Saudi banks head for record profits in 2012

Domestic credit surges as banks cut provisions and economy picks up

Saudi Arabia’s banks netted more than SR28 billion in the first 10 months of 2012 as lending continued to rebound and banks largely eased a provisioning drive triggered by a severe domestic debt default crisis three years ago.

The figures by the Saudi Arabian Monetary Agency (SAMA), central bank, indicated the Gulf Kingdom’s 12 banks could be heading for their best financial year following negative profit growth during 2009-2010.

Releasing its monthly report this week, SAMA put the total net earnings of the banks at SR28.75 billion during the first 10 months of 2012, below the full year profits of SR30.9 in 2011 but above the 2010 net income of about SR26.1 billion.

Analysts said that in case banks earned SR six billion in the remaining two months of 2012, they could record their highest profits and bear the previous 2006 record income of more than SR34 billion.

The analysts attributed the high earnings this year to a surge in domestic credit as banks are slowing down their bad debt provision build up and taking advantage of an upswing in the economy and in public sector projects.

The surge in domestic credit followed a sharp slowdown in previous years in the wake of the 2008 global financial distress and the ensuing debt default problem by two Saudi family businesses.

Slackening domestic credit allied with a rise in provisions to trim Saudi banks’ net profits to around SR26.8 billion in 2009 from SR29.9 billion in 2008. Profits again slipped to SR26.1 billion in 2010 before bouncing up to SR30.9 billion in 2011, their highest level since 2006.

SAMA’s figures showed banks’ claims on the private sector swelled year-on-year by about 14.6  per cent in October 2012 compared with 10.7 per cent in 2011 and only around 5.5 per cent in 2010. Credit growth was negative in 2009.

Month-on-month, bank credit to the private sector “continued to expand at a healthy rate”, the Riyadh-based Jadwa Investments said.

A notable trend is the strong expansion in medium-term credit which reflects the banks participation in financing infrastructure and housing projects undertaken by the private sector, it said in a study.

“The strong performance of banks this year is mainly due to the expanding credit to the private sector, lower provision this year as well as low funding cost,” Jadwa’s senior economist Fahad Al Turki told Emirates 24/7.

Recovering credit allied with higher commission and investment return to boost Saudi banks’ net profits by nearly 18 per cent to around SR30.9 billion in 2011 from nearly SR26.1 billion in 2010.

The surge marked a return to profit growth by the banking sector in the largest Arab economy after a decline in the previous four years.

Saudi Arabia’s banks netted their highest profits of SR34.6 billion in 2006 before the income slumped to SR30.2 billion in 2007.

During the two years that followed the domestic default crisis, Saudi banks chopped off a large part of their income to build up provisions against non-performing loans, with an estimated allocation of nearly SR20.4 billion.

Saudi banks have the second largest asset base in the Arab region after UAE banks, with their combined assets standing at SR1.69 trillion (Dh1.67 trillion) at the end of October against about Dh1.76 trillion for UAE banks.

In a recent study, a Saudi investment firm said Saudi banks are performing better because of an upturn in lending activity and the operation of two new banks. 

“There are two main reasons for the rise in the banks’ profits last year… first, provisions for bad debt were much lower than in the previous few years and second, lending grew at a fast pace since 2008,” Jadwa Investments said. 

“Another fact is that in 2007 Al-Inma Bank did not exist and Bank al-Bilad was just getting started. Now both banks are making good profits, which adds to the total for the sector,” the Riyadh-based firm added.


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