Provisions stifle Saudi banks’ performance

Saudi Arabia's banks are expected to perform better this year but are unlikely to return to full recovery because of slow credit activity and heavy bad debt provisions, a key bank in the Gulf Kingdom said Wednesday.

The 12 commercial banks in the world's top oil exporter narrowly escaped the damaging effects of the global fiscal turmoil last year but they suffered from a setback in the first quarter of 2010, the Saudi American Bank (SAMBA) said.

In a 14-page study on Saudi economic and financial sectors, SAMBA said it saw no sign that the Saudi banking sector, the second largest in the Arab world after that of the UAE, is returning to real growth..

"Notwithstanding the dislocations in global financial markets, the Saudi banking sector remained largely untroubled during 2009 as demonstrated by very modest declines in profitability," said SAMBA, one of the largest Gulf banks.

"In fact, the sector's net income position only worsened significantly in the first quarter of 2010, at a time when the other sectors saw their positions improve."

According to the study, the steady performance of the banks in 2009 largely reflected what it described as a strong showing from overseas investments, which offset sharply lower yields from domestic assets.

"The dip in profits in the first quarter of 2010 reflects increased provisioning in the wake of debt problems among some major family conglomerates during 2009."

Although they increased sharply in April, the banks' net earnings in the first four months of 2010 were nearly 15 per cent below the profits in the same period of 2009. Balance sheets showed the banks' combined net income totaled around SR9.633 billion in the first four months of this year compared with about SR11.3 billion in the first four months of 2009.

The banks' exposure to the financially troubled Saudi Saad and Algosaibi family businesses have forced them to chop off a large part of their income to build up provisions against non-performing loans, with an estimated allocation of more than SR10 billion through 2009 alone.

Analysts said the large provisions and low domestic credit were the main reason for a 10.3 per cent decline in the banks' net earnings to SR26.83 billion in 2009 from around SR29.928 billion in 2008.

"The sector's performance in the current period has been more muted, with little deterioration during the height of the recession, but no sign yet of a rebound to growth. Judged on asset growth, the sector should perform better this year". Banks are highly liquid and are looking to grow their loan books albeit cautiously, while private sector demand for loans is gathering pace, SAMBA said.

"A stronger stock market performance would also help to boost advisory income. Nevertheless, with abundant liquidity and growing competition, loan spreads are being squeezed again, and this is likely to weigh on profitability this year."

In a study last week, a Saudi investment company expected a 10 per cent rise in the banks' profits this year because of better return on foreign investments, a pick up in credit and a slowdown in provisioning.

"Banks' net earnings will be dependent on provision levels, but net income growth of 10 per cent or more in the sector is still possible. "The retail sector is showing strong organic net income growth, with its net income growing by around 27 per cent in the first quarter of this year," said NCB Capital, an affiliate of Saudi Arabia's largest bank, National Commercial Bank.

Official figures showed credit by the banks sharply rebounded in the first four months of 2010 after stagnating in 2009.

From around SR734.2 billion at the end of 2009, total credit grew by nearly two per cent to SR750.6 billion at the end of April. Credit growth through 2009 was near zero compared with a massive 27.2 per cent through 2008.

To offset slackening domestic lending, Saudi banks have turned abroad, pumping a record SR48 billion into foreign markets through 2009.

The figures by the Saudi Arabian Monetary Agency, the country's central bank, showed the banks are pursuing that drive through 2010, with their consolidated investments abroad gaining nearly SRsix billion to reach SR118.3 billion at the end of March before swelling to a record SR119.6 billion at the end of April.
 
 

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