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Saudi banks better earnings despite lower Q2 growth

Saudi Arabia's banks performed well in the second quarter of 2009 compared with the first quarter although their collective net income was lower than in the same period of 2008, according to the banks' balance sheets and experts.

Despite a sharp slowdown in the domestic economy, tight credit conditions and a festering default problems at two major Saudi business conglomerates, the Gulf Kingdom's banks boosted net earnings by about 2.9 per cent to SR6.47 billion (Dh6.40bn) in the second quarter from SR6.28bn in the first quarter of this year, the banks' results showed.

But year-on-year, the combined earnings receded by 5.2 per cent from SR6.82bn in the first quarter of 2008.

The results covered 10 of the country's 12 commercial banks. They did not include those National Commercial Bank ( NCB ), which is not listed on the bourse, and Alinma Bank , which was launched this year.

In the second quarter of this year, Alinma reported a sharp decline in net profits to about SR68 million compared with nearly SR109m in the first quarter, its balance sheet showed.

The bank attributed the plunge in its income to lower return on investments, an increase in operating expenses mainly related to the new branches, and the pre-operating expenses of the new subsidiary, Alinma Investment Company .

While there was a slight growth in the combined earnings of the 10 other banks in the second quarter compared with the first quarter, there was a steep decline in the profits on individual basis, the balance sheets showed.

"Generally speaking, the performance of Saudi banks was better than what was expected," said Mohammed Yunus, senior economist at NCB . Considering the difficult economic conditions in the Kingdom this year, the default problems and other factors, I think their general performance was good... there was slower growth on an individual basis but there was no loss."

Yunus said Saudi banks managed to keep earnings at reasonable levels in the second quarter because of better net interest income, higher earnings from commission and fees, and probably better return from overseas investment.

Discouraged by receding investors' confidence and growing lending risks, many Saudi banks began this year channeling their investments back into global markets, mainly high yield US securities, according to Saudi bankers.

The increase in investments abroad was at the expense of domestic credits, which have fallen in the past two months despite an improvement in oil prices, and consequently better government income and higher spending. Official figures showed the Saudi banks' claims on the private sector slumped to about SR724.8bn at the end of May from nearly SR727.4bn at the end of April. They stood at about 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.

In a recent study, the Saudi American Bank Group (Samba) attributed the faltering domestic lending by Saudi banks to the slackening local demand, their adoption of a stricter and 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 Saad and Gosaibi 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 the Saudi Arabian Monetary Authority," it said.

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

A breakdown for bank profits published in Saudi newspapers yesterday showed five Saudi banks recorded a drop in their net earnings in the second quarter compared with the first quarter while five others reported an increase.

Those reporting lower income were Investment Bank , Al Bank Al Saudi Al Fransi , the Saudi British Bank (Saab) , the Saudi American Bank Group (Samba) , and the Saudi Hollandi Bank . The banks with higher earnings were Al Jazira Bank , Al Rajhi Group, Riyad Bank , Arab National Bank , and Al Bilad Bank .

The highest quarterly income growth was recorded by Riyad Bank , with its net earnings leaping by 108 per cent to SR917.9m in the second quarter from SR441.05m in the first quarter.

The biggest decline was reported by Saudi Hollandi Bank , whose net profits dived from SR284.4m in the first quarter of this year to about SR90.5m in the second quarter. The combined earnings of the 10 banks fell 3.5 per cent to SR12.76bn in the first half of 2009 from nearly SR13.23bn in the first half of 2008.

By Nadim Kawach

© Emirates Business 24/7 2009