Saudi banks, financial sector to see continued growth in 2012 (page 1 of 2)

On the main Saudi stock index the kingdom's financial sector lost 12.7% over the course of 2011, however according to National Commercial Bank (NCB), the kingdom's largest bank by assets, banks in Saudi Arabia recorded SR31.6bn in net profits in 2011, an 18.4% increase over net profits for 2010.

Core banking activities gained as net special commission income rose 4.7% year-on-year, but it was the higher efficiency levels of banks, driven by the traditionally risk-averse stance of Saudi banks, which made the real difference to profit margins in 2011 - whatever the stock ticker said.

Increase in private sector lending

According to the Saudi Central Bank, bank lending in Saudi reached a total SR891.6bn as of end-November 2011, up 15% on the year-earlier figure. This positive momentum was generated largely by a rise in credit to the private sector, where loans extended hit SR859.4bn in November 2011 alone, up 15% year-on-year. Lending to the public sector, meanwhile, stood at SR31.9bn as of end-November 2011, down 0.3% year-on-year.

The shift towards private sector lending reflects not just the robustness of the Saudi economy, which NCB estimates grew 6.8% in 2011, but also the particular circumstances thrown up by 2011: the Arab Spring and regional uncertainty meant high oil prices and increased oil production, while the Saudi government's response to the unrest has been to unveil a hugely ambitious spending programme which represents an excellent opportunity for banks to drive growth in 2012.

All domestic Saudi banks report full-year net profit

According to banks' individual statements, all 12 domestic Saudi banks made a full-year net profit in 2011. Moreover, 10 out of 11 publicly traded domestic banks grew the value of their loan portfolios over the course of the year, with Alinma Bank (up 62%), Bank Al Jazira (25%), Al Rajhi Bank (17%), SABB (14.3%) and Banque Saudi Fransi (14%) showing particular progress. Banks provided SR854.5bn in loans, an 11.6% increase over 2010, while deposits expanded by 10.7% over the same period.

And these and other institutions will be heartened by the anticipated decline in problem loans: a report published in December 2011 by ratings agency Moody's forecast that problem loans, those overdue by 90 days, would fall to between 2.5% and 3% of gross loans in 2012, compared to 3.5% at the end of 2010.

The healthy level of capitalisation of Saudi banks means they are well-placed to improve lending in 2012, particularly on the back of the kingdom's response to the regional unrest which cast a shadow over the Middle East and North Africa in 2011. Early last year King Abdullah announced $130bn of new fiscal initiatives, which include increased public-sector hiring and, in an effort to address the dearth of residential housing, a $67bn programme to build 500,000 affordable housing units. These far-reaching spending initiatives amount to some 30% of GDP, and banks will certainly be looking to deploy their excess liquidity to take advantage of upcoming opportunities afforded by such largesse, particularly in the high-margin retail and real estate sectors.

Nevertheless, banks cannot afford to rest on their laurels, nor expect another year of bumper growth such as that enjoyed in 2011. Total bank assets expanded by 9.2% year-on-year, adding SR126.5bn over the financial year of 2011. However the efficiency with which banks optimised their assets in 2011 leaves limited room for improvement in 2012, according to NCB.