Despite regional unrest, Saudi banks performed exceptionally well in the second quarter of this year. The 12 local commercial banks recorded a staggering SR8.2 billion in net profits, marking a 15.3 percent increase over the same period last year, according to the National Commercial Bank’s (NCB’s) weekly Market Review & Outlook.
All banks recorded gains, some with quadruple digit growth rates, apart from Samba Financial Group which witnessed a decrease of 9.7 percent due to lower net special commission income (NSCI) levels, a decline of 5.7 percent.
Similarly, SABB and The Saudi Investment Bank recorded shrinking NSCI of 17.4 and 1.8 percent respectively. System-wide, operating income gained only 1.4 percent on an annual basis. The NCB report said net profit gained on the back of lower provisions, which resulted in reducing total operating expenses. As banks step away from the risk averseness stance witnessed in 2010, profit margins will regain momentum and prove fruitful for 2011.
Total assets of Saudi banks expanded by 2.9 percent while investments gained an impressive 11.8 percent over the same period.
The report said Saudi banks would need to continue deploying their liquid assets throughout the remainder of 2011 in order to maintain their profitable momentum.
Meanwhile, Standard & Poor's Ratings Services said in a report on Friday that Saudi commercial banks continue to rank among the world's most profitable banks.
The report said these banks operate in a potentially volatile but favorable environment, with high oil prices and vast spending plans announced by the Saudi government. The key structural features of the Saudi banking system solid performance are low cost of funding, good pricing power, high efficiency, and a tax-free environment.
“The Saudi banking system continues to remain healthily solid. Banks are posting strong profitability results and a testament to this is the most recently announced second quarter results in light of the fact that we haven't seen any interest rate changes,” John Sfakianakis, chief economist at Banque Saudi Fransi, said.
Banks should continue to grow at a healthy pace going forward as the economy is on sound growth grounds. The government continues to put its money where its mouth is and provides ample support for all the growth cylinders of the economy to keep on firing, he added.
There is no doubt that prudential regulation and proper banking are key to the successful operation of a banking system and SAMA (Saudi Arabian Monetary Agency) is a central component. Also the macroeconomic environment is another key component to the successful operation of the banking system. One of the lowest government to GDP (gross domestic product) debt ratios in the world as well as the country's net credit status, high foreign asset base and ability to withstand exogenous shocks such as the 2009 financial crisis are essential toward achieving greater sustainable growth, Sfakianakis said.
For the macroeconomic well-being the policies of the Ministry of Finance have to be duly recognized. There is little doubt that banks will remain profitable this year given that credit is becoming from readily available and banks are taking advantage of the general growth conditions in the country, he said.
Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said: “It is probably correct to say that Saudi banks now rank not only as some of the most profitable in the world but also some of the safest. The risk aversion that took hold after the onset of the global economic crisis has caused Saudi banks to further bolster their risk management and provisioning. Thanks to such steps, as well as SAMA's strong track record as a regulator, Saudi banks are, in the face of exceptional global economic uncertainty, remarkably well positioned to weather even a severe storm.”
But, he said, risk management is not a growth strategy. There is a growing need for Saudi banks to transition from their current defensive mode to a more growth-oriented focus. A balanced economic recovery in the Kingdom will only take hold if and when the recent positive trends in bank credit are further consolidated and amplified. In real terms and by historical standards, the progress to date is still modest, not yet sufficient to rectify the heavy reliance of the economy on oil-fueled government spending. Banks — both directly and through their investment subsidiaries and counterparts — will also have a critical role to play in fueling the structural growth stories in the Kingdom. These include the considerable opportunities that exist in areas such as housing/mortgages, infrastructure development, and economic diversification.
With their financial health enviable by global standards, the true challenges for Saudi banks come from mobilizing their ample financial resources to more effectively fuel economic growth, Kotilaine said.