Saudi banks’ first half results point to increasing pressure on profitability

Dubai: First half results of Saudi Arabia’s banks showed increasing pressure on their profitability, reflecting rising funding costs and tightening liquidity from decline in deposits.

“We expect the Saudi banking sector to continue facing major headwinds over the coming quarters, resulting in tougher conditions for borrowers, even as their margins are coming under pressure from the slowdown. Liquidity will continue tightening: deposit growth turned negative in March 2016 (and has remained so since), while the three-month Saudi Interbank Offered Rate reached 2.6 per cent in July 2016, compared to 0.8 per cent a year earlier,” BMI Research, a Fitch Group company said in a report.

The first half profits of the listed Saudi banks marginally rose by 0.75 per cent to SR23.3 billion, compared to SR23.1 billion in the same period last year. Net profits of the Saudi banks in the second quarter of 2016 was at SR11.6 billion down by 3.2 per cent from SR11.98 billion reported in the same period last year.

In absolute terms, National Commercial Bank (NCB) reported the largest profit of SR5.06 billion in the first half of 2016, but the year on year growth was a modest 2 per cent compared to SR4.96 billion.

In terms of year on year growth Al-Rajhi Bank topped the sector with a 17.6 per cent growth in net profits in the first half the year with SR4.06 billion in the first half of 2016 compared to SR3.46 billion in the same period last year. In the second quarter of the year, the bank reported SR2.05 billion, up 5.72 per cent year on year.

Many leading banks saw either profits stagnating or declining during the first six months of the year. While profits of Samba Financial Group (SFG) dropped by 1.41 per cent to SR2.57 billion in H1, 2016, compared to SR2.61 billion, Arab National Bank (ANB) and Saudi Hollandi Bank (SHB) witnessed decline of 2.4 per cent each in their net profits in the first half of the year.

Riyad Bank SR2.32 billion compared to SR2.30 billion (+0.87 per cent), Saudi British Bank (SABB) SR2.29 billion compared to SR2.25 billion (+1.82 per cent), Banque Saudi Fransi (BSF) SR2.12 billion compared to SR2.06 billion (+3 per cent).

Clearly the deterioration in operating environment is taking its toll on bank profitability. According the International Monetary Fund’s (IMF) recently concluded the Article IV Consultation report, Saudi Arabia’s real GDP growth is expected to slow to 1.2 per cent in 2016, but recover to 2 per cent in 2017 as the pace of fiscal consolidation eases.

“Bank deposits have declined, but growth of credit to the private sector remains strong. Capital buffers are high, non-performing loans (NPLs) low, and banks are well provisioned against loan losses,” the IMF said in its report.

Latest data from Saudi Arabia Monetary Authority (SAMA), the country’s central bank, shows that Saudi banks had recorded a 0.5 per cent decline in total deposits in May, after decreasing by 0.7 per cent in April. These two consecutive months of declines contributed to a six-month decline of 0.9 per cent and a 12-month drop of 3.4 per cent, which is the largest 12-month decline in deposits since August 1994.

Credit rating agency Moody’s said in a recent report that the declines [in deposits] are credit negative for Saudi banks because they add to the liquidity pressure that banks are already experiencing, even though loan growth has remained above 9 per cent since January.

“Tightening liquidity is negatively affecting banks’ loan-to-deposit ratios and liquid asset levels and will negatively affect banks’ cost of funding and profitability, with knock-on effects increasing nonperforming loan ratios (NPLs),” said Olivier Panis, Vice President — Senior Credit Officer at Moody’s.

Analysts are cutting their earnings projections for Saudi Arabian banks amid the highest borrowing costs in seven years and expectations that provisions for NPLs will start to rise.

The IMF is optimistic on reforms and expects these to strengthen the financial system, and the banking sector is well positioned to weather lower oil prices and slower growth. They encouraged the authorities to continue to closely monitor credit quality, strengthen the macroprudential framework, and finalise the framework for bank resolution and liquidity provision. They also recommended strengthening the liquidity forecasting and management frameworks of the central bank.