Profitability at Saudi Arabia’s top banks improved during the first quarter of the year. However, the sector will face challenges due to COVID-19 headwinds, a recent report showed.
Alvarez & Marsal’s (A&M) first edition of the KSA Banking Pulse stated that Saudi banks’ return on equity (RoE) rose to 12.5 percent in Q1 2020 from 11.1 percent in Q4 2019. Increased operating efficiency and lower provisioning helped offset the effect of lower operating income.
Total operating income dropped 1.6 percent quarter-on-quarter (QoQ) as net interest income fell 3.9 percent. Non-interest income grew however by 7 percent in the period as certain banks reported strong trading income in Q1, while provisioning decreased 21.8 percent QoQ according to the report.
The report examined data for the 10 largest listed banks in the kingdom, comparing Q1 2020 against Q4 2019.
Despite the COVID-19 pandemic, loans and advances (L&A) grew by 4.9 percent QoQ while deposits rose 1.5 percent for the same period, while net loans to deposit ratio rose to 86 percent from 83.2 percent.
Asad Ahmed, A&M Managing Director noted however that the sector is likely to face a challenging environment due to COVID 19 headwinds.
“With oil prices dropping, austerity measures from the government are likely to delay major projects and impact demand in the economy. Thus, we expect loan growth to remain limited, while low interest rate regime coupled with a possible increase in provisioning will impact profitability,” Ahmed said.
Aggregate net interest margin (NIM) fell by 25bps to 3.2 percent in Q1 2020 weighed down by lower interest rates. Cost-to-income ratio (C/I) dropped to 35.1 percent in Q1 2020 compared to 37.4 percent in Q4 2019.
“In the medium to long term, banks are likely to focus more on rationalizing their costs to hedge against the uncertain conditions,” Ahmed said.
(Reporting by Gerard Aoun; editing by Seban Scaria)
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