Reform bonus for Saudi banks as profits surge

Saudi banks, which are working to capitalize on economic reforms, have defied recessionary trends by posting profits during the first quarter of 2018.

The banks have cumulatively reported a 7.5 percent year-on-year increase and an 18 percent quarter-on-quarter growth in net profit for the first quarter, thanks to lower interest expenses and provisioning charges.

“The results are credit positive for Saudi banks because the improvement occurred amid subdued economic activity that negatively affected credit demand and banks’ revenue,” said a report released by Moody’s Investors Service on Wednesday.

The report said that Saudi banks’ interest expenses declined 12.5 percent year on year, reflecting improving funding conditions in Saudi Arabia after significant tightening in 2016.

“Saudi Arabia’s improving liquidity and funding conditions since 2017 have narrowed the Saudi Arabian Interbank Offered Rate’s (SAIBOR) spread against the US dollar-denominated London Interbank Offered Rate, even reaching negative spreads in March 2018, despite a number of rate hikes by the US Federal Reserve,” the report said.

The report further noted that Saudi banks have an average net-loans-to-deposits ratio of 83 percent and more than 60 percent of their liabilities were in non-interest-bearing deposits as of March 2018. 

Commenting on the report, M. Shariful Hassan, a local banker, said that “the results are credit positive for Saudi banks, which have been giving better performance despite subdued economic activity.”

Several foreign banks, including Citigroup, have secured licenses to operate in the Kingdom to derive benefits from the Saudi Vision 2030 reform programs. 

The US bank ended a five-decade presence in the Kingdom in 2004 with the sale of its 20 percent stake in Samba Financial, but in 2015 won permission to invest directly in the local stock market and in January this year gained approval to begin investment banking operations in the country.