Kingdom's banks look to golden era

Record prices for Saudi crude oil have sent government revenues soaring and boosted business confidence. As a result greater consumer appetite for personal loans is continuing this year with an increase in deposits helping to finance a steady expansion in loans and advances.

Samba Financial Group (Saudi American Bank) has forecast that the Kingdom's economy will grow 6.5% in real terms in 2005 and maintain annual growth of 5.7% until 2010. 'This will be the best year in the Saudi Arabia's economic history,' it predicts.'

The rush of applications for the newly formed Al Bilad Bank's initial public offering in May was indicative of the confidence in the Kingdom's banking sector. The new bank formed from the merger of eight local money exchange companies is Saudi Arabia's eleventh bank to begin operations in the Kingdom.

Half-year results from the banking sector have also provided ample evidence of this. Samba saw six-months profits jump 50% compared to the same period of 2004 from SR1.2 billion to SR 1.8 billion ($480 million). The bank also saw its deposits rise 20% over the same period to SR104.4 billion. Loans rose 42% to SR 57.3 billion. Customer deposits also increased 26% to SR81.2 billion ($21.6 billion).

National Commercial Bank, the largest of the country's banks, similarly saw first-half profits soar 39% to SR 2.43 billion ($648 million). NCB, which is 80% state-owned, said customer deposits grew 7% to SR 103.75 billion and total assets rose 11% to SR 139.33 billion. Net loans and advances increased 27.1% to SR71.8 billion.

Another of the big four, Al Rajhi Banking and Investment Company (ARABIC) recorded a huge 66% profit increase to SR 2.27 billion ($605 million). CEO Abdullah Al-Rajhi said the bank's net assets rose to SR88 billion in the first half while total revenues reached SR 3.56 billion ($949 million).

Al Rajhi says it is going ahead with a major expansion plan to set up 18 new centres throughout the Kingdom to handle exchange and remittance business.

Profitability extends throughout the sector. Banque Saudi Fransi and Arab National Bank witnessed substantial profit rises of SR 1 billion and SR892 billion respectively.

Banque Saudi Fransi said income from banking services increased to SR412 million nearly double the level of the first half of 2004. Loans and advances rose 32% to SR37.7 billion. Assets jumped 23.5% to SR66.3 billion and customer deposits rose 15% to SR50.4 billion. The bank's chairman, Ibrahim Al-Touq, said the results were achieved through 'a sustained momentum witnessed across all business lines of the bank.'

Saudi British Bank recorded a 44% increase in profits to S1.2 billion ($320 million). Customer deposits rose 13.2% to SR44.5 billion while, loans and advances went up 27% over the same period last year to SR 35.4 billion. Assets increased 21% to SR60.5 billion.

The bank's managing director, Geoff Calvert comments: 'First-half results have been very strong. Operating revenues continue be well above 2004 levels. While non-funds income continues to benefit from a buoyant local equity market, growth has been strong across all areas.'

Saudi Hollandi Bank, reported a net profit of SR455.8 million, a 28% increase over the comparable period of 2004. According to managing director Giel-Jan van der Tol, 'Our performance was healthy as we witnessed encouraging income growth across all our main business activities including corporate banking, consumer banking, treasury and investments. We are particularly pleased with our continued strong performance in the corporate banking sector.'

The Kingdom's smallest bank Bank Al-Jazira also saw its profits rise 278% to SR254.3 million compared to SR67.3 million in the first half of last year Customer deposits went up 41% in the period to reach SR 9.9 billion. CEO Mishari Al-Mishari attributes the results to the success of a strategic modernisation and the bank's development of Sharia-based financial instruments.

The immediate future looks upbeat for the whole sector Saudi banks continue to trim costs with cost to income ratio dropping to 35.8% in the first quarter of 2005 compared to 41% the year before.

Banks also expect to see an increasing amount of income generated from companies seeking listings and through initial public offerings. They also continue to benefit from their status as soul agents for trading in the local capital market and providing management services.

A young and growing population combined with an expanding economy is likely to mean a continuing expansion of banks' loan portfolios helping to increase margins and income levels.

NCB believes that the Kingdom's SR 500 billion of mega-projects over the next five years will also offer the banking sector ample opportunities in structured finance and syndication areas.

However, with very large capital projects, Saudi banks will need to develop co-operation with international institutions to provide the necessary financing instruments and arrangements. In this, a growing local aptitude in Islamic financing could prove a valuable element.