Saudi banks face challenge of lower rates

26 April 2002

Strong first-quarter profits have been posted by most of Saudi Arabia's 10 banks, but they could prove to be the last vibrant interims before the impact of a low interest rate environment begins to bite.

The most spectacular performance came from the kingdom's largest bank, National Commercial Bank (NCB), which raised its net 83 per cent year-on-year to an impressive SR 734 million ($196 million). The balance sheet reached SR 100,800 million ($26,880 million) at the end of March.

A number of the mid-sized banks have also put in strong performances. Arab National Bank (ANB)grew net profits by more that 35 per cent and Al-Bank Al-Saudi Al-Fransi, Saudi British Bank (SABB)and Saudi Investment Bankwere also impressive, generating earnings hikes of 28 per cent, 20 per cent and 19 per cent respectively.

The only bank to buck the growth trend is the Islamic institution, Al-Rajhi Banking & Investment Corporation, which reported first-quarter earnings some 32 per cent down on the same period of last year. The main reason for this was a severe drop-off in mutajara transactions.

'Excellent as most of these figures are, it would be misleading to suggest that they are sustainable throughout the year,' says a senior banker in Riyadh. 'The impact of tighter spreads will start hitting us hard from 2Q [the second quarter of the year] onwards and full-year profits are likely to be flat or only marginally up on full-year 2001, unless interest rates start moving upwards pretty quickly.'

The 12 cuts in US interest rates were broadly matched in Saudi Arabia and while almost all banks demonstrated impressive hedging skills last year, they will be unable to avoid the impact of contracting spreads. 'With most Saudi banks enjoying comparatively high levels of NIBs [non-interest-bearing deposits], there is a floor on their funding costs and the lending rates have moved down towards it. They have nowhere to go,' says another Riyadh-based banker.

Equally, those institutions that had been successful in locking in as a large a proportion of higher-yielding fixed-interest instruments as possible will inevitably feel the pinch of repricing at lower rates over the coming months. 'This can't be avoided, we'll just have to take our medicine and look forward to the upswing in interest rates that will inevitably come,' says the second banker.

In addition to the interest rate issue, it is significant that some of the strong first-quarter showings have been inflated by other factors. For example, ANB has stressed that SR 24 million ($6 million), or 59 per cent, of its SR 41 million ($11 million) increase in earnings came from one-off capital gains. Equally, a 65 per cent contraction in provisioning at SABB released more to the bottom line than the entire SR 39 million ($10 million) net profit increase.

However, there are positive signs that most banks are well positioned for the eventual uptick in interest rates. Despite the historical lack of correlation in Saudi Arabia between low interest rates and credit demand, the 12 months to the end of March witnessed some impressive loan book growth. The most significant move came from Saudi American Bank (Samba), the second-largest in the sector, which increased its total loan portfolio by 17 per cent to almost SR 35,000 million ($9,300 million). That Samba - and the others that grew their books - achieved this during a period of ongoing weak corporate and project credit demand, underlines the continued growth of the consumer banking market.

'Those banks that develop healthy, strong loan portfolios now - particularly those based on retail lending - will be very well positioned when [interest] rates start to rise,' says the first banker.

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