over the next eighteen months as public sector projects continue to be rolled out and as private firms spend more on capital investment,” it said.
 
“Banks have already begun to build their deposit positions in readiness for what is likely to be a period of strong lending growth. We estimate overall lending growth (to public and private sectors) to have reached around six per cent in 2010, and to accelerate to around 18 per cent in 2011 as the private sector recovery gains traction. Lending growth will likely be reined back from mid-2012 onwards as L-D ratios nudge towards 90 and we see a somewhat calmer—but still robust—period of lending growth in 2012-13, averaging around 16 percent.”
 
According to Samba, one of the largest Saudi banks, deposit growth should be supported by a firm pick-up in corporate profits. Combined, this will allow the end-2013 L-D ratio to ease back to around 84.
 
“Our projection assumes that the long-awaited mortgage law will not be enacted during the forecast period. If it was passed, then this would provide a major fillip to consumer lending growth, which has, since 2005, been constrained by salary caps,” it said.
 
“Mortgage lending currently accounts for only around three per cent of GDP in Saudi Arabia compared with over 50 per cent in OECD countries…there is substantial pent-up demand for new housing in the Kingdom, with only around 30 per cent of Saudis owning their accommodation. However, the mortgage law would be no panacea:
 
regulations governing building quality, valuations and the encouragement of a much deeper secondary land market will all be necessary to spur mortgage growth.”
 
Like in other Gulf oil producers, banks in Saudi Arabia have suffered from a slowdown in profits over the past two years because of the crisis, their exposure to regional defaults and low domestic credit.
 
Such developments depressed the net profits of Saudi Arabia’s banks by around 9.6 per cent in the first nine months of 2010.
 
Balance sheets showed the net income of the 12 banks in the world’s dominant oil power dipped to SR20.2 billion in the first nine months of 2010 from SR22.35 billion in the first nine months of 2009.
 
On annual basis, the net earnings slipped to around SR26.12 billion in 2010 from nearly SR26.3 billion, according to data by the Saudi Arabian Monetary Agency (central bank).