Saudi Arabia’s commercial banks earned nearly SR4.9 billion in the first two months of 2010 and are projected to perform well through the year because of higher lending, lower provisions and stronger oil prices.
The Gulf Kingdom’s 12 banks earned around SR2.5 billion in January while the remaining income was recorded in February. At that average, their combined net earnings could be around SR30 billion.
“Saudi banks will perform well through 2011 and their income could exceed that in 2010 as credit is expected to pick up and economic conditions have largely improved,” the Riyadh-based Jadwa Investments said.
Experts said expectations of lower loan loss provisions would also allow the banks to boost net income as such provisions were the main factor in the decline in their earnings over the past two years compared with 2008 and 2007.
In 2010, the net income of Saudi banks stood at around 26.1 billion, slightly lower than the 2009 earnings of nearly SR26.8 billion. The profits totalled around SR29.9 billion in 2008 and peaked at SR30.2 billion in 2007.
Balance sheets showed the Kingdom’s banks have allocated more than SR20 billion for loan loss provisions over the past two years
Provisions in the third quarter of last year surged by nearly 27 per cent to SR3.1 billion compared with the previous quarter and about 30 per cent over the same period of 2009, according to Jadwa.
Despite the improvement in domestic economic conditions because of higher oil prices, the performance of Saudi banks through 2010 remained stifled by low lending and accumulation of loan loss provisions.
Besides expectations of lower provisions this year, experts believe the banks’ performance would improve because of higher economic growth, which is forecast at more than five per cent in 2011. Another factor is a projected pick up in lending following a slowdown of nearly two years because of the 2008 global fiscal crisis and regional debt default problems.
In 2010, domestic credit rebounded by around 5.2 per cent but growth remained far below the boom period of 2007 and 2008, when growth topped 30 per cent. According to a Saudi bank, lending is expected to continue recovering through 2011 as a result of better economic conditions and other factors.
National Commercial Bank (NCB, the largest Saudi bank, said it based its expectation on continued recovery in the Saudi economy, large public capital expenditure and planned projects worth a staggering SR2.5 trillion.
In a study, its figures showed lending by Saudi banks bounced back during 2010 after a 1.1 per cent drop in 2009 following a 3.8 per cent growth in the Saudi real GDP last year against 0.16 per cent in 2009.
It said growth helped restore the confidence to the banking system to start expanding credit again and utilize untapped resources as shown by declining excess reserves and net foreign assets.
The study noted that a sharp rise in T-bills indicates that banks have the ability to redirect their lending to extending or providing credit for existing and new clients, but added that they are still reluctant to reach the same level of credit growth.
“As government expenditure on infrastructure projects increases, demand for credit will be driven upwards. The government announced SR580bn in spending for 2011 (of which capital expenditure is expected to be around 44 per cent), although actual expenditure is projected to ruse to SR677bn in 2011,” it said.
“Demand for bank credit is expected to increase in 2011, with an estimated SR2.5 trillion worth of projects being on hold or in the planning phase as of February, an 8.8 per cent increase.”
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