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The net income of Saudi Arabia's banks slumped by more than 20 per cent in January as they appear to have maintained a tight lending position triggered by the global fiscal crisis and debt defaults by two local family firms.
Figures released by the Saudi Arabian Monetary Agency (Sama) yesterday showed the net profits of the Gulf kingdom's 12 commercial banks dived to around SR2.85 billion (Dh2.82bn) in January 2010 from SR3.58bn in the same month of 2009.
The decline comes amid strict lending policies adopted by Saudi banks, but economists believe profits will pick up in the coming months and the country's banks will end the year with better performance than in 2009.
"The outlook for banks in Saudi Arabia and other Gulf countries in 2010 is more promising as governments spend increasing oil revenues and capital inflows improve, although bank access to international wholesale funding markets may remain tight until the second half of the year," said Andrew Gilmour, Senior Economist at Samba, one of the largest banks in the kingdom.
Despite massive provisions against bad debt through 2009, estimated at more than SR10bn, the net earnings of Saudi banks slipped by only around 0.3 per cent last year compared with a decline of nearly 12 per cent in 2008 as a result of a sharp fall and losses by some banks in the fourth quarter of that year.
Besides high provisions, a sharp slowdown in domestic credit has been blamed for the decline in the profits of some Saudi banks last year.
Economists expect lending by Saudi Arabia's banks, which control the second-largest assets in the Arab World after the UAE, will remain relatively slow in the first half of 2010, before it begins to pick up in the second half.
They noted that the banks have retained their cautious lending approach despite monetary easing measures by Sama, the kingdom's central bank.
According to the Riyadh-based Jadwa Investments, the recent increase in the discount rate in the United States does not signal the prospect of imminent interest rate rises in Saudi Arabia, whose currency is pegged to the dollar.
Jadwa Investments said the US move is part of the unwinding of some of the temporary policy measures introduced during the financial crisis and reflects greater confidence in the health of the financial sector rather than a desire for higher lending rates.
It said that at present, low interest rates are appropriate for Saudi Arabia, where reverse repo rate (the rate commercial banks receive on their deposits at Sama) is at an all-time low of 0.25 per cent in order to encourage banks to lend.
Sama is expected to maintain this rate at its present level until there is a sustainable pick up in bank lending to the private sector, Jadwa Investments said.
It also ruled out any change to the repo rate (the rate Sama charges for lending to banks) until rates start to rise in the US.
Its figures showed Saudi bank lending to the private sector fell by SR14.5bn in December, the largest decline since November 2004.
Sama's figures showed the banks' claims on the private sector edged up slightly to around SR735.6bn at the end of January from about SR743.2bn at the end of December.
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