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Saudi bank profits at SR24.2 bn in 11 months

The only banks that recorded higher income were Banque Saudi Fransi, Al-Bilad Bank and National Commercial Bank (NCB), the largest bank in Saudi Arabia.

By Nadim Kawach

Saudi Arabia’s banks earned nearly SR24.2 billion during the first 11 months of 2010 and their net profits are projected to be almost equivalent to those in 2009, official figures showed on Thursday.

Despite the improvement in domestic economic conditions because of higher oil prices, the performance of the Gulf Kingdom’s 12 commercial banks has remained stifled by low lending and accumulation of loan loss provisions.

The banks gained around 2.22 billion in November to boost their net earnings to SR24.218 billion during the first 11 months of this year, showed the figures by the Saudi Arabian Monetary Agency (SAMA), the country’s central bank.

Bankers expect the total net profits to be close to those achieved in 2009, when they stood at around SR26.83 billion, the lowest since 2005.

“There is a consensus that the profits of banks this year will be more or less as in 2009…banks have taken much of their resources for provisions and are still very tight in their lending activity,” said an economist at a Saudi bank.

The 2010 and 2009 profits will be much below the earnings of SR29.9 billion recorded in 2008 and the SR30.2 billion earned in 2007. The combined profits of Saudi banks soared to one of their highest levels of SR34.6 billion in 2006, when their credit operations were at one of their peaks.

Lower lending and massive loan loss provisions have already depressed the net profits of Saudi banks by around 9.6 per cent in the first nine months of 2010 despite earlier forecasts about better performer through the year.

Balance sheets showed the consolidated net income of the 12 commercial banks in the world’s dominant oil power dipped to around SR20.2 billion in the first nine months of this year from SR22.35 billion in the first nine months of 2009.

All but three banks saw their earnings decline as a result of slackening domestic credit and an ongoing drive by the banks to build up provisions following the 2008 global fiscal turmoil and regional debt default problems.

The only banks that recorded higher income were Banque Saudi Fransi, Al-Bilad Bank and National Commercial Bank (NCB), the largest bank in Saudi Arabia.

The nine-month decline followed earlier forecasts by the Saudi American Bank Group (SAMBA) that Saudi banks, which control the largest asset base in the Arab world after the UAE, would perform better through 2010.

“Notwithstanding the dislocations in global financial markets, the Saudi banking sector remained largely untroubled during 2009 as demonstrated by very modest declines in profitability,” SAMBA said in a study in mid 2010.

“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.”

Saudi banks’ exposure to the financially troubled Saad and Algosaibi family conglomerates 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 nearly SR20.4 billion over the past two years.

Provisions in the third quarter alone surged by nearly 27 per cent to SR3.1 billion compared with the previous quarter and about 30 per cent over the same period of 2009, according to the Riyadh-based Jadwa Investments.

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 in 2009.

“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 month, 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 in the second half and a slowdown in provisioning.

“Banks’ 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 NCB.