The first wave of 2008 financial results from banks around the region indicates a split between an underperforming Saudi banking sector and sustained growth in other Gulf markets.

Mohamad Moabi, an economist at Qatar National Bank (QNB), says the average increase in profits for Saudi banks in the first three months of 2008 was 2.4 per cent, although this masks widely diverging performance.

Banks such as Al-Jazira reported large declines in profit, while others such as Sabb and Saudi Hollandi made significant gains on the same period in 2007.

The figures indicate that Saudi banks are still struggling to make up for the lost revenue streams associated with the fall of the Saudi stock market (Tadawul), which began in 2006.

In 2007, their results showed a decline from the stock market peak. Analysts had predicted their comparative performance would start to recover now that the year-on-year figures are no longer being compared with the peak of the stock market boom. However, this has not been the case.

“I was surprised that Saudi banks are still recording declines, or small growth rates,” says Moabi. “I had been expecting more of a recovery by now.”

Most Saudi banks reported growth of about 5 per cent compared with the first quarter of 2007, although comparisons to the final quarter of 2007 show a more marked increase in profits.

The outlook for the rest of 2008 is more positive for Saudi banks, according to Riyadh-based Hisham Tuffaha, head of research at Bakheet Investment Group. “Given the high liquidity in the Saudi market and the massive real estate investments that are planned, there will be a great demand for capital over the rest of the year,” he says.

“This should give banks opportunities to expand their loan books as well as grow interest income.”

Growth figures for banks in the rest of the region show far stronger performance, with banks reporting first-quarter profit increases of between 9 per cent and 69 per cent. Qatar Islamic Bank and the UAE’s First Gulf Bank reported particularly strong figures, with profit growth of more than 60 per cent each.

However, increasing costs and falling rates of customer deposits indicate that some banks may face tough times in the future, as the region’s low interest rates and high inflation rates make it more attractive for consumers to borrow and spend than save.

Analysts say costs will remain a serious issue for regional banks as they expand their branch networks, hire more staff and suffer the effects of rising inflation.

Raj Madha, director of equity research at Egyptian investment bank EFG-Hermes, says growing loan books and slowing deposit growth could be a negative sign. “We have seen very strong loan growth and good profitability, but there are some concerns over deposits and provisions made, although we will have to wait for more banks to report to see if this is a wider trend,” he says.

Some of the largest banks in the region, such as National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, Emirates NBD and Gulf International Bank, had not releases figures for the first three months of 2008 as MEED went to press.

So far, the impact of the global credit crunch and the decline in the value of assets related to the sub-prime crisis has affected only a limited number of banks in the region. However, Madha says this could change if banks seek capital market funding while lenders are risk averse and borrowing costs are high.

“In principle, the credit crunch will raise the cost of funding for banks, but no banks have issued capital instruments yet,” says Madha. “It could be an issue for the second or third quarters of the year, when banks may have to refinance old debt at steeper prices.”

The main banks to have suffered from the sub-prime crash to date include Gulf International Bank, Arab Banking Corporation and Gulf Investment Corporation, which between them have made provisions of $1.5bn.

All three are based in Bahrain and are owned by GCC governments, so have a different outlook to the commercial banks.

They were set up during the oil booms of the early 1970s and the mid-1980s to boost co-operation between governments around the Gulf.

Table: First-quarter results for Gulf banks

Net profit ($m) Year-on-year growth (%) Assets ($bn) Year-on-year growth (%)
Saudi Banks
Al-Rajhi 427 2.0 38.1 25.7
Samba 320.7 -5.4 48 0.4
Saudi Hollandi 282.4 31 58.96 21.0
Sabb 202 22 28.4 33.3
Banque Saudi Fransi 195 6.2 29 30.6
Riyad Bank 184 5.5 35.8 10.7
Arab National Bank 179 5 27.7 26.4
Al-Jazira 40.9 -49 4.5 nk
Al-Bilad 13.6 97.8 4.54 2.4
Other Banks
National Bank Kuwait 308.5 28 43 nk
Qatar National Bank 252 40.5 35.7 85.8
First Gulf Bank 183.8 66 21.5 56
Qatar Islamic Bank 125.3 69 8.24 104
Burgan Bank 92.2 9 nk nk
Doha Bank 75.3 22.6 9.09 43.9
Commercial Bank Dubai 72.7 22 9.1 66
BankMuscat 68.9 39.4 11.9 nk
Rakbank 38.7 65 3.2

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nk=not known. Sources: Tadawul; company reports