Analysis: Saudi banks post better-than-expected Q3 results

Robust mortgage lending, easier cost of funds and lower than expected provisioning helped

Image used for illustrative purpose. A trader monitors stocks at a Saudi Bank in Dammam October 26,2008.

Image used for illustrative purpose. A trader monitors stocks at a Saudi Bank in Dammam October 26,2008.


Despite the tough operating conditions—COVID-19 related lockdowns, lower interest rate regime and dropping oil prices— Saudi Arabia’s listed banks reported better than expected third-quarter results. Cumulatively, the 11 banks reported 11.88 billion Saudi riyals in net profit for the quarter ended September, down 5 percent compared to the year-ago period.

The results, which came in 18 percent over analyst estimates, were supported by lower-than-expected provisioning, robust demand for mortgage lending and lower cost of funding.

“Banks’ results are good and management commentary suggests that end-of-year  provisions may be less than what people expected previously,” Pritish Devassy, head of equity research at Riyadh-based Al Rajhi Capital told Zawya. 

Sara Boutros, senior analyst at Egypt-based CI Capital told Zawya that net interest margins (NIM) also improved, reflecting the bulk of asset repricing in H1 2020.

“Q1 NIMs dropped by 30bps q-o-q (quarter-on-quarter) for our coverage and 12bps in Q2 and by 5bps in Q3,” she added.

While most banks did see a decline in profits for the quarter, National Commercial Bank and Bank Albilad reported an uptick.

Al Rajhi Bank, the biggest retail lender in the kingdom, made a net profit of 2.66 billion riyals, down 3 percent from 2.74 billion riyals in the same period a year earlier. Provisions increased by 40 percent year-on-year to reach 465 million for the quarter.

At National Commercial Bank, the biggest lender by assets, net impairment charges for expected credit losses (ECL) fell 43 per cent y-o-y to 379 million riyals. The bank made a net profit of 3.16 billion riyals, up 24 percent y-o-y.

Earlier this month, NCB agreed to merge with Samba Financial Group in a deal that will create the Arab world’s third-biggest banking entity with assets worth over $200 billion.

Riyad Bank’s net profit fell 14 percent to 1.30 billion riyals as higher impairments boosted operating expenses. Provisions more than doubled to 466 million riyals. Net loans rose 15 percent to 191 million riyals on robust mortgage lending.

Saudi British Bank reported a 10 percent drop in net profit to 1 billion riyals, beating most market expectations. Provisions fell to 51 million riyals compared with 182 million y-o-y while the loan book grew slightly on year to 152 million riyals.

Bank Saudi Fransi’s Q3 net profit slumped 62 percent to 333 million riyals as provisions jumped over 300 percent to 930 million riyals. 

Bank Albilad, meanwhile, saw a 17 percent rise in net profit y-o-y to 383 million, helped by a 9 percent rise in total operating income.

According to a report by Al Rajhi Capital, cumulative provisioning for Saudi banks came in at 3 billion riyals, down from 5 billion in the last quarter and nearly 27 percent better than estimated. However, there is a concern that the Saudi central bank’s decision to extend the deferred payments program by a further three months to December might have masked the true impact of the banks and pushed impairment recognition to 2021.

However, Boutros believes that is unlikely. “We do not believe they will bounce back in 2021. Provisioning was heavy in the first half and in Q4-2019 and the bank’s ECL models factored in scenarios that proved to be too conservative. Provisions will remain elevated in 2021 with a slight ease y-o-y,” she said.  

Future provisions may remain low even following the deferral period because most banks have indicated that they are tracking the financial position of MSMEs (Micro, Small and Medium Enterprises) closely and have taken appropriate measure in terms of making provisions in advance, according to Al Rajhi Capital.

Mortgage lending

Cumulative loans and deposits were up 14 percent and 11 percent respectively on a y-o-y basis and were in-line with most expectations. Mortgages, which have been a key driver of credit growth in the Saudi banking sector in recent years, clocked robust growth.

“We estimate mortgage lending to have grown by 50 percent in 9M20. The bulk of the growth in 9M20 was brought in by the mortgage segment, plus some activity within the corporate segment in 1Q20,” said Boutros.  

Currently there’s an average run-rate of 10 billion per month and this rate is expected to continue. By 2020 year-end the total mortgage lending of Saudi banks is estimated to top 293 million riyals, from 187 billion at the end of 2019. The kingdom’s housing minister recently said the implementation of the second phase of the housing program will begin in early 2021 and continue for five years.

Al Rajhi Bank, National Commercial Bank and Riyad Bank are estimated to have over 60 percent of the mortgage lending market. Mortgage lending made up 30 percent of the entire lending for Al Rajhi Bank.  

Cost of funds

The decline in the cost of funds (CoF) from the second quarter onward has been a positive for the banking sector. The CoF for banks averaged between 55- 60 bps while the Saudi Arabian Interbank Offered Rate (SAIBOR) has been around 80 bps. The liquidity injections and non-interest-bearing deposits by the central bank have helped keep the cost of funding lower.

(Reporting by Brinda Darasha, editing by Seban Scaria)


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© ZAWYA 2020

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