Higher business volumes driving profitability of banks in Saudi Arabia

In a report published titled "Higher Business Volumes Are Key Driver Of Saudi Banks' Soaring Profitability," Standard & Poor's Ratings Services analyzes the factors behind this phenomenal performance, segregating volume from price effects.

"The main conclusion we draw from the analysis presented in this report is that high volumes of credits and brokerage transactions have been the key drivers boosting Saudi banks' profits over the past two years," said Standard & Poor's credit analyst Anouar Hassoune.

The contribution of interest income to profitability was more contrasted. The yield on the loan book decreased in 2004, and increased in 2005, reflecting interest rate movements on the dollar, to which the Saudi riyal is pegged. When funding cost is taken into account, the effect of interest rates on net interest margins was negative in both years. In both years, Saudi banks also earned huge revenues from brokerage fees, on the back of the tremendous boom in stock trading in the kingdom.

"For full year 2006, we expect loan growth to remain high, the funding mix to evolve toward longer term funds raised in the international markets, and brokerage fees to remain relatively stable at high levels, despite the severe correction of Saudi stock prices," said Mr. Hassoune.

Altogether, these effects should translate into higher profits for Saudi banks in 2006, although the rate of increase is likely to be in the single digits.