Saudi bank provisions top SR20bn

Saudi Arabia’s banks have allocated more than SR20 billion for loan loss provisions over the past two years and this has adversely affected their profitability, according to a key investment firm in the Gulf kingdom.

Provisions in the third quarter of this year surged by nearly 27 per cent to SR3.1 billion compared with the previous quarter and about 30 per cent over the same period of 2009, the Riyadh-based Jadwa Investments said in a study. The study, sent to Emirates 24|7, said heavy provisioning by the Kingdom’s 12 commercial banks had been prompted by their exposure to a severe debt default problem involving two Saudi family conglomerates and recent instructions by the Saudi Arabian Monetary Agency (Sama), the country’s central bank.

“Provisioning for bad loans has jumped in recent years as a result of high profile defaults at some private sector groups and the general slowdown in the economy. Total provisions by the 12 banks since the end of the third quarter of 2008 amount to around SR20.4 billion,” Jadwa said.

“Shortly before the end of the third quarter of this year, Sama announced that it wanted all banks to increase their provisions to cover 100 per cent of non-performing loans by the end of the year. Sama has traditionally taken a fairly tough line on bank provisioning.” According to the study, earnings by the country’s banks, which control the second largest asset base in the Arab region, were below analysts’ forecasts again in the third quarter. In many cases, large new provisions for non-performing loans remained the main drag on profitability, it said.

It said SAMA’s instructions to banks to raise their provisions to a sufficient amount to cover all non-performing loans on their books by the end of the year are intended to make banks more comfortable with accelerating lending. Less need for provisions should improve the financial performance of banks in 2011 and prompt them to ease curbs on credit, the report said.

It showed total net income of the listed banks fell by 18 per cent in year-on-year terms in the third quarter, the fourth consecutive year-on-year decline.  “The main reason for the decline in profits was an increase in the amount of money banks have set aside to cover bad loans.”

Total provisions averaged over 150 per cent of non-performing loans between 2004 and 2008, the study said, adding that high provisions at the onset of the financial crisis have helped banks’ financial performance in the past two years. “It seems that Sama's actions are motivated by the assumption that once banks have covered all existing bad loans they will be prepared to resume lending.”

The study said the absence of reasonably priced bank credit has been a key factor holding back the performance of the private sector over the last two years. It showed total bank credit to the private sector was flat last year and had climbed by only four per cent in the first eight months of this year, following average annual growth of 27 per cent between 2004 and 2008.

“Although setting aside funds as provisions reduces the amount of money banks have available to lend, banks are liquid and their lack of lending stems from unwillingness rather than inability,” it said.

The report also showed total outstanding loans were higher for five banks in the third quarter, with the four Islamic banks leading the way.

“This broadly reflected the pattern of asset growth, with the four Islamic banks among the seven that reported asset growth in year-on-year terms. The lack of lending has also contributed to the decline in banks’ profits, as have very low interest rates and tough competition in the investment banking business.”

The study gave no figures for the banks’ earnings but the balance sheets of all 12 banks showed they dipped to around SR20.2 billion in the first nine months of this year from SR22.35bn in the first nine months of 2009. All but three banks saw their earnings decline as a result of slackening domestic credit and an ongoing drive by the banks to build up provisions.

Analysts said high provisions and low domestic credit were also the main reasons for a 10.3 per cent decline in the banks’ net earnings to SR26.83bn in 2009 from around SR29.928bn in 2008.

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