Saudi Arabian domestic banks in aggregate reported a 7.5 per cent year-on-year increase (18 per cent quarter-on-quarter growth) in net profit for the first quarter, mainly because of lower interest expenses and provisioning charges, said Moody’s Investor Service in a new report.

 Moody’s said the results are credit positive for Saudi banks because the improvement occurred amid subdued economic activity that negatively affected credit demand (lending contracted by 1 per cent year on year as of March 2018) and banks’ revenue.

Key points:

•    Saudi banks’ interest expenses declined 12.5 per cent year on year (and 2 per cent quarter on quarter), reflecting improving funding conditions in Saudi Arabia after significant tightening in 2016.

•    Saudi Arabia’s improving liquidity and funding conditions since 2017 have narrowed the Saudi Arabian Interbank Offered Rate’s (SAIBOR) spread against US dollar-denominated London Interbank Offered Rate, even reaching negative spreads in March 2018, despite a number of rate hikes by the US Federal Reserve.

•    Since April 2018, the SAIBOR has risen to around 2.4 per cent, its highest level since 2009, following a decision by the SAMA to increase its repo rate in response to a decline of Saudi money rates below US rates.

•    However, Moody’s doesn’t expect that this increase will create immediate upward pressure on interest expenses given limited credit growth and Saudi banks’ favourable funding profile.

•    Saudi banks have an average net-loans-to-deposits ratio of 83 per cent and more than 60 per cent of their liabilities were in noninterest-bearing deposits as of March 2018.

•    Moody’s expects interest income generation to remain challenged given subdued lending activity, somewhat balanced by higher returns on investment portfolios and the gradual re-pricing of variable-rate assets.

•    However, the positive trend in net interest income was partly offset by an 8 per cent year-on-year reduction in non-interest income, leading to 3 per cent growth in operating income.

•    Declining noninterest income arises from less demand (and thus fee-based income) for loans, credit cards, trade and foreign-exchange transactions. – TradeArabia News Service