First-half results of Saudi banks showed a general improvement in bottom line figures for nearly all domestic banks compared to both first quarter 2008 results and the performance achieved in the corresponding period of last year.
The Gulf's largest banking sector is making steady if not spectacular progress from the disappointing year of 2007.
Net profit improved by six per cent against the first half of 2007. It was also a higher increase than the two per cent achieved in the first quarter of 2008. Asset growth is continuing to drive earnings, feeding off the still solid growth in the domestic economy. Total assets grew by 16 per cent for the six months. Saudi banks' balance sheet growth is being driven by loan and advances expansion.
Sector loans increased by a strong 22 per cent for the first half of the year. High growth is being achieved despite the restriction on loan growth enforced by Saudi Arabian Monetary Authority (Sama) in an effort to restrict any problems going forward, particularly on the retail side. Loan expansion is broadly based but there remains noted big ticket items still occurring together with medium-sized enterprise growth and consumer financing growth.
Saudi banks' loan growth is feeding into higher net special commission income, or interest income. This grew by a noted 17 per cent in the first half of 2008. However, despite the increase, net interest margins were down marginally as yields saw a contraction from last year. The reduction in its reverse repurchase rate, the raising of banks' reserve requirements, and the increasing of the rate on time savings deposits for customers has added to margin pressure. Customer deposits were up by 12 per cent. Liquidity remained sound as did capital position.
Returns for the overall Saudi banking sector were steady in the first half of 2008, with a return on assets of approximately 2.9 per cent.
Samba was one of the few Saudi banks to record a lower net profit figure for the first half of 2008 against the same period in 2007. Although only a small decline, the bottom line was affected by a fall in non-commission income. Fees from banking services recorded a fall of 33 per cent, which was attributed to the reduction in income from share trading and fund management. Provisions for credit losses were also higher. Saudi's second largest bank is looking at expanding in both the UAE and Qatar in order to diversify earnings sources.
Saudi British Bank saw a strong performance period on period. Net profit of SR1,552 million (Dh1,520m) for the six months ended June 30, 2008, was 24 per cent higher over the first half of 2007. The performance was driven by the loan growth of 60 per cent. This level of growth has offset the impact of falling rates. In addition, strong performance from SBB's cards, trade, mutual funds, treasury and IPO-related businesses has boosted income streams. SBB recently announced the formation of SBB Insurance Services, which will complement its Takaful insurance.
Saudi Hollandi Bank also put in a noted performance in the first half of 2008 with a net profit of SR609m, an increase of 59 per cent over the same period last year. SHB achieved this result through growth and improved efficiencies. Net special commission income increased by 22 per cent in the period. The bank's return on average assets rose from 1.9 per cent to 2.2 per cent.
All the main Saudi banks have strong brand names and franchises and are looking for further asset expansion from domestic operations to drive income further. Many banks are also looking at opportunities outside the Kingdom to help maintain margins and diversify income sources. The increasing wealth generated by very high oil prices will help banks to increase their assets and loans.