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Top Saudi Arabia Business News  

Kingdom’s banking industry is expected to have another good year


JEDDAH, 10 September — The interim results of the nine listed banks for the first six months of 2001 show a strong rise in net profits at 11.6 percent, suggesting that Kingdom’s banking industry is expected to have another good year. The profitability growth could have been higher if the aggressive 50 percent increase in the provisioning were not taken during the first half of this year. There are a number of factors why Saudi banks so far this year are continuing to perform well. While the economy grew more rapidly in 2000 than originally estimated, growth is expected to remain strong in 2001, creating greater opportunities for banks. Private sector activities have been expanding and consumers are continuing to spend, both are turning to banks for their credit needs. The fall in interest rates since the beginning of this year was a further boost to the banks, benefiting from a wider margin on fixed rate loans due to lower cost of funding. The banks also enjoyed the fruits of the heavy provisioning and bad-debt write off of the last year. The general trend emerging from the corporate results of the nine listed banks shows strong profitability growth, healthy balance sheets, expanding investment and loans portfolios and widening customer base during the first six months of this year.

The combined net profit of the nine listed banks reached SR4,199 million during the first six months of this year, up from SR3,764 million in the same period a year ago, representing a rise of 11.6 percent. The strong profitability growth this year was mainly due to the 14.5 percent increase in total operating income, a moderate rise of 4.7 percent in the special commission income and a decrease of 2.6 percent in the special commission expenses. On the direct expenses side, salaries and related staff costs increased in line with the long-term trend by 9.5 percent to SR1,646 million in the first-half of 2001, as significant increases were reported by Saudi Hollandi Bank (21.6 percent), Al-Jazirah (17.9 percent), Saudi British Bank (15 percent). However, Saudi American Bank (SAMBA) reported a moderate increase of 8.4 percent during the period, followed by a meager 2.2 percent increase reported by Saudi Fransi Bank, while Riyad Bank reported a drop of 0.6 percent in its salaries and the related staff costs. Including NCB, the overall net profit of the banking industry grew strongly by 16.5 percent to SR5,041 million during the first six months of 2001, up from SR4,327 million on the same period of last year.

Based on the 6-month profits, the combined return on equity of the nine listed banks amounted to 10.23 percent at the end of June 2001, expanding from 9.54 percent on the same period a year ago. The 7.4 percent growth in total assets pushed up the return on assets to 1.17 percent during the first six months of 2001, from 1.12 percent in the same period of last year. During the first half, the combined assets comprised of 32.9 percent of loans & advances, 45 percent investments, 12.4 percent due from banks, 3.8 percent cash & balances with SAMA, 1.6 percent trading securities, and the remaining included fixed and other assets. On the liability side, customers deposits grew by 8.6 percent in the 12-month to June 2001 while ‘due to banks’ shrank by 0.4 percent in the same period.

Saudi American Bank (SAMBA) became the most profitable bank with a 13 percent rise in net profits to SR1,109 million during the first half of this year. With a total shareholders equity of SR8,473 million, SAMBA made a return on equity (ROE) of 13.1 percent for the first half of this year, compared to 10.6 percent over the same period last year, suggesting higher productivity. Al-Rajhi Bank (ARABIC), which took nearly SR1,100 million worth of provisions over the last eighteen months to June 2001, reported a 4.8 percent shrinkage in its net profits to SR890 million in the first half of this year. If this year’s provisions of SR386 million were kept at the last year’s level of SR281 million, the bank’s net profits would have risen by 6.5 percent to SR996 million. The return on equity of Al-Rajhi contracted from 13.7 percent in the first six months of 2000 to 12.1 percent for the same period of this year. Al-Rajhi is still fundamentally a strong bank in the Kingdom as marginal profitability shrinkage can be viewed as a technical adjustment than a real weakness within the bank.

Riyad Bank, the second largest listed bank in terms of total assets, reported 15.3 percent growth in its net profits to SR698 million, largely due to 17 percent growth in its total operating income and a 10.7 percent decline in the special commission expenses during the first half of this year. The bank’s profitability would have been even better if the nearly four-fold increase in the loan loss provisions at SR84 million were not taken in the first half of this year, compared with a relatively low figure of SR17.5 million for the same period a year ago. The return on equity rose to 7.9 percent for the first half this year, compared with 7.1 percent on the same period a year ago, while the return on assets also expanded from 0.97 percent in the first half of last year to 1.04 percent in June 2001.

The medium-size banks — Arab National Bank, Al-Fransi, Hollandi and British — continued to register impressive gains in net-profits during the first six months of this year. Leading the way was Saudi Hollandi Bank, which reported a 27.3 percent increase in profits to SR248 million in the first two quarters of this year after registering a record profit of SR401 million for the whole of last year. The bank’s profitability was boosted by a 22.0 percent rise in total operating income, a moderate rise of 4.2 percent in special commission expenses, nearly 24.2 percent increase in banking services income and a relatively slower growth in the total operating expenses of 17.3 percent during the first half of 2001. The net profit of Saudi-Fransi Bank rose by 24 percent to SR404 million during the first half of this year, up from SR326 million on the same period a year ago. The bank saw its profitability growing due to a 17.6 percent growth in total operating income, a relatively slow growth of 7.5 percent in its special commission expenses and a marginal 2.2 percent increase in the staff expenses during the first half of this year. The least capitalized bank, Al-Jazirah reported that its profits rose by 19.7 percent to SR28 million during the first six months of this year, from SR23.4 million on the same period a year ago.

