Top banks in Saudi Arabia, which saw only a marginal growth in profitability in the past quarter, are likely to see net income taper down in the coming quarters due to a slowdown in credit growth and rising non-performing loans, according to professional services firm Alvarez & Marsal (A&M).

The top 10 KSA banks posted Q1 2023 net profit of 17.3 billion riyals ($4.6 billion), up 2.7% quarter-on-quarter (QoQ) as they continued to be affected by slower growth in operating income and higher impairment charges of 14.4% QoQ, the report said.

“Looking ahead, we expect banks to face a slowdown in credit growth and a possible uptick in non-performing loans due to the higher interest rate environment. Saudi Central Bank (SAMA) has maintained its interest rates in line with the US Federal Reserve, and we expect this to continue. The higher interest rate environment is causing customers to migrate to interest-bearing instruments that is likely to affect the cost of funding for some of the banks,” said Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services.

During the quarter, the net interest margin (NIM), the difference between interest income from loans and what is paid out on deposits--a key measure of bank profitability-- contracted marginally for six out of the 10 banks on the back of lower loan-to-deposit ratio (LDR), which fell to 95.2% after eight consecutive quarters of increase, and marginal spread expansion.

SAMA raised its repo and reverse repo rates by 50 basis points (bps) QoQ in during Q1 to 5.5% in line with the Fed rate hike.

According to A&M, aggregate NIM contracted by 7 basis points (bps) in Q1. Yield on credit (+49bps QoQ) increased to 7.4% due to the rise in benchmark rates during the quarter. The cost of funds (CoF) increased by 45bps QoQ to 2.3%.

Profitability is expected to taper down in the coming quarters as further interest rates are likely to be marginal and some portions of the portfolios may show stress due to the higher borrowing rates, the report concluded.

The listed banks analysed in A&M’s KSA Banking Pulse are: Saudi National Bank, Al Rajhi Bank, Riyad Bank,  Saudi British Bank, Banque Saudi Fransi, Arab National Bank, Alinma Bank, Bank Albilad, Saudi Investment Bank and Bank Aljazira.

(Reporting by Brinda Darasha; editing by Seban Scaria)