International rating agency Fitch Ratings said that despite a tougher operating environment in 2002, Saudi Arabian banks are well placed to cope with an uncertain 2003, according to a special report published this week.
There is still a great deal of uncertainty as to what effect the war in Iraq will have on the region. The report, ‘Saudi Banking Annual Review 2002’, said uncertainty about what may happen in the region in the aftermath of a war has forced the banks to adopt a cautious approach to booking new business.
This coupled with low interest rates is likely to put pressure on earnings this year. Therefore, banks in the kingdom will be more dependent than ever on keeping deposit costs down and increasing non-interest bearing deposits to boost profitability. Similarly, cost reduction will come to the forefront as an alternative means of boosting profitability.
In contrast to 2001 when most Saudi banks performed well on the back of buoyant market conditions within the kingdom, the tougher operating environment in 2002, caused mainly by declining interest rates, meant results were considerably more varied. This had created a significant gap between the strongest and weakest performers.
The three largest listed banks—excluding National Commercial Bank—with the biggest franchises were the poorest performers as the small and medium-sized banks recorded the highest rates of profit growth, according to a Fitch press release.
A combination of high oil prices and a global downturn has resulted in surplus liquidity being kept within the kingdom. The banks have been a significant beneficiary of this influx of funds with deposits growing by 7.8 percent and non-interest bearing deposits increasing by 16.2 percent.
This coupled with continuing demand for consumer loans and a pick up in commercial loan demand following a temporary fall in the previous year have been the principal drivers of Saudi banks profitability in 2002. Despite the surge in consumer lending, credit quality of the individual has held up quite well and credit losses have been relatively benign to date. The build up of reserves in good times by all Saudi banks should help them weather a downturn. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
