Saudi Arabia’s banks have posted strong profit growth for the first quarter of this year, driven by increased lending activity.

One of the most profitable banks was Samba Financial Group, which reported a net profit of SR1.24bn ($330.6m), marking an increase of 7 per cent on last year’s first quarter results.  

Banque Saudi Fransi was one of the fastest growing banks, posting profits of SR856m, a 25 per cent increase on the same quarter last year.

Al Rajhi Bank, one of Saudi Arabia’s largest banks, posted healthy profits of SR1.7bn. However this marked a decline of more than 16 per cent on its results in Q1 2013.

The majority of Saudi banks reported increased volumes of loans and advances in the first quarter of this year compared to 2013, which is partly driving profit growth.

Samba posted a 10.8 per cent increase in lending activity, while Banque Saudi Fransi posted an 8.5 per cent increase in lending activity. The Saudi British Bank posted an 8.6 per cent in loans in the first quarter.

This volume of growth is in line with analysts’ expectations. A report published in April from US rating agency Standard & Poor’s forecasts that lending growth will not “markedly” grow faster than 10 per cent per year between 2014 and 2015.

The report adds that profitability in the country’s banking sector will mainly be driven by lending volumes and fees. “The banks have little headroom left to further reduce operating costs,” the report says.

Speaking to MEED, Timucin Engin, director, financial services ratings at US ratings agency, Standard & Poors, based in Dubai, adds: “We continue to see Saudi Arabia as a healthy market for banks.

“There is tough competition but then this market has been historically competitive”.

S&P’s report also concludes that the greatest challenge facing the Saudi banking market is no longer the high cost of risk, which is expected to flatten or lower in the coming year.

The impact of the US Federal Reserve increasing interest rates in the coming years could have a more significant impact.

“If interest rates go up, current account volumes might fall in Saudi Arabia as customers transfer money to higher interest accounts. This could affect deposit volumes and banks’ funding costs,” says Engin, before adding that any hike in funding costs is a “manageable risk” for the sector.