Ris­ing pro­vi­sions take toll on Saudi bank prof­its in H1

The Pak Banker - - FRONT PAGE - DUBAI -AP

Ris­ing loan loss pro­vi­sions ad­versely im­pacted prof­its of Saudi Ara­bia's banks in the first half of 2020 de­spite an im­prove­ment in loan growth and to­tal rev­enues, ac­cord­ing to rat­ing agency Moody's.

Ten out of the 11 pub­licly traded Saudi Ara­bian banks re­ported first-half ag­gre­gate prof­its of 19.1 bil­lion Saudi riyals, down 10 per cent from 21.2 bil­lion Saudi riyals in first-half 2019.

"The de­cline re­flects higher loan im­pair­ments in an­tic­i­pa­tion of credit losses and weaker as­set qual­ity, a credit neg­a­tive for the sys­tem," Moody's said in a note. Ag­gre­gate loan-loss pro­vi­sion­ing for the first half in­creased to 0.93 per cent of gross loans from 0.68 per cent in 2019 and off­set a 3 per cent in­crease in net rev­enue.

"In line with our ex­pec­ta­tion that the non-oil sec­tor will con­tract to around 4 per cent in 2020 from growth of 3.3 per cent in 2019, we ex­pect lower oil prices, re­duced govern­ment spend­ing and coro­n­avirus-in­duced dis­rup­tions to fur­ther erode banks' as­set qual­ity over the next 12-18 months," said Chris­tos The­ofilou, a se­nior an­a­lyst at Moody's.

Moody's noted that the de­cline in prof­its and in­creased loan im­pair­ments were less se­vere than in other Gulf Co-op­er­a­tion Coun­cil (GCC) coun­tries. In the UAE, for ex­am­ple, ag­gre­gate profit for the four largest banks was down 36 per cent and loan im­pair­ments to gross loans in­creased by 77 ba­sis points to 1.6pc.

"We ex­pect ad­di­tional pro­vi­sions for Saudi banks in the com­ing quar­ters, al­though both profit ef­fects and loan im­pair­ments will likely re­main below GCC peers such as the UAE, re­flect­ing the stronger his­tor­i­cal per­for­mance and re­silience of the Saudi bank­ing sys­tem," said The­ofilou.

Saudi banks re­ported 8 per cent first-half loan growth and 14 per cent in­vest­ment port­fo­lio growth, drove net in­ter­est in­come higher and off­set lower lend­ing and in­vest­ment rates amid lower ref­er­ence rates. Non­in­ter­est­bear­ing de­posits from the cen­tral bank, which kept the banks' cost of fund­ing low, mainly funded the growth.

Higher loan growth was sup­ported by con­tin­ued strong growth in mort­gage loans and a tem­po­rary spike in con­sump­tion be­fore a 1 July value-added tax in­crease to 15 per cent from 5 per cent pre­vi­ously. High loan growth was in spite of lower eco­nomic ac­tiv­ity be­cause of coro­n­avirus re­lated con­tain­ment mea­sures.

Banks' ag­gre­gate loanto-de­posit ra­tio was 87 per cent as of 30 June, ver­sus 84 per cent in De­cem­ber 2019, as loan growth out­paced the 4 per cent growth in de­posits.

The banks pre­served their strong cap­i­tal buf­fers, with an ag­gre­gate share­holder ra­tio of 14.1 per cent as of June 2020, com­pared to 14.5 per cent as of De­cem­ber 2019. "We ex­pect Saudi banks to main­tain a high cap­i­tal ra­tio, which are among the strong­est in the GCC," Moody's said.

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