Gulf’s biggest banking sector sees returns fall


After some years of strong returns, the growth in net income for the Saudi banking sector is slowing.

The Gulf’s biggest banking sector by all measures saw returns fall in 2007 and indications are that this trend will continue in 2008.

First quarter earnings expectations are subdued, as is the forecast for the rest of the year.

Riyad Bank, Saudi Arabia’s fourth largest bank, recorded its slowest profit growth for some time in the first quarter of 2008.

Riyad’s net profit rose by just 5.4 per cent compared with the corresponding quarter of 2007. Income from brokerage activities continues to come under pressure. Long the most profitable sector in the Gulf, this accolade is currently coming under pressure.

In 2007, overall net income for GGC banks rose by around six per cent.

However, the Saudi banking sector recorded a decline of more than 12 per cent. Nearly all Saudi banks saw weaker net income in 2007.
The Saudi banking system achieved a return on assets of three per cent in 2007, still high against most other GCC banking sectors where the average is 2.4 per cent, but Saudi’s return is down sharply from four per cent the previous year. In 2008, the return on assets is forecast to be lower by 2.6 per cent. Saudi banks’ return on equity was 23.5 per cent in 2007 against 30.7 per cent previously.

Equity returns are expected to fall to around 20 per cent this year – more in line with the overall GCC banking average.

Assets have continued to grow up to now for Saudi banks, rising by a high 35 per cent in 2007, but this growth rate will pull back in 2008, not least because of more conservative direction from the Saudi Monetary Authority to reign back lending. Equity also continues to expand, thus supporting the overall very well capitalised nature of balance sheets.

But the more pessimistic earnings forecast have already seen Saudi bank shares being hit on the Saudi Stock Exchange. For the year, the main Saudi bank shares have been priced down sharply; Al Rajhi Bank’s share price is down by 27 per cent, Samba 39 per cent, and both Saudi Fransi and Arab National Bank down by 30 per cent for the year to date. The Saudi market overall is down by 14 per cent.

Profit is being hit by lower income from Saudi stock market activity and fund management operations due to lower transactional volume and hence weaker commissions and fees. Higher credit provisions are also affecting some banks together with realised losses in investment portfolios. Lower loan growth in 2008 will also impact earnings, not least through margin pressure.

To diversify income streams and asset bases, a number of Saudi banks are venturing into new markets, such as Malaysia and Turkey.
However, meaningful contributions to group net income will take some time. Domestically, they are looking to strengthen areas such as Islamic banking and investment banking to boost income.

First quarter results for all Saudi banks will be crucial in shaping the outlook for the remainder of the year.

Results are, however, expected to be lack lustre.

Picture by AFP