Saudi banks go from strength to strength

22 August 2003
Local banks performed well over the first half despite the prevailing low interest rate environment, posting aggregate profits growth of 15.6 per cent on the back of strong demand for retail banking services.

National Commercial Bankcontinues to dominate the sector, recording profits growth of 8.5 per cent to SR 1,499.9 million ($400 million) - alone accounting for almost a quarter of aggregate net income. A new board was elected for the Jeddah-based bank in May, with Abdullah Salem Bahamdan, who has masterminded the recovery of the bank since his appointment in 1999, keeping his chair (MEED 23:5:03).

The steepest rate of profits growth was posted by Al-Rahji Banking & Investment Corporation, the kingdom's fourth largest bank in terms of assets, which increased year-on-year profits by 49.6 per cent to SR 914.8 million ($243.9 million). However, the scale of the rise reflects problems in the first half of 2002, when a sharp decline in returns from foreign investments cut net income by 31 per cent (MEED 19:7:02).

The second largest player in the sector and another historical outperformer, Saudi American Bank (Samba), failed to mount such an impressive recovery, with first half profits up only 1.3 per cent to SR 976 million ($260.3 million) year-on-year. Saudi Arabia's third biggest bank, Riyad Bank, saw profits grow slightly below the average rate at 14.5 per cent, to SR 874.5 million ($233.2 million).

All the small and medium-sized banks posted profits growth close to the average with the exception of Saudi Hollandi Bank, which increased net earnings by only 1 per cent to SR 293.6 million ($78.3 million), and Arab National Bank (ANB). ANB is continuing to reap the rewards of its restructuring programme, which has delivered consistently large profits growth for several years. Net income climbed 24.9 per cent to SR 377.3 million ($100.6 million).

Despite the low interest rate environment, rapidly increasing demand for consumer credit is delivering healthy margins and creating continued improvement in loans-to-deposits ratios. Excluding sector minnow Bank al-Jazira, the growth was led by Saudi British Bank (SABB), which increased its loan-to-deposit ratio by 9.5 per cent to 63.8 per cent on the back of a 14.3 per cent rise in loans and advances.

While such loan growth should be sustainable for the remainder of 2003, analysts expect that over the longer term, as all the kingdom's banks focus on the booming retail banking sector, market saturation and spread compression will result. Corporate credit demand remains flat due to high levels of corporate liquidity, but a number of major projects in the pipeline offer the prospect of big-ticket lending opportunities.

The banks' aggregate assets continued to climb steadily, up 4 per cent over the first half to SR 517,000 million ($138,000 million). Low levels of non-performing loans suggest that this growth is not being accomplished at the expense of asset quality.

A key event for Saudi banks in the first half of 2003 was the government's approval in June of the capital markets law (MEED 20:6:03). The legislation will end banks' oligopoly on share trading and could lead to the decoupling of their brokerage arms from other operations. Full implementation is expected to take up to two years. The following month, the government passed another major piece of economic reform legislation - the insurance law - which will liberalise the insurance market and alter banks' insurance activities.

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