Saudi Arabia’s banks made higher earnings in 2010 and are expected to maintain strong performance through 2011 as lending picks up and high public spending supports their business, the country’s largest bank said on Thursday.
The Gulf kingdom’s 12 commercial banks netted around SR26.7 billion in profits last year, nearly four per cent above their 2009 income as a result of higher banking fees and lower provision allocations, National Commercial Bank (NCB) said in a study sent to 'Emirates24|7'.
On the other hand, special commission expense recorded a staggering 49.3 per cent drop due to the decline in cost of funds from 0.98 per cent in 2009 to about 0.48 per cent in 2010, the study said.
Core operating revenues remained around SR52 billion, adding a mere SR295 million, growing 0.6 per cent year-on-year in 2010.
The study said it expected a recovery in 2011 for the brokerage business since trading volumes and credit activities have already picked up.
Foreign exchange and other operating income also posted a gain of around 6.6 per cent, benefiting from higher remittances and efficiency.
Operating expenses gained only 2.5 per cent in 2010, compared with 3.8 per cent in 2009, indicative of increased cost control measures.
“We expect this trend to continue for the remainder of 2011 and well in 2012. However, such record-low expense growth can rebound if banks’ appetite for balance sheet expansion gains further momentum,” NCB said.
“Overall, the Saudi banking system remains profitable with plenty of room to grow. As the global risk averseness continues to diminish, Saudi banks cautiously follow suit and deem eventually to expand their loans portfolios….with over SRone trillion deposits on balance sheets, and a range of lending opportunities in an expanding economy, banks are set for a profitable year, as seen in the first quarter with 5.6 per cent growth in the industry’s net income.”
The report showed return on average assets and return on equity for Saudi banks rose to 2.2 per cent and 16.3 per cent, respectively in the first quarter of 2011 from two per cent and 14.7 per cent by the end of 2010.
“Furthermore, massive government spending supported by the recent royal decrees will provide the stimuli for this growth, despite the full impact materializing over time,” the study said.
“Meanwhile, banks need to address the asset liability maturity mismatch and diversify their funding base into dollars as well. In turn, they would be in a stronger position to seize the emerging lucrative opportunities, especially after the fall in provisions, which are already enhancing the income to cost ratio.”
The report showed last year’s provisions were due to loans portfolios, albeit to a slightly lesser scale compared with 2009. Total provisions stood at SR9.9bn in 2010, nearly SR1.3bn less than 2009. Investment provisions plunged by a massive 82 per cent as banks shifted their investments to higher grade securities, the report said. Provisions for credit losses declined by only around 8.9 per cent to SR9.5bn.
“In fact, banks sought after more collaterals and increased their non-performing loans (NPLs) coverage ratio.” Functioning as a security cushion, collaterals increased by SR23 billion to SR168.7bn, a 15.8 per cent growth. As for NPLs, they contracted by 10 per cent to SR23.2bn, amounting to three per cent of gross loans, a better position than the 3.4 per cent in 2009.
“Interestingly, NPLs for the loans category classified as ‘Others’ have soared during the past three years by 23.5 per cent, 80.5 per cent and 46.1 per cent respectively, and we do believe troubled family conglomerate businesses fall under this category,” the study said. “NPLs in 2009 were mainly in commerce, others, and manufacturing portfolios, with a combined share of 70.3 per cent. However, banks have sufficiently mitigated specific and general portfolio risks by increasing their industry-wide coverage ratio to 115.7 per cent in 2010 from 89.8 per cent in 2009.”