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Saudi Banks Seen Growing Higher-Margin Loans In 2012

Wednesday, Jan 11, 2012

--Higher margin loans to enhance profits

--Saudi banks have strong capital adequacy ratios

--Effect of lower provisions on profits more muted in 2012

By Summer Said

Of ZAWYA DOW JONES

RIYADH (Zawya Dow Jones)-Saudi banks are expected to continue growing their lending activity in 2012, encouraged by the government's massive spending programs, with loans to the higher-margin retail and real estate sectors likely to enhance profits.

High capital ratios and strong liquidity positions will allow Saudi banks to grow their loan books by 13.5% this year, said Farouk Miah, an equity research analyst at Riyadh-based NCB Capital . This compares with estimated loan growth of just over 11% in 2011.

Even though the new Saudi budget projects lower expenditure of 690 billion Saudi riyals ($184 billion) in 2012, well below last year's actual spending of SAR804 billion, government spending is still running at high levels, boosting liquidity in the banking system and encouraging the banks to extend more loans. Moreover, lending rates are under pressure and cutting into banks' margins, encouraging them to take a more aggressive approach.

"Banks are expected to be less conservative this year compared to 2011 as they need to overcome the effect of low interest rates and declining net interest margins on their profitability," said Miah at NCB Capital .

Lending to the private sector rose 11% to SAR859.7 billion November 2011 from SAR776.3 billion in the same month a year earlier, according to central bank figures. Much of the lending has been focused on the high-margin real estate and retail sectors, Miah said, though some banks are starting to diversify by lending more to the corporate sector.

The extra lending is expected to translate into increased profitability. Banks can lend at higher rates to the retail and real estate sectors, and this will help boost interest income at the top ten Saudi banks by 5.6% in 2012, after an estimated decline of 0.9% in 2011, NCB Capital calculates. Increased trading activity on the stock market and other banking fees are expected to boost non-interest income by 14.2% in 2012, after growth of 10.4% in 2011, NCB Capital added.

In their latest results for the third quarter of 2011, much of the increase in the banks' net profits came from lower provisions. The aggregate net income of 10 of the 11 listed banks rose 27.4% compared with the previous-year quarter, as the banks were able to reduce provisions by 46.8%. Pre-provision profits increased by only 2.5% year-on-year in the third quarter after declining in the previous two quarters as many of the banks faced higher expenses.

After facing multi-billion dollar defaults by some family-owned companies after the 2008 financial crisis, Saudi banks greatly increased their provisions against bad and doubtful debts in recent years. By March 2011, Saudi banks had provisioned for as much as 118% of the value of their bad loans, according to the former central bank governor Muhammad Al Jasser.

The provisions and strong capital ratios helped banks pass a nation-wide financial health check last year, including stress tests on how well they could absorb losses in the event of a downturn in the economy or a fall in property prices. The tests conducted by the kingdom's central bank , showed that the risks facing Saudi banks were limited by their modest exposure to global financial markets.

According to Riyad Capital , the capital adequacy ratio of the Saudi banks stood at a comfortable 20.6% in the third quarter of 2011.

From this strong background, Saudi banks were able to lower their provisioning levels in the second half of 2011, according to Asim Bukhtiar, vice president of research at Riyad Capital . Provisions should continue to drop in 2012, though the effect on earnings will be more limited, Bukhtiar said. Instead, future earnings growth for Saudi banks will need to come from increases in operating income, he added.

-By Summer Said, Dow Jones Newswires; +966-546-842-373; summer.said@dowjones.com

Copyright (c) 2012 Dow Jones & Co.

(END) Dow Jones Newswires

11-01-12 0602GMT