Sunday 11, March 2018 by Nabilah Annuar

Recovery in 2017 net profits is a credit positive for Saudi banking sector


Results are credit positive for Saudi banks because their improvement occurred amid subdued economic activity that negatively affected credit demand and banks’ revenue.

Following Banque Saudi Fransi’s (A1 stable, a31) submission of its preliminary 2017 financial results to Tadawul, Saudi banks in aggregate have reported a nine per cent year-on-year increase in net profits. This was up from a five per cent year-on-year decline in 2016, mainly because of lower interest expenses.
Moody’s in a commentary stated that the results are credit positive for Saudi banks because their improvement occurred amid subdued economic activity (Moody’s estimates that real GDP contracted 0.7 per cent in 2017) that negatively affected credit demand (lending contracted by 1 per cent in 2017) and banks’ revenue.
Saudi banks’ interest expenses declined 12 per cent last year, reflecting an improvement in domestic funding conditions after significant tightening in 2016 because of falling oil prices. After the average cost of funds doubled to one per cent in 2016, it fell to 0.9 per cent in 2017. With limited growth opportunities, Saudi banks’ financing needs moderated, and banks were able to unwind more expensive funding sources such as time deposits, which declined five per cent year on year in 2017, and wholesale funds, which declined nine per cent year on year.
Moody’s expect the gradual pickup in credit growth and the positive effect of higher interest rates on margins to support Saudi banks’ profitability this year and counterbalance continued provisioning efforts. With an improved return on assets of two per cent for 2017, versus 1.9 per cent in 2016, the ratings agency expect Saudi banks’ profitability to continue to outperform other Gulf Cooperation Council banking systems.
The improved funding environment reflected a steady reduction in the Saudi Arabian Interbank Offered Rate (SAIBOR), a gauge of domestic funding conditions and a benchmark for lending rates. Also aiding Saudi Arabia’s funding environment was the Saudi Arabian Monetary Authority’s decision to keep its repo rate unchanged at two per cent, despite three interest rate increases by the US Federal Reserve in 2017, to support domestic liquidity and contain banks’ funding costs.
Lower funding costs last year supported a nine per cent year-on-year increase in net interest income, and mitigated slower growth in interest income of four per cent, versus 22 per cent in 2016. However, the positive trend net interest income was partly offset by a seven per cent reduction in non-interest income for the second consecutive year, leading to four per cent growth in operating income.

The declining trend in non-interest income since 2016 arises from reduced fee-based business for banks, such as trade finance activities, foreign-exchange transactions and lower demand for personal loans and credit cards. As a proportion of operating income, Saudi banks’ non-interest income shrank to 26 per cent of total operating income in 2017 from 33 per cent in 2015. And Saudi banks slightly improved their reported cost-to-income ratio to 36 per cent in 2017 from 37 per cent in 2016, reflecting flat year-on-year expenses versus a six per cent increase in 2016.

Higher operating revenue and tight cost control supported an increase in Saudi banks’ pre-provision income to 2.5 per cent of total assets in 2017 from 2.4 per cent in 2016 and offset the negative effect of increased provisioning on banks’ profits. Net impairment charges on loans increased by 3.5 per cent in 2017, following a sharp increase of around 50 per cent in 2016, totalling more than SAR 10 billion, the highest level since 2009.

Although Saudi banks’ cost of risk compares favourably with those of other Gulf Cooperation Council banking systems, it increased to 19 per cent of pre-provision income in 2017 from 13 per cent in 2015. Fiscal consolidation measures and subdued economic growth have triggered asset quality pressures in banks’ lending books since 2015, particularly in the building and construction segment, raising provisioning requirements.


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