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Saudi Arabian Banks Set To Recover This Year

Saudi Arabia : 25 April 2011

Non-performing loans will be covered by provisions already in place.

The banks in Saudi Arabia are on the road to recovery in 2011 as the domestic economy improves and sufficient provisions are put in place to cover non-performing loans, according to a local investing firm.

The twelve Saudi commercial banks have experienced difficult times in the last three years due to rising non-performing loans, a consequence of the worldwide financial crisis of 2008 and defaulted debt seen across the region. Jadwa Investments of Riyadh made this statement in a recent study released to local media.

The total of non-performing loans recorded by listed banking institutions rose by almost SR 10.2 billion from the close of 2008 to the close of 2010, an astonishing jump of 132 percent after a five-year period of relative stability. Bad loans among the listed banks went from a close of 2008 figure of 1.1 percent of the overall loans outstanding to a close of 2009 figure of 3.2 percent. This was the highest point recorded since 2003. That amount dropped to 2.7 percent by the close of 2010.

Jadwa’s study shows that enormous provisions due to credit losses have resulted in distortions to the bank earnings in the last three years. These provisions follow years of banks recording high earnings.

Jadwa noted that banks have finished the job of cleaning up the loan portfolios. With shares prices well positioned, this should result in healthy recovery over the course of 2011.

If the listed banks had seen unchanged performance financially in 2010, but their credit loss provisions had been normal, the earnings per share in this fiscal year would be recorded at 35 percent higher than those seen in 2010. With profit growth thrown into the mix, earnings from the banking sector should increase 42 percent this year, according to the study.

Due to improving conditions in the economy investors feel that the total of non-performing loans newly recorded should decrease significantly this year. Also, all signs indicate that most of the provisioning for built up debts occurring in the last few years has been completed.

The report also showed that credit loss provisions increased from the 86 percent seen at the end of 2009 to 109 percent coverage of bad loans for the close of 2010. The SAMA (or Saudi Arabian Monetary Agency) is content with this overall level of provisioning and is encouraging banks to increase their lending.

With the effects of those massive credit loss provisions taken away the bank profits will experience a major impact. But even with the levels of provisioning seen on average from 2000 to last year, much larger profits should be seen in the banking sector, according to the study.

The impact of dealing with increasing non-performing loans has been significant for the listed banks in the last few years. In fact, those provisions resulted in net income levels SR 21 billion less than would have otherwise been seen from 2008 to 2010. Last year, those credit loss provisions resulted in a 26 percent decrease in profits.

Banking capital has also experienced pressures due to heavy provisioning in the past two years. On average from 2000 to 2008 the rate of growth in banking shareholder equity was above 20 percent. In the last two years that rate fell to only eight percent, according to the study.

Some banks have been replenishing through capital increases. These conditions also affected statutory reserves, which grew by only 11 percent in the past two years, after increasing by 15 percent on average over the previous decade. However, the study indicated that despite all of these conditions Saudi banks maintain tier one capital ratios that are quite high, indicating adequate amounts of capital and sufficient room to cover write offs from bad loans without the need to raise new capital.

Distributions of dividends were affected, dropping by 5.4 percent in 2010, with the banks retaining cash in order to support capital. Since cash distributions often lag behind results, Jadwa expects to see lower dividends in 2011 as well. The banks may bump up the distribution of dividends to undergird share prices, as occurred in 2006 and again in 2008, but this move would trigger a slow down in capital growth, according to the study.

Data from SAMA indicated that Saudi banks enjoyed a net income of about SR 26.1 billion last year, just under the SR 26.8 billion seen in 2009. Profits for 2008 stood at SR 29.9 billion, while 2007 was a peak year with SR 30.2 billion in profits.

In addition to the expected lowering of provisioning, industry experts forecast that the performance of banks will improve due to rising economic growth in 2011, which is expected to surpass five percent. Also, an increase in lending is forecasted after a two-year slowdown due to the worldwide fiscal crisis of 2008 and defaulted debt issues in the region.

Paul Holdsworth, Staff Writer, Gulf Jobs Market News
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