Saudi Arabian banks have posted healthy second-quarter profits, driven in part by “unexpected” revenue growth.

“The big story here was better revenues,” says Asim Bukhtiar, vice-president, head of research at Riyad Capital in Saudi Arabia.

“More notably, revenues were particularly strong [in the second quarter] on commission income, which is income they gain from lending activities. Commission income was better than expected in this quarter,” he says.

Profits were also fuelled in part by banks’ reduced provisioning costs and low impairment charges in the second quarter. Provisioning in the Saudi banking sector has been steadily dropping in recent years.

Samba Financial Group, Banque Saudi Fransi, Saudi British Bank, Riyad Bank and Saudi Investment Bank are among the Saudi financial institutions that have seen profits grow in the three months ending on 30 June, compared with the same period last year.

The rate of profit growth ranged between 5 per cent and close to 30 per cent compared with profits recorded in Q2 2013.

Saudi banks’ loans and advances portfolios grew between 5 and 20 per cent in the first half of the year compared to 2013. Saudi banks are ramping up their fee-generating lending activities due to the highly competitive low-interest environment in the Kingdom.

“The results are in line with our expectations. The profitability of banks continues to be supported by the volume of lending, especially as the margins are a bit tight,” Paul-Henri Pruvost, associate director, financial services ratings, Central Eastern Europe, Middle East and Africa, at US rating agency Standard & Poor’s (S&P), based in Dubai, tells MEED.

In contrast to the wider banking trend, Al-Rajhi, the largest lender listed on the Saudi Stock Exchange (Tadawul) with a strong focus on domestic retail banking, posted an 8.2 per cent decline in profits in the second quarter of this year compared with the same quarter last year.

The bank’s decline has been blamed on higher provisioning costs, due to some legacy loans sitting on its books.

The bank still holds a significant market share in Saudi Arabia, but is beginning to lose out in terms of the price it can charge for loans due to heightened competition in the retail market.

“Where Al-Rajhi is taking a hit is on the yields or profit margins on lending. The premiums the bank was commanding in the past have been eroded,” says Bukhtiar.

Pruvost adds: “Al-Rajhi Bank’s results really capture the trends in the banking sector, most of all the competition in the retail side, where profitability is declining due to competition.”

Looking towards the second half of the year, S&P forecasts that lending by Saudi banks will continue to grow at an annual average rate of 10 per cent.   

Market competition is forecast to remain strong and margins will stay low.

“If I were to take an overall view [on margins], I would say neutral to bearish. I don’t think margins have a lot of room to improve here. If something happened it would take us by surprise,” says Bukhtiar.

Although Saudi banks have been expanding into the retail banking market in recent years to generate more commission income, Bukhtiar says the corporate market will remain banks’ “bread and butter”.

He adds, however, that financial institutions are looking to new markets.

“We have heard a lot of enthusiasm from lenders about high-net worth segments, wealth management or private banking propositions,” he says.

Banks are also eyeing the small- and medium-sized companies (SMEs) market, while the development of the retail mortgage product could be another driver of long-term growth for the banking sector.