Growth in net profit at the top 10 Saudi banks slowed to 0.3% quarter-on-quarter (QoQ) in Q2’23 despite a significant drop in impairment charges, said leading global professional services firm Alvarez & Marsal (A&M).

 

The country’s 10 largest listed banks analysed in A&M’s KSA Banking Pulse are: Saudi National Bank (SNB), Al Rajhi Bank, Riyad Bank (RIBL), Saudi British Bank (SABB), Banque Saudi Fransi (BSF), Arab National Bank (ANB), Alinma Bank, Bank Albilad (BALB), Saudi Investment Bank (SIB) and Bank Aljazira (BJAZ). 

 

Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services, commented: “Profitability for the KSA banks marginally improved during the quarter owing to a substantial decrease in impairment costs. Lenders saw a slight drop in operating income due to flat net interest income (NII) growth and a decline in non-core income. Consolidated balance sheets and capital position of Saudi Arabian banks continues to be strong.

 

Credit growth may slow

“Looking forward, if Saudi Central Bank (SAMA) continues to match policy rate hikes by the US Federal Reserve, as we have seen in the past, we expect banks to face a slowdown in credit growth and some pressure on the loan book due to the economic environment. 

 

As impairment charges decreased by 23.3% QoQ, cost of risk improved by 13 basis points (bps) QoQ. Higher operating expenses (+2.4% QoQ) worsened the cost efficiency, deteriorating the cost-to-income (C/I) ratio by 95bps QoQ. This resulted in slowing down the net income growth (+0.3% QoQ) to SR17.4 billion ($4.64 billion).

 

Return on equity (RoE) declined by 21bps QoQ to 14.9%, while return on assets (RoA) remained stable at 2%. KSA banks witnessed moderate growth in both lending and deposit mobilisation. 

 

Loans & advances (L&A) increased by 2.6% QoQ while deposits growth moderated to 1.7% QoQ. Operating income declined marginally by 0.7% QoQ, due to flat NII growth and decline in non-core income (-3.2% QoQ).

 

Using independently sourced published market data and 16 different metrics, A&M’s KSA Banking Pulse assesses banks’ key performance areas, including size, liquidity, income, operating efficiency, risk, profitability, and capital, tracking Q2’23 results against Q1’23. The report also offers an overview of the key developments affecting the banking sector in the Kingdom.

 

Prevailing trends

L&A increased by 2.6% QoQ mainly driven by growth in corporate / wholesale lending (+3.6% QoQ). Deposits increased by 1.7% QoQ driven by growth in time deposits (+7.9% QoQ). Consequently, aggregate loan-to-deposit ratios (LDR) for the top 10 banks increased 0.8%age points QoQ to 96.1%.

 

Total operating income decreased marginally by 0.7% QoQ in Q2’23. Aggregate net interest income (NII) was flat for the quarter at SR25.3bn, whereas non-core income decreased by 3.2% QoQ, driving the overall decline in total operating income. As SAIBOR increased by 30bps in Q2’23, aggregate total interest cost increased by 20.9% QoQ.

 

Aggregate net interest margin (NIM) contracted by 8bps in Q2’23 on the back of spread contraction and the lag effect of decline in LDR in the previous quarters. Yield on credit (+38bps QoQ) increased to 7.8% due to the rise in benchmark rates while the cost of funds increased by 39bps QoQ to 2.7%. Seven out of the top 10 banks in KSA reported a contraction in NIM. 

 

Cost-to-income (C/I) ratio deteriorated by 95bps QoQ to reach 31.8%. The deterioration was a result of higher operating expense (+2.4% QoQ) as opposed to a decline in operating income (-0.7% QoQ). 

 

The cost of risk improved by 13bps QoQ to settle at 0.4% in Q2’23 as aggregate impairment charges declined by 23.3% QoQ. Nine out of the top ten banks reported an improvement in cost of risk.-- TradeArabia News Service