Consolidated second-quarter (Q2) earnings for Saudi Arabia’s banking sector declined 2.4 per cent year-on-year (y-o-y) with more than half of the banks reporting profits higher than consensus estimates, a report said.

The key surprise across almost all banks was sequentially higher asset yields despite lower effective benchmark rates offsetting the sharp decline in noninterest income, added the “Saudi Banking Sector” report by Al Rajhi Capital, a top financial provider in the kingdom.

“Based on our calculations, asset quality remained broadly stable compared to the previous quarter. Asset yield over benchmark Saibor is already around its historical quarterly highs and hence in an environment with no meaningful loan growth, gross income growth will be driven primarily by an increase in Saibor,” Al Rajhi said in the report.

Participation in Sukuk issuances by the government is likely to improve investment yields and capital adequacy ratios. This could enable Banks to pay higher dividends (till pay-out reaches 50 per cent or more for healthier banks), assuming no major deterioration in asset quality.

“We have already seen a couple of banks reporting higher dividends for H1 2017 which we infer as a sign of confidence. Improved asset yields in Q2 despite lower Saibor. Gross interest income was widely expected to continue to decline for the second consecutive quarter on the back of lower Saibor rates and stagnant advances compared to the previous quarter.

“However, asset yields turned out to be higher than expected, resulting in a surprise at the gross interest income level (which in turn trickled down to net profit level). Given that most banks saw their spreads over effective Saibor increasing, we believe refinancing of loans for the private sector (wherever applicable) may have happened at higher rates,” it added.

Banks could have benefitted from higher earnings on reserves with Sama as well, as Sama raised reverse repo rates from 0.75 per cent in December 2016 to 1 per cent in March 2017 and further raised to 1.25 per cent by mid-June). We also note that Q1 yields could have been lower than usual and hence Q2 is likely to be the right base for observing change in Saibor and yield levels. A shift to higher tenure financing could also have marginally contributed to the increase.

Financing expense was down as expected. While yield on loans and advances was comparatively sticky, deposit costs continued to decline as expected, in-line with the decline in effective Saibor rates. Thus, stable gross interest income combined with lower interest expense boosted the sector’s net interest income even while loans & advances were stagnant. Overall net interest income rose 4.2 per cent q-o-q for the sector.

Decline in commission & fees income was in-line with expectations as well. Despite the 4.2 per cent increase in net interest income, total operating income for the sector was down 0.9 per cent q-o-q, indicating that fee and commission income (among other components of Non-Interest income) was likely to have significantly declined during the quarter.

This was broadly expected as Q2 is a seasonally weak quarter for commission and fee earnings as compared to Q1. In addition to the seasonal impact, lower loan disbursal, remittances and Tadawul trading volumes also put pressure on commission and fees income. – TradeArabia News Service