The combined assets of the nine listed banks rose strongly by 7.4 percent to SR360 billion by the end of June 2001, from SR335 billion over the same period last year. Including NCB, the entire banking industry saw its total assets growing by 8.1 percent to SR463.3 billion by the end of June 2001, from SR428.8 billion over the same period a year ago. The assets of SAMBA, which accounted for nearly 21.2 percent of the total of the nine listed banks, marginally declined by 0.3 percent to SR76.3 billion at the end of June 2001, from 76.6 billion in the same period a year ago. Although customer deposits at SAMBA grew by 7 percent, loans and advances declined by 1.2 percent in the period, investments shrank by 9 percent, fixed assets dwindled by 4.3 percent, and other assets were down by 2.8 percent in the first half of this year. However, SAMBA seems to have utilized the incremental deposits to reduce its ‘interbank’ liabilities to SR7.94 billion in the first six months of 2001, from SR12.20 billion over the same period a year ago.

Riyad Bank reported a 7.2 percent growth in its total assets to SR66.84 billion in June 2001, up from SR62.37 billion over the same period of last year. Although customer deposits at Riyad Bank declined by 1.7 percent to SR38.35 billion in the 12-month to June 2001, expansion in assets was partly financed through a 35.5 percent growth in interbanking lending. The third largest listed bank, Al-Rajhi, saw its total assets growing by 7.5 percent to SR52.45 billion in June 2001, up from SR48.82 billion in the same period of last year. The growth in customers’ deposits at Rajhi amounting to 7.5 percent was utilized in expanding loans to other banks, increasing investments and other assets during the first six months of this year. The medium size banks saw their assets growing by 19.4 percent at Al-Fransi Bank, 13.5 percent at Hollandi Bank, and 10.9 percent at Arab National Bank during the first six months of this year. Elsewhere, the assets of Saudi British Bank, Al-Jazirah Bank and Saudi Investment Bank rose respectively by 5.4 percent, 3.8 percent and 11.2 percent in the year to June 2001.

The demand for domestic lending appears to have been rather moderating ever since the oil price recovery during the last two years. Excluding Al-Rajhi, the combined domestic lending by the listed banks grew by 6 percent to SR118.2 billion in the first two quarters of this year, compared with SR111.5 billion in the year before. The corresponding loans to deposits ratio was 54.8 percent in June 2001, down from 56.2 percent over the same period of last year. This suggests that there is still room to expand the loans portfolio, as the loan-to-deposit ratio was still 5 percentage points below SAMA’s statutory limit of 60 percent. The limiting factor, however, is the tight availability of net domestic liquidity. While the entire banking industry saw total deposits expanding by SR15.46 billion in the 12-month to June 2001, total claims were expanding by SR29.3 billion. This appears to suggest that buildup in claims was funded by the net interbank borrowing and the industry’s own resources.

The loans portfolio of Al-Fransi Bank, which accounted for nearly 14.2 percent of the combined total of the eight listed banks, rose by 20.3 percent to SR16.83 billion at the end of June 2001, from SR13.99 billion on the same period a year ago. The bank used almost the entire 21.8 percent growth in deposits to raise its loans portfolio this year. Other banks that recorded significant growth in their loans portfolios in the first six months of this year included Al-Jazirah Bank (24.7 percent), Arab National Bank (10 percent), and Al-Hollandi Bank (9.6 percent).

Prudent bank management requires that adequate provisions for potential non-performing loans be made on a regular basis, especially in good years when the bank’s balance sheet is most able to provide the necessary funding. The combined loan loss provisioning of the nine listed banks rose by 49.9 percent to SR847.6 million, up from SR565.3 million during the same period a year ago. The sharp increase in provisioning for loan loss was quite in line with the banks credit policy given the domestic conditions going forward. Banks that allocated higher provisioning in the first half of this year included Al-Rajhi at SR386.0 million (37.5 percent up), Arab National Bank at SR157.7 million (59.3 percent up), Saudi Al-Fransi Bank at SR67 million (48.9 percent up), Saudi British Bank at SR113 million (22.9 percent up), and Riyad Bank at SR84.2 million (381.8 percent up). Saudi American Bank, by June 2001, seemed well established in the ranks of the more fortunate banks, adding back SR14.8 million to its profits, from the provisions of the previous years.

On the liability side, customer deposits of the nine listed banks grew by 8.6 percent to SR253.8 billion in the 12-month to June 2001, up from SR233.7 billion over the same period a year ago. Including NCB, the entire banking industry in the Kingdom saw its customer deposits growing by around 6 percent to SR274.7 billion in the first half of 2001, representing an absolute expansion of SR15.46 billion. Within the market segment of listed banks, SAMBA accounted for the largest share of the deposit market at 22.5 percent growing by 7 percent to SR57.2 billion in the 12-month to June 2001. Riyad Bank reported a 1.7 percent drop in its total customers’ deposits to SR38.3 billion at the end of June 2001. Al-Rajhi Bank, the third largest in terms of deposits and the second largest in terms of net-profit, recorded a 7.5 percent growth in its total deposits to SR38.1 billion in the first half of this year, up from SR35.4 billion in the same period last year. The banks, which have achieved significant growth in their customers’ deposits included Al Fransi Bank (21.8 percent), Hollandi Bank (20.4 percent), and Al-Jazirah Bank (16.3 percent) in the 12-month to June 2001.

(The author is chief economist at the National Commercial Bank)

Source: Arab News©


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