Saudi banks can look forward to another year of healthy loan growth, albeit with diminished opportunities for boosting their profitability, according to Standard & Poor’s Ratings Services.
Bank credit growth has rebounded markedly in the Kingdom over the past year and was running at 14.7 percent YoY in May. S&P estimates suggest that pace of expansion will continue with only slight moderation in the coming months.
According to S&P, Saudi banks’ lending to be about 10 percent in 2012, on the back of sustained retail activity and a gradual pickup in corporate lending toward the end of the year.
“Saudi banks have made substantial provisioning efforts as a precautionary measure supported by the Saudi Arabian Monetary Agency (SAMA), and we expect this trend to continue to a lesser extent in 2012,” S&P said.
Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said: “The positive news is that the pick-up in bank credit we have seen over the past year or so is now giving way to fairly sustained growth at a fairly brisk pace. This is good news for the economy. The positive momentum will be supported by the internationally robust health of the sector where the loan to deposit ratios are fairly low and the provisioning cycle has been largely completed.”
He added: “The S&P analysis suggests that, overall, we are looking at a period of normalization - a rebound giving way to relatively stable growth and profitability. This will likely reflect and go hand in hand with a similar pattern in the broader economy after the bumper year that we saw in 2011.”
Kotilaine said the newly approved mortgage law may offer some convergence growth potential but the pace may well prove measured even there. You need new regulations, procedures, and products and the market discovery process itself should be somewhat gradual. Overall, the outlook is good but less exceptional than during the rebound phase.
S&P said in its report “Gulf Banks Shrug Off Eurozone Turmoil To Continue Steady Recovery From 2008 Crisis” released yesterday that Gulf banks are to continue their steady recovery from the 2008 crisis and remain isolated from euro zone turmoil for the rest of 2012 and 2013.
S&P said the euro zone turmoil is unlikely to have a big direct impact on the GCC banks because their net funding dependence on European banks, external funding in general, is largely limited and manageable.
“We believe the trend of declining loan loss provisions will continue for most of the banks in the Gulf Cooperation Council, resulting in further recovery in reported net profits despite adverse conditions in the euro zone and international banking markets,” S&P’s credit analyst Timucin Engin said in a statement.
The report says banking industry in the GCC will continue to grow at a low pace over the next two years as the banks in most GCC countries keep their more conservative lending stance, given the uncertainties in the global economy. The system’s compound annual growth rate increased by a very fast 22 percent between 2002 and 2008, but fell sharply to 4.4 percent between 2008 and 2011.
Customer deposits continue to be the main source of funding for GCC banking systems, according to year-end 2011 central bank data. Saudi and Kuwaiti banks are operating with very comfortable loan-to-deposit ratios of 78 percent and 84 percent, while the UAE and Qatari banks are operating with stretched, but at this point manageable, ratios of 107 percent and 111 percent.
The S&P report said GCC banking systems are traditionally net placers of funds in international markets. Gross exposures are limited and manageable for most countries as banks mainly rely on core customer deposits to fund their lending activities. Saudi, Kuwaiti, and Omani banking systems have strong net asset positions, whereas the UAE and Qatari systems have limited but manageable net borrower positions.