A sharp recovery in domestic credit will ally with low funding costs to boost the net profits of Saudi Arabia's banks to their highest level in 2013 after a slowdown in the wake of the 2008 global fiscal distress, according to a Saudi investment firm.
Credit to the private sector by the Gulf Kingdom's 12 commercial banks surged by nearly 16.5 per cent in May to extend a boom in lending after near zero growth in the aftermath of the 2008 fiscal turmoil and the ensuing debt default crisis in the Kingdom, the Riyadh-based Jadwa Investments said in a study sent to Emirates 24/7.
"The expansion in credit and low funding costs continue to contribute to a pick-up in bank profits," it said, adding that in May, banks recorded a profit of SR3.2 billion, 11 percent high than in May last year, taking the year-to-May profit to SR15.7 billion.
"We remain positive on bank profit growth, based on a solid path for credit growth and low funding costs in 2013. In fact, we expect this year's bank profit to surpass the all-time high of SR34.7 billion recorded in 2006."
Its figures showed credit to the private sector (excluding securities lending) expanded 16.5 percent year-on-year (1.3 percent month-on-month) in May compared with 16 percent year-on-year (1.6 percent month-on-month) in April.
In nominal terms, banks increases their credit portfolio by SR12.8 billion in May leading to SR61.8 billion of new net credit issued so far this year compared with SR52.6 billion for the same period last year.
Loans, advances and overdrafts combined to make the largest contribution (16.4 percentage point) to the year-on-year credit growth in May, the report showed.
In addition, total claims on the private sector, which include investment in private securities, expanded 1.2 percent month-on-month in May pushing the year-on-year growth to 16.5 percent compared with 16 percent the previous month.
"We expect growth in credit to the private sector to expand further this year (16 percent year-on-year), although with a smoother trajectory than we saw last year (16.4 percent year-on-year). On this basis, we expect the incremental increase in bank credit issued to the private sector to reach SR154 billion in 2013 compared with SR135.7 billion last year and close to an all-time high record of SR155.3 billing in 2008."
"Expansionary government fiscal policy and rising disposable income are expected to be the main growth driver, while regional geopolitical risk and external economic environment present a downside risk on market sentiment, hence credit growth."
In 2012, Saudi banks earned around SR33.5 (Dh33.2 billion), their second highest profits since the 2006 record income and analysts attributed the surge to credit recovery, higher investment return and project upturn.
The earnings last year were nearly 8.4 per cent above the 2011 net income of around SR30.9 billion but the profit growth in 2012 was much slower than in 2011, when it stood at around 18.3 per cent. Net earnings of the Saudi banks, with the second largest assets in the Arab world after UAE banks, were relatively low during 2009-2010.