Saudi banks have totally recovered from financial crises over the past few years and are projected to net higher earnings in the next years after returning to profits growth in 2010-2011, a key Saudi bank has said.
“The Saudi banking system remains in robust shape and the outlook is encouraging. The system weathered the 2008-2009 financial crisis without undue distress, and is well capitalised with an average capital adequacy ratio of some 16 percent,” Saudi American Bank Group (SAMBA) said.
Referring to the debt default crisis that jolted two Saudi family businesses in 2009, it said the crisis had a more pronounced impact on the system, since these led banks to examine their portfolios more closely, and where necessary to help clients to restructure their debt profiles.
As part of this process, clients became more reticent about taking on fresh debt and the 2009-2010 period was one of weak lending growth, it said.
“This process has now been completed, and banks re-grew their loan-books during 2011. In November 2011 year-on-year lending growth was running at around 10 percent, up from some 6 percent in 2010,” SAMBA said.
“Nevertheless, lending growth in the Kingdom remains well below the peaks registered in the middle part of last decade, when credit to the private sector regularly exceeded 30 percent growth.”
The report said the slowdown reflects two main structural factors. The first is that the government and public sector firms pay in a much more timely fashion than previously and the private contractors therefore have less call for bridging finance. The second is that government salary caps introduced in 2005 have kept the lid on personal lending, it said.
But the report noted that there has been additional scope for asset-building beyond traditional corporate finance.
It said the distress in the European banking sector has seen many European banks shed global assets in a bid to build capital.
“The Gulf has been no exception, and Saudi banks have been busy acquiring Gulf-based assets from their European peers—usually of good quality and at favourable prices. This process has yet to run its course (possibly intensifying if the eurozone debt situation degenerates) and provides the basis for strong profit growth in the next two years and beyond,” SAMBA said.
“The domestic project market is also lively, though here competition is keen, and margins are thinner. On the retail side, exponential profit growth could be generated by the mortgage market, where pent-up demand is substantial. However, participants continue to await the final approval of the mortgage law, which has been pending for well over a decade.”
SAMBA forecast overall lending growth at around 12 percent in 2012, slightly higher than the estimate for 2011, fuelled largely by a buoyant project market and reasonable levels of corporate investment.
It said lending growth should then gather pace in 2013 to reach around 16 percent as activity in the non-oil economy firms. “Growth would be brisker were the mortgage law to be passed. “ Saudi banks, which control the second largest Arab asset base after those of the UAE, recorded an 18.4 percent increase in net profits to nearly SR31.6 billion ($8.4 billion) in 2011, according to their balance sheets.
In a recent report on the banking sector, Saudi Arabia’s largest bank, National Commercial Bank (NCB) said core banking activities in the Gulf Kingdom continued to gain on a moderate pace as net special commission income increased by 4.7 per cent on an annual basis.
“But profits were mainly due to higher efficiency levels driven by the risk averse stance of the banking system,” NCB said.
Like in other Gulf oil producers, banks in Saudi Arabia have been jolted by the 2008 global fiscal distress and regional debt default problems.
The crises prompted most banks to step up bad debt provisioning at the expense of their net earnings, reversing years of high profits during the oil boom before the 2008 turmoil. But many banks started to recover as they cut provisions and gradually relax ed curbs on domestic credit.
After a difficult period in 2009, Saudi banks reported a return to profit growth in 2010, when their net earnings rose by around four per cent to SR26.7 billion as a result of lower provisions and higher banking fees.