Dubai: Rising loan loss provisions adversely impacted profits of Saudi Arabia’s banks in the first half of 2020 despite an improvement in loan growth and total revenues, according to rating agency Moody’s.
Ten out of the 11 publicly traded Saudi Arabian banks reported first-half aggregate profits of 19.1 billion Saudi riyals, down 10 per cent from 21.2 billion Saudi riyals in first-half 2019.
“The decline reflects higher loan impairments in anticipation of credit losses and weaker asset quality, a credit negative for the system,” Moody’s said in a note.
Aggregate loan-loss provisioning for the first half increased to 0.93 per cent of gross loans from 0.68 per cent in 2019 and offset a 3 per cent increase in net revenue.
“In line with our expectation that the non-oil sector will contract to around 4 per cent in 2020 from growth of 3.3 per cent in 2019, we expect lower oil prices, reduced government spending and coronavirus-induced disruptions to further erode banks’ asset quality over the next 12-18 months,” said Christos Theofilou, a senior analyst at Moody’s.
Less severe impact
Moody’s noted that the decline in profits and increased loan impairments were less severe than in other Gulf Co-operation Council (GCC) countries. In the UAE, for example, aggregate profit for the four largest banks was down 36 per cent and loan impairments to gross loans increased by 77 basis points to 1.6 per cent.
“We expect additional provisions for Saudi banks in the coming quarters, although both profit effects and loan impairments will likely remain below GCC peers such as the UAE, reflecting the stronger historical performance and resilience of the Saudi banking system,” said Theofilou.
Balance sheet growth
Saudi banks reported 8 per cent first-half loan growth and 14 per cent investment portfolio growth, drove net interest income higher and offset lower lending and investment rates amid lower reference rates. Noninterest-bearing deposits from the central bank, which kept the banks’ cost of funding low, mainly funded the growth.
Higher loan growth was supported by continued strong growth in mortgage loans and a temporary spike in consumption before a 1 July value-added tax increase to 15 per cent from 5 per cent previously. High loan growth was in spite of lower economic activity because of coronavirus related containment measures.
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Banks’ aggregate loan-to-deposit ratio was 87 per cent as of 30 June, versus 84 per cent in December 2019, as loan growth outpaced the 4 per cent growth in deposits.
The banks preserved their strong capital buffers, with an aggregate shareholder ratio of 14.1 per cent as of June 2020, compared to 14.5 per cent as of December 2019. “We expect Saudi banks to maintain a high capital ratio, which are among the strongest in the GCC,” Moody’s said.