Saudi Arabia's banks are expected to maintain strong performance through 2011 as lending picks up and high public spending supports their business, the National Commercial Bank (NCB) said in a new study. The Kingdom's 12 commercial banks netted around SR26.7 billion in profits last year, nearly four percent above their 2009 income as a result of higher banking fees and lower provision allocations, the study said. "Overall, the Saudi banking system remains profitable with plenty of room to grow. As the global risk averseness continues to diminish, Saudi banks cautiously follow suit and deem eventually to expand their loans portfolios …. with over SR1 trillion deposits on balance sheets, and a range of lending opportunities in an expanding economy, banks are set for a profitable year, as seen in the first quarter with 5.6 percent growth in the industry's net income," the study said. The report expected a recovery in 2011 for the brokerage business since trading volumes and credit activities have already picked up. Foreign exchange and other operating income also posted a gain of around 6.6 percent, benefiting from higher remittances and efficiency. "We expect this trend to continue for the remainder of 2011 and well in 2012. However, such record-low expense growth can rebound if banks' appetite for balance sheet expansion gains further momentum," NCB said. Core operating revenues remained around SR52 billion, adding a mere SR295 million, growing 0.6 percent year-on-year in 2010. Operating expenses gained only 2.5 percent in 2010, compared with 3.8 percent in 2009, indicative of increased cost control measures. Return on average assets and return on equity for Saudi banks rose to 2.2 percent and 16.3 percent, respectively in the first quarter of 2011 from two percent and 14.7 percent by the end of 2010. However, special commission expense recorded a staggering 49.3 percent drop due to the decline in cost of funds from 0.98 percent in 2009 to about 0.48 percent in 2010, the study said. Besides, "banks need to address the asset liability maturity mismatch and diversify their funding base into dollars as well. In turn, they would be in a stronger position to seize the emerging lucrative opportunities, especially after the fall in provisions, which are already enhancing the income to cost ratio." Total provisions stood at SR9.9 billion in 2010, nearly SR1.3 billion less than 2009. Investment provisions plunged by a massive 82 percent as banks shifted their investments to higher grade securities, the report said. Provisions for credit losses declined by only around 8.9 percent to SR9.5 billion. "In fact, banks sought after more collaterals and increased their non-performing loans (NPLs) coverage ratio." Functioning as a security cushion, collaterals increased by SR23 billion to SR168.7 billion, a 15.8 percent growth. NPLs contracted by 10 percent to SR23.2 billion, amounting to three percent of gross loans, higher than the 3.4 percent in 2009. Meanwhile, Banque Saudi Fransi said bank credit to the private sector totaled SR767.9 billion in May, whereas credit to the public sector totaled a mere SR27.6 billion.
