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Saudi Banks Emerging From Crisis: Analysts

Saudi banks, often viewed as a benchmark for the region, have been struggling to shrug off the overhang from the 2008 financial crisis, and have been hit in particular by the more than $20 billion in loan defaults by the two family-owned businesses of Saad and Al-Gosaibi.

Main roads in Riyadh are decorated with national flags and portraits of King Abdullah bin Abdul Aziz of Saudi Arabia on February 21, 2011 amid preparations to welcome the Saudi royal back as he is expected to return home later this week after convalescing in Morocco from operations in New York, according to a source close to the oil-rich Gulf monarchy. AFP PHOTO/FAYEZ NURELDINE (Photo credit should read FAYEZ NURELDINE/AFP/Getty Images)
Fayez Nureldine

But despite the relentless Arabian summer heat, the latest reports on second quarter earnings sent investors into the weekend with arguably something to cheer about.

Heavyweight banks broadly met or exceeded market expectations, with the country’s largest lender, Al-Rajhi Bank, posting a SAR 1.843 billion ($491.5 million) net income, marking a 3.6 percent increase over the same period last year. NCB Capital maintained an ‘Overweight’ rating, with a target price of SAR 84.9, a more conservative estimate than the ‘outperform’, SAR 97 by Credit Suisse.

Meanwhile, SABB posted a 90.6 percent rise in second quarter profit, coming in at SAR 852 million ($227.2 million). The bank is 40 percent owned by HSBC Holdings Plc.

Riyadh Bank and Saudi Hollandi Bank also beat estimates. Samba Financial Group, Saudi Arabia’s second largest lender by market value, reported a 9.7% drop in second quarter profit, although still in line with prior market estimates.

Analysts noted the clear improvement from a healthy net income growth, despite the low interest rate environment.

“We are also encouraged by the loans’ growth ahead of that of deposits,” Mahdi Mattar, head of research and chief economist at CAPM Investment, told CNBC.

Credit growth in Saudi Arabia has been recovering, with private bank credit excluding investments in securities expanding 7.1 percent in May, compared to the same period last year. The latest data from the Saudi Arabian Monetary Agency (SAMA), the country’s central bank, further shows that the figure is still far off the pre-crisis levels of roughly 21 percent in 2007.  The Kingdom maintains a conservative loan-to-deposit ratio cap of 85 percent.

The bad loan provisioning, which ate chunks out of banks' bottom lines quarter after quarter, appears to be on the downward slope.

With the massive stimulus packages passed earlier this yearto stave off the wave of unrest that became the Arab Spring, banks were bound to get a bit of a boost. The data points, and the latest earnings, convinced Haissam Arabi, CEO of Gulfmena Investments, to start accumulating in Saudi financials.

“Capital adequacy and provisions are satisfactory and with top line prospects available now, the banks are well poised to re-rate in the near term, especially given that they are trading at historic low multiples relative to the Saudi market,” he said.

Indeed, analysts see significant upside to several Saudi banks. The highly-anticipated mortgage law continues to be one possible future catalyst for stimulating credit growth further, although there is considerable skepticism in the market about the numbers being circulated.

Credit Suisse has upgraded Saudi banks, pointing that a new sector average target price suggests around 30 percent of "upside potential”. The report also makes clear that within the credit recovery cycle, Saudi banks continue to be the most advanced.

There’s seems to be little doubt about the direction. Despite the sector being lower some 8 percent so far this year, Mattar believes the projected loan growth and higher interest rates down the line will only prove supportive for Saudi banks.