Saudi Banks Pause for Breath

In this report, we provide insights on the nine months (9M) 2009 financial performance of the eleven locally-incorporated commercial banks, hereinafter our coverage universe. As of September 2009, our coverage universe accounted for 96% of total system-wide assets. In 2009 year-to-date, our coverage universe remained profitable, liquid and sound even though growth in net profit decelerated to –7.3% Y/Y, which was mainly driven by historically high provisioning (SAR6.7 billion), and to a lesser degree, by the negative contribution of non-asset-based fee income. In contrast to 9M 2008, whereby investment provisions drove the scene, the provisions till date are primarily attributed to the spike in credit provisions by 281% Y/Y. Non-asset based fee income, comprised of banking fees and exchange income continued the downtrend, falling by double-digits, -12.2% and –10.2% Y/Y, respectively. Thus, weighing heavily on core operating revenue by eroding the moderate growth in net special commission income (NSCI). Amid a protracted liquidity glut, the ratio of cash in vaults and at SAMA to total assets rose to 9.9% and capital adequacy ratio (CAR) went up slightly to 16.7%. The strong contribution of non-core income, mainly from trading and fair value through income statement investments explain the rise in CAR. These two items had registered a substantial income of SAR1.36 billion by the end of 3Q compared to a loss of SAR0.82 billion in 2008. Assessing the yearly performance and the historically low records so far, we believe that the steep upward credit cycle had run its course and that banks are reassessing their current credit portfolios in terms of composition and volumes to adapt to a moderate credit cycle, a “New Normal” to be exact .

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