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Saudi Arabia’s banks chopped nearly SR7.6 billion off their financial resources for bad debt provisions in the first nine months of 2010 to maintain an intense drive to bolster their reserves following a local debt default crisis.
The country’s 12 commercial banks have already allocated nearly SR36 billion for non-performing loans (NPL) provisions through 2009 and in the previous few months that followed the 2008 global fiscal distress.
Figures by National Commercial Bank (NCB), the largest bank in Saudi Arabia, showed nearly SR25.8 billion was allocated for NPL provisions in 2009 alone.
“In contrast to 2008, whereby investment provisions took center stage, the provisions by the end of 2009 and the third quarter of 2010 were largely driven by deteriorating credit quality, apparently warranted after the industry’s NPLs ratio surged to 3.3 from 1.4 per cent,” NCB said in a study sent to Emirates 24/7
It said the credit provisioning cycle in 2009 provided a deeper insight into what lays beneath the balance sheets of those banks.
“In particular, NPLs and provisions that are allocated to such delinquent loans helped in highlighting credit stress at the sectoral level. At the same time, data pertaining to the past due but not impaired loans reflected upon the ‘pipeline credit risk’, and in our opinion, was a prelude to the high provisions witnessed in the third quarter of last year,” the study said.
The report showed NPLs leaped by nearly 146 per cent from around SR10.5 billion in 2008 to SR25.8 billion in 2009.
Most of the NPLs were concentrated in the commerce, manufacturing and construction portfolios, with their shares standing at 44, 14, and 11 per cent.
As expected, this sudden surge in NPLs forced the banks to allocate more credit provisions, rocketing by 215 per cent from SR3.3 billion to SR10.4 billion.
“Assessing the past due but not yet impaired loans signified an elevated degree of stress at most banks, as past due loans between 60-90 days and more than 90 days had registered annual growth rates of 129 and 31 per cent, respectively, indicating the increased probability of default and the difficulty in collection.”
It showed Saudi banks allocated SR7.6 billion for provisions during the first nine months of 2010, an increase of nearly 29 per cent over the third quarter of 2009.
It also showed banks’ incremental provisioning has risen from SR2.2 billion and SR2.4 billion in the first and second quarters, respectively, to SR3.1 billion in the third quarter, with the central bank stipulating banks to set aside more provisions, and the NPL coverage ratio7 to approach 150 per cent, given that increased NPLs has reduced the ratio for most banks to below 100 per cent.
“The improvement in valuations in capital markets globally has not only led to increased gains on investments, but also resulted in no additional provisioning for the investment portfolio on an industry-level.”
Turning to profits, the report showed that banks recorded a net income of around SR20.3 billion in the first nine months of 2010, down by 8.5 per cent compared with the earnings during the first nine months of 2009.
“The decline was a result of higher provisions, a plunge in trading income, and a decline in Net Special Commission Income (NSCI),” it said.
“After more than two years of global financial crisis, the Saudi banking sector has emerged almost unscathed. But like many banking systems, during the turbulent period, both investment and loan portfolios of Saudi banks were implicated. As a result, all Saudi banks have taken steps to reinforce their fundamentals by allocating provisions and cutting costs, while reaching out to customers.”
The report said it saw a pick-up in banks’ lending in the fourth quarter of 2010. It noted that corporate sector demand for funding expanded by 2.6 per cent.
“Will Saudi banks have enough resources to deploy in 2011 and beyond after registering historically low levels of lending in 2009 and 2010… the answer is clearly a yes, given the fact that capacity utilization is unstrained, with loans to deposits ratio falling from around 83.5 per cent in 2008 to 77.5 per cent in the third quarter of 2010. This capacity manifested itself in the substantial increase in net foreign assets and excess deposits with SAMA, amounting to around SR106.6 billion and SR65.3 billion in the third quarter respectively,” it said.
“Therefore, it is not the capacity question that matters, but the appetite to extend credit lines to existing credit holders and also to finance new clients.”
It said the accommodative monetary policy, which was aimed to spur lending over the last two years, with SAMA implementing three consecutive cuts in the benchmark reverse repo rate from 1.5 to 0.25 per cent, last of which in June 2009, however, mainly contributed to amassing of excess reserves at the central bank despite the low rate or return.
“On the demand side, an estimated $690 billion worth of projects planned and underway by the end of September 2010 are already tapping into conventional credit and most likely will create ample opportunities for banks.”
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