Saudi banks post year to date growth in net interest income

Pickup in credit demand and loan re-pricing to support profits

Saudi Arabia’s 12 domestic banks reported a 3.2 per cent increase in aggregate net profits for the first nine months of 2017, largely driven by the rising net interest income and strong cost discipline.

The improvement in year to date profits of Saudi banks despite the challenging operating environment is credit positive for the banking sector according to rating agency Moody’s.

“The positive results were achieved despite lower government spending and slowing economic activity. We expect real GDP to contract by 1 per cent in 2017, which has led to negative lending growth and higher provisioning charges for most banks,” said Jonathan Parrod, Moody’s

Nine-month data shows, despite a 2 per cent year-on-year decline in net loans as of September 2017, net interest income rose by 8 per cent in the first nine months of the year, driven by a 20-basis-point improvement in the net interest margin, up to 2.9 per cent for the first three quarters of 2017.

Analysts said such improvement reflected a combination of higher asset yields, easing funding costs and repricing of loans. In particular, Bank AlBilad increased net interest income by 22 per cent year on year owing to asset growth that was faster than the system average.

Riyad Bank, Saudi Investment Bank and Bank Al-Jazira all increased their net interest income by more than 12 per cent year on year despite loan book contraction, reflecting the continued upward re-pricing of their loans.

“Three successive rate hikes by the US Federal Reserve since December 2016, and Associate Analyst at the subsequent rise of lending rates by the Saudi Arabian Monetary Authority (SAMA), owing to the peg of the Saudi riyal to the US dollar, allowed domestic banks to re-price their loans, which provided a boost to interest income,” said Olivier Panis, Senior Credit Officer at Moody’s.

Funding costs remained under control owing to a large proportion of low-cost or zero-cost demand deposits exceeding 60 per cent of deposits on average. At the same time, banks transferred their excess of lowyielding cash balances placed with SAMA into investments in the latest government bonds and Sukuk issuances (up 30 per cent year to date as of September 2017), which attract better returns.

Saudi banks’ margin expansion also came from lower interest expenses which were down 4 per cent year on year after the three-month Saudi Interbank Offered Rate (Sibor) normalised at around 1.8 per cent in October 2017, down from a peak of 2.4 per cent a year ago, reflecting improved liquidity in the banking system.

Time deposits

Banks also reduced their reliance on expensive market funding and time deposits down 4 per cent year to date as of September 2017 amid lower asset growth.

In the context of limited growth opportunities, Saudi banks have successfully rationalised their cost bases.

In the first nine months of 2017, operating expenses were up 1 per cent year on year, following a 5 per cent increase in the same period in 2016. Consequently, Saudi banks maintained a stable cost/income ratio of around 36 per cent on average for the first nine months of 2017. Higher net interest income and tight cost control offset the effect of lower non-interest revenue that was down 8 per cent year on year, and rising provisions on loans that were up 24 per cent year on year.

Weak economic conditions drove down the volume of banks’ fee-based business such as trade and foreign-exchange transactions, and affected borrowers’ repayment capacity, leading to higher loan-loss provisioning for almost all Saudi banks.

“Although we expect economic conditions to remain challenging over the next 12-18 months [with real GDP growth of 1.1 per cent in 2018], Saudi banks’ profitability should remain resilient, supported by a gradual pickup in credit demand combined with further loan re-pricing in a rising rate environment,” said Panis.