Saudi banks' profits hit SR14.2bn in five months

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Saudi Arabia's banks netted about SR14.2 billion (Dh13.9bn) in profits in the first five months of 2009 despite a sharp slowdown in their domestic credits due to slackening domestic demand and their focus on foreign markets.

About SR2.88bn were netted in May and bankers said the kingdom's 12 commercial banks could still make higher profits in 2009.

"The banks' performance has been good so far this year and I think profits could be equivalent to those in 2008 or even higher," said Mohammed Younus, a senior economist at the Saudi National Commercial Bank.

"I know domestic lending has been slow this year for some reasons but the banks have several other sources of income, including their investments in external markets, commission income, fees and other services."

Figures by the Saudi Arabian Monetary Agency (Sama)Saudi Arabian Monetary Agency (Sama), the kingdom's central bank, showed the banks' net profits climbed to their highest monthly level this year of around SR3.58bn in January. Averaged monthly earnings edged down in the following months but remain relatively high.

Sama's figures showed domestic credit has continued to recede despite the recent surge in oil prices, with the banks' claims on the private sector reaching around SR724.8bn at the end of May compared with SR727.4bn at the end of April. They stood at around SR734.5bn at the end of 2008.

In contrast, the banks' investments abroad jumped to about SR83.9bn at the end of May from SR64.8bn at the end of 2008. The increase boosted the banks' combined foreign assets to nearly SR179.8bn from SR153.9bn.

Sama's figures showed foreign liabilities continued their decline to reach SR86.3bn compared to SR112.4bn in the same period. This sharply widened the banks' net foreign assets to SR93.4bn at the end of May from SR41.5bn at the end of 2008 and only SR45 million at the end of September.

In a study published this week, the Saudi American Bank Group (Samba) attributed the faltering domestic lending by Saudi banks to the slackening local demand, their adoption of a more selective lending policy and their preference to invest in higher yielding securities in the United States. It also cited debt default by the troubled Saudi SaadSaad and GosaibiGosaibi groups.

"Many banks have opted to channel surpluses towards higher-yielding foreign securities. The continued weakness in lending growth comes despite fresh measures by the authorities to stimulate lending, including reducing treasury bill yields and, most recently, lowering rates on commercial bank deposits held with Sama," said the 10-page mid-year study on the Saudi economy.

"But rather than channelling additional liquidity towards the private sector, many banks have instead chosen to buy higher-yielding foreign assets."

Samba noted that Saudi banks were tempted by a surge in return by US investment tools, with yields on 10 year treasuries were around 3.5 per cent in mid June. This compares to yields on Saudi debt of less than one per cent.

"Beside the good returns on foreign assets, there are a number of reasons why banks have been more selective about private sector lending."

Samba said a retrenchment of international banking operations in the kingdom because of the global financial turmoil has prompted Saudi banks to focus on loans for large petrochemicals or utilities projects that can often exceed $20bn.

These projects also have long lead times, throwing up potential asset-liability mismatches, and meaning that banks must hold more risk-weighted capital to comply with Basel II regulations, said the study.

"Second, banks remain cautious about corporate growth prospects, particularly for those firms that are dependent on export demand. The rapid decline of global industrial output has eroded demand for Saudi Arabia's principal non-oil exports. This has fed through into worsening perceptions of credit-worthiness, a situation that has been amplified by a couple of recent high-profile corporate debt restructurings and defaults," it said.

"Third, the experience of the global financial crisis has encouraged all banks (not just Saudi Arabia's) to refocus on risk management. As a proportion of banks' deposit bases, the surge in credit during 2006-08 was not as excessive as in some other Gulf states; nevertheless, at its peak last September, the average loan-deposit ratio exceeded 95 per cent, well above the Sama-mandated limit of 85 per cent. This was an uncomfortable situation for a banking sector that is naturally conservative and since then banks have worked hard to build up deposits and show greater selectivity in their lending."

The study said demand-side issues had also played a part as new private sector projects coming to the market have dwindled over the past six months.

"This is because project sponsors, faced with deteriorating domestic and global demand conditions as well as credit constraints, decided to put increasing numbers of projects on hold."

By Nadim Kawach

© Emirates Business 24/7 2009