Saudi banking sector's collective net profit rose the highest in nine quarters, to reach SAR7.5 billion in the first quarter of 2012, according to Egyptian bank EFG-Hermes.
Net profit rose 21.5% year-on-year and 27.3% quarter-on-quarter, while loan growth has also been on a steady recovery, rising to 14.4% year-on-year in the first quarter.
The banks' total assets also collectively rose to their highest since the first quarter of 2010, rising SAR1.2 Trillion, a 9.4% increase year-on-year, EFG-Hermes data shows.
"Aggregate recurring earnings of the banks under our coverage grew almost 16% year-on-year on strong loan growth, rising non-interest income and normalising provision," wrote the bank in a note. "Stronger-than-expected acceleration in loan growth was the biggest positive surprise for us in 1Q2012 results for Saudi banks."
Al Rajhi Banking & Investment Corp. earned the highest net profit, rising SAR2.01 billion in the quarter, 18.3% higher than the same period last year, and was ahead of most estimates.
"The strong results have come on account of 41.3% year-on-year jump in non-commission income (from banking fees and investment income) although on a quarter-on-quarter basis the non-commission income is down by 4.5%," said Digvijay Tanwar, senior financial analyst at Global Investment House.
Balance sheet growth was once again very strong, with total financing recording a jump of 8.3% quarter-on-quarter and customer deposits were up by 7.2%. Total financing/ total customer deposit ratio stood at 81.7% as compared to 77.4% in the first quarter of 2011.
Samba Financial Group net profit was subdued at SAR 1.15 billion, up 2% year-on-year and 21% quarter-on-quarter. Total operating income stood at SAR 1.8 billion in the first quarter, up 6% year-on-year.
"As expected, the net interest margin [NIM] is still under pressure," said Raja Ghoussoub, vice-president research at NBK Capital. "Net interest income was nearly flat year-on-year but dropped 5% quarter-on-quarter on a decrease in the NIM in 1Q2012."
Non-interest income, however, was a positive surprise, expanding 16% year-on-year and accounted for 41% of operating income in the first quarter compared with 37% in the first quarter of last year and 33% in 2011.
Meanwhile, Riyad Bank reported a net profit of SAR901 million in the first quarter, up 22% year-on-year and 16% quarter-on-quarter. This was the highest quarterly net profit recorded in the past two years.
"We believe this is a good set of results with the exception of the weaker-than-expected loan growth," said Sara Kanaan, analyst at NBK Capital research. "Operating income was very much in line with our forecast, and the on-going weakness in the NIM is not surprising."
Arab National Bank net profit shot up SAR655.5 million, 78% higher than the previous quarter, and 11.6% higher over the same period last year.
"ANB came up with good numbers on account of a stronger than expected performance in its operating income which has jumped by 5.0% quarter-on-quarter and 7.4% year-on-year," said Global's Tanwar.
"While net interest income has decreased by 2.6% year-on-year and 3.3% quarter-on-quarter indicating tightening of margins, non-interest income (investment and fee income) has increased by 24.4% quarter-on-quarter and 32.2% year-on-year and is mainly instrumental in the growth."
However, balance sheet growth for the quarter, like other banks, was quite strong (up 6.7% quarter-on-quarter) driven by a quarter-on-quarter jump of 3.8% in net loans and 3.2% quarter-on-quarter in deposit base.
Saudi Arabian British Bank (SABB) clocked in a SAR854 million profit, as loans (rising 7.5%) powered growth. There was also recovery in fee income, expanding by 18% quarter-on-quarter, further supporting the growth in operating income in the first quarter.
Banque Saudi Fransi's net profit jumped 10% year-on-year and 19.4% quarter on quarter to SAR789 million on the back of strong non-commission income.
"While NII has increased by 5.8% year-on-year and 2.6% quarter-on-quarter, non-interest income has increased by 6.4% year-on-year and 37% quarter-on-quarter. Balance sheet growth for the quarter was once again quite strong (up 6.8% quarter-on-quarter) driven by a quarter-on-quarter jump of 5.1% in net loans, although deposit mobilization remained relatively low at 2.8% quarter-on-quarter," said Global's Tanwar.
'GROWING' FORWARD
Rising bank deposits and surplus liquidity will enable the country's financial services sector to sustain lending growth.
"This growth is likely to be at a reasonable pace and therefore should not hurt asset quality or banks' viability ratings," says Fitch ratings agency.
However, there are concerns that margins of banks with higher retail exposure will come under pressure, as face stiff competition from banks like Riyad Bank, Banque Saudi Fransi, Alinma and NCB, who have ramped up their retail banking operations.
"In addition, retail loans those were disbursed in 2006-08 at higher interest rates are due to mature and will have to be reinvested at a lower yield. This is a retail lending specific risk, as they are typically five years in maturity and fixed rated in nature, in contrast to floating rated corporate credit," noted Manama-based Securities & Investment Company (SICO) in a note to clients.
Fitch argues that rising lending is a sign of rising confidence among Saudi banks, but that they are not relaxing lending standards too far.
"In any case, lending to established companies in Saudi Arabia is relatively safe in comparison to other countries given the benefits they enjoy from government-sponsored projects," counters Fitch.
Going forward, Saudi banks would benefit from growth from major projects in housing, education, healthcare and infrastructure, apart from lending to small and medium enterprises and individual customers.
"Stronger-than-expected loan growth and recovery in fee income have surprised us positively. We believe stock valuations are yet to completely incorporate the strength of loan growth and earnings recovery," noted EFG-Hermes. "We remain overweight on Saudi banks and prefer exposure to the sector through the conventional banks for their valuation discount to Islamic banks. Banque Saudi Fransi, Saudi Hollandi Bank, and Samba remain our top picks in the sector."
© alifarabia.com 2012
