Stronger challenges facing Saudi Arabian banks are likely to be reflected in third-quarter results as earnings are hit by weak stocks, more delayed payments in the building industry and slacker loan growth.
The kingdom’s 24 banks have so far delivered generally better than anticipated earnings since the roughly 50 percent decline in oil prices from June last year, helped by the opening of the Saudi market to direct foreign investment.
“We are expecting slower earnings (growth) compared to previous quarters. Banks have made good money in the first half of the year but the outlook for earnings drivers remains weak,” said Murad Ansari, analyst at EFG-Hermes.
EFG-Hermes is forecasting lower net income on an annual basis for half of the 10 banks it covers including Samba Financial Group, Riyad Bank, Saudi British Bank (SABB), Saudi Hollandi Bank and Bank Albilad.
Al Rajhi Bank would report the strongest earnings growth, rising 12 percent from the year earlier, EFG-Hermes forecast. Banks are expected to start releasing quarterly results this week.
Results should be supported by lenders’ purchases of local currency government bonds, a move set to improve asset yields further in a banking sector already holding some of the most secure balance sheets in the industry worldwide.
The opening of the market to foreign investment helped propel stocks in the first part of the year, giving banks’ brokerage businesses a lift and bolstering investment income.
That evaporated by the third quarter as trading volumes dipped 40 percent from the previous quarter and the benchmark Tadawul Index sank 19 percent.
The third quarter is generally slower for banks, as it includes the quieter, summer months and this year Ramadan and Eid holidays.
DELAYED PAYMENTS
In a state where the pace of growth is largely determined by oil revenues and government spending, banks are starting to see a pick-up in delayed payments, say bankers.
“It’s widespread even in the good times but is getting worse,” said a banker. “Contractors are not getting paid for projects and that means delays in payments to sub-contractors all the way down the line.”
It may be several quarters before the full extent of worsening credit conditions feed through to banks’ balance sheets in the form of defaults.
In what analysts say is a sign of a slowdown of payments from the government, bank loans to contractors rose 16 percent in the second quarter on an annual basis, nearly twice the rate of total credit growth across corporate and government sectors. That could leave lenders exposed if the pace of building work slowed.
During the third-quarter, banks scrambled to gauge the fallout from a decision by the government on Sept. 15 to suspend Saudi Binladin Group, one of the kingdom’s largest contractors, from new contracts after the collapse of a crane in Mecca, killing at least 107 people.
Banking sources say the government is unlikely to let the company fall into financial troubles because of its close links to the state and the banking system — the company’s credit exposure stands at 45 billion riyals ($12 billion), representing 15 percent of banks’ equity, estimates NCB Capital.
Riyad Bank and Banque Saudi Fransi have among the largest gross loan exposure to the building sector, while SABB and Al Rajhi Bank had built up the least provisions against bad loans in the industry, according to a JP Morgan report. ($1 = 3.7501 riyals).
