Dubai: The profitability outlook for Saudi banks showed signs of improvement as increased operating income and reduced provisioning supported return ratios, said an analysis of third quarter results by professional services firm Alvarez & Marsal (A&M).
“While we have witnessed an overall improvement in profitability this quarter, the near-term outlook for Saudi banks looks bearish,” said Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services.
“The Saudi government’s announcement to cut budget spending by 7.5 per cent in 2021 could have a spill-over effect in other sections of economy.”
Balance sheet growth
Saudi Arabia’s top 10 banks reported an increase in loans and advances which grew at a faster pace in Q3 2020 (3 per cent quarter on quarter, compared to 1.9 per cent in the previous quarter.
This growth was primarily driven by increased credit uptake in consumer and credit card segment. Similarly, deposits showed signs of improvement in comparison to the previous quarter. These can be partially attributed to an uptick in economic activity during the quarter following the easing of lockdown measures.
While we have witnessed an overall improvement in profitability this quarter, the near-term outlook for Saudi banks looks bearish.
Consequently, loans to deposit ratio (LDR) increased to 86.9 per cent in Q3 from 86.7 per cent in Q2. Operating income increased, driven by support from major income streams. The improvement in the operating income was driven by an increase in net interest income (NII) by more than 2 per cent and net fee and commission income by more than 20 per cent over the previous quarter.
The improvement in NII was despite reduced system-wide interest rates. Fee income increased as easing of lockdown measures in certain sections of the economy potentially generated higher fee / commission income from cards.
Costs & margins
Saudi banks continued to improve their efficiency, as cost to income (C/I) ratio declined for the third consecutive quarter. Although operating expenses increased this quarter by 4.6 per cent, C/I ratio fell as operating income increased at a quicker pace of 6.5 per cent over the previous quarter.
Net interest margins (NIM) also continued to decline substantially, reaching 3.02 per cent – the lowest level in past several quarters due to continued decline in yield on credit. Furthermore, the provisions for loans decreased by 36.7 per cent quarter on quarter, which was a positive element in the results.
“We expect interest rates to remain at current record low levels, which could limit NII growth,” Ahmed.
While pressure on interest margins and loan quality are likely to remain concerns, Ahmed said Saudi banks’ strong capitalisation levels would provide some cushion against any material deterioration of the fundamental profile of banks.
Despite the continued pressure on loan yields, profitability improved as increased operating income and reduced provisioning supported return ratios. Net income increased 27.5 per cent quarter on quarter as total operating income increased 6.5 per cent and provisioning declined 36.7 per cent. As a result, return on equity (RoE increased to 13.2 per cent from 10.6 per cent in Q2’20.
The country’s 10 largest listed banks analysed in A&M’s KSA Banking Pulse are National Commercial Bank (NCB), Al Rajhi Bank, Riyad Bank, Samba Financial Group, Saudi British Bank, Banque Saudi Fransi, Arab National Bank, Alinma Bank, Saudi Investment Bank and Bank Albilad.