Monday, Jul 04, 2011

By Summer Said

Of ZAWYA DOW JONES

RIYADH (Zawya Dow Jones)--Banks in oil-rich Saudi Arabia, buffeted by financial headwinds following the global credit crunch, are expected to see higher earnings in the second quarter of 2011 due to lower provisions and higher income from lending activities, analysts said.

"We expect provisions in the second quarter to decline by 48.5% year on year and 10.6% quarter on quarter. This is likely as most Saudi banks have comfortable provisions coverage ratios," Faisal Al Azmeh, an analyst at NCB Capital said in a note.

In addition, a two-month salary bonus announced by King Abdullah earlier this year as part of new expenditures packages worth about $129 billion has positively impacted loan growth for many banks and will likely have a partial impact in the second quarter.

The combined net income of the 11 listed lenders in the Arab world's largest economy, including heavyweights Al Rajhi Bank (1120.SA), the Arab Gulf's biggest lender by market value, and Samba Financial Group (1090.SA), rose to 6.25 billion Saudi riyals ($1.7 billion) in the first quarter of the year from SAR5.79 billion in the year-ago period.

Over the past two years Saudi lenders have booked higher provisions to cover non-performing loans that culminated in multi-billion dollar defaults by some family owned firms. Last month, Saudi central bank head Muhammad al-Jasser said provisions for bad loans reached 118% of their value by the end of March.

"Furthermore, as many of the consumer and retail loans given out in 2005 and 2006 are likely to be renewed this year, this should support our overall expectation of an annual retail growth of 9%," Al Azmeh added.

Total credit growth in the kingdom, which saw a 2% rise until the end of March, is also expected to improve in the second quarter of this year but at a slower rate, said Raj Shekhar, senior research analyst at Bahrain based SICO Investment Bank.

Saudi Arabia, which has filled its coffers with surplus income from oil exports this decade, has drawn on its reserves to fund record budgets and keep its $400 billion five-year infrastructure development program on track. While this spending helped the Arab world's largest economy grow last year, according to the kingdom's budget released last December, banks have remained hesitant to extend credit.

Bank lending to the private sector edged higher to SAR811.1 billion in May from SAR802.5 billion in the month earlier and up from SAR753.4 billion in May 2010. During the boom years, bank claims on the private sector tripled between 2003 and 2008.

In the first quarter of 2011, margins declined across the sector as asset yields continued to fall on maturing sovereign credit and on higher growth in deposits vis--vis loans.

"We think most of the pressure on margins have already materialized and we would expect the banks to enjoy some resiliency on net interest margins moving forward," said Mohammad Hawa, research analyst Credit Suisse, Investment Banking.

Saudi lenders are predominantly corporate banks with the exception of Al Rajhi Bank--the largest retail bank in the kingdom by market capitalization. "We expect to see strong lending income, and strong demand on the retail side, but most of the growth will come from corporate business for banks this quarter," he added.

-By Summer Said, Dow Jones Newswires; +966-546-842373; summer.said@dowjones.com

Copyright (c) 2011 Dow Jones & Co.

(END) Dow Jones Newswires

04-07-11 0710GMT