(MENAFN - Arab News) Saudi banks remain resilient on the back of strong fundamentals that include high liquidity, adequate capitalization and prudent risk management and supervision. These fundamentals, in turn, have enabled Saudi banks to recover after two years of weak performance, with profitability and assets growth improving markedly in 2011 and 2012, amidst a robust macro-economic environment, according to a report by the National Commercial Bank (NCB).
The bank expects, therefore, an overall sustained growth in the banking market, with banks maintaining such elevated levels of profitability this year and in 2013. Apparently, most banks have optimized their operating expenses and cost of funding, despite the on- going debt European crisis.
Even though oil supply uncertainties was favorable to the Kingdom's twin balances and, in turn to banks, it is imperative to remain vigilant and assess the likelihood of adverse scenarios that might arise going forward, along with their implications on government oil revenues and the Saudi commercial sector.
The domestic banking system maintained its unique features that represent both strengths and opportunities when compared to global counterparts.
Profitability of domestic banks maintained its double-digit trajectory that was witnessed since Q2, 2011, due to significant asset growth and sharp decrease of provision levels. Attributed to strong economic growth, accelerated government spending and private capital expenditures, The bank expects net income to be driven by volume growth and non-interest income this year and next. Loan growth will maintain its upside trajectory, growing by nearly 15.9 percent and 15.1 percent Y/Y, in 2012 and 2013, respectively, the report said. Although, the expansion in lending seems moderate compared to the more than 20 percent growth rates pre-2009, but is certainly more sustainable in the near to medium-term.
During Q2, 2012, real estate finance had an unprecedented leap at 83.4 percent Y/Y, rising by SR 16.5 billion to SR 47.9 billion, triggered by the July initial announcement of the approval of the mortgage law. This leads us to believe that codifying the mortgage law in the near term will have positive repercussions that will support retail lending in the medium-to-long term.
Saudi banks continue to be shielded from external shocks as they build up their total assets. By the end of Q2, 2012, the 12 locally incorporated banks amassed a total of SR 1.59 trillion after breaching the SR 1.5 trillion level by the end of 2011. Banks have accelerated the pace of growth as the post- crisis era unfolds new trends and opportunities up for grabs, the NCB report said.
The Saudi banking system remains a key beneficiary of the government's expansionary fiscal policy. Smaller banks, namely Alinma and Bank Albilad, have been keen to benefit from exceptional government spending and, thus, were able to grow their assets by 36.6 percent and 29.4 percent, respectively by the end of the second quarter.
The oligopolistic market remains to be dominated by NCB, Al-Rajhi Bank, Samba, and Riyad Bank, holding a combined 58.8 percent of market as-sets. NCB maintains its dominant position with regards to total assets at 20.1 percent, followed by Al-Rajhi Bank that captures around 14.9 percent of the market's assets, moving ahead of Samba to claim the second largest bank by total assets. The bank focused on penetrating the retail market and their campaign has been fruitful.
The report said net loans and advances rose by 16.5 percent in Q2, 2012 following 2011's 11.6 percent. Al-Rajhi Bank's retail penetration resulted in a gain of 16.8 percent on their books, surpassing NCB as the largest lender in Saudi Arabia which holds a share of 16.0 percent. The Saudi Investment Bank (SAIB) was the only bank to reduce its financing activities, with a drop of 2.7 percent on the back of lower corporate loans. In general, the momentum of last year's growth in credit facilities was retained in H1, 2012, and the upside trajectory is expected to remain through the remainder of this year.
Industry-wide deposits posted a new record at SR 1.21 trillion by the end of 2Q2012. NCB's customer deposits reached SR 250.3 billion, albeit contracting on an annual basis by 0.2 percent, but still maintaining its lead position. Meanwhile Al-Rajhi Bank retained its second place by an increase of 11.8 percent. All banks expanded their deposits for the first half of 2012, except NCB, and industry- wide deposits grew by 9.4 percent annually. Amid the globally suppressed interest rates, demand deposits carry on to be the main attraction. Short-term deposits have been preferred due to lower yields on time deposits, which have dropped to represent 34.7 percent of total deposits by June 2012.
Furthermore, foreign currency deposits remained on an upside trajectory in line with last year, expanding by 14.9 percent in first eight months of 2012 to around SR 156.8 billion, the NCB report said.
The Kingdom's banks have recorded a stellar performance on the back of the Kingdom's spending spree and higher operational efficiency. Heavy weight banks, namely NCB, Al-Rajhi Bank, and Riyad Bank, boosted profits by 23.2 percent, 15.8 percent, and 15.1 percent by the end of Q2, 2012, respectively.
Meanwhile, Samba was rather modest, recording the smallest profit growth at 3.5 percent as it struggled with special commission income and trading income levels coupled with higher provisioning. According to preliminary press releases, during the three quarters of 2012, Saudi banks efficiently increased net income levels by 12.4 percent, reaching SR 27.0 billion, driven by higher banking fees and lower provisioning, the NCB report said.