Saudi banks start feeling tremors of global meltdown

Saudi Arabia’s banking sector, one of the largest in the Middle East, has started to feel the pinch of the global financial crisis with a decline in its performance in the third quarter for the first time in 2008. After surging by 29.1 and 8.3 per cent in the second and first quarters of this year, the combined net profits of the kingdom’s listed banks plunged by nearly 22.2 per cent in the third quarter, banking data showed yesterday. The decline was partly due to growing loan loss provisions that reached nearly SR1.2 billion (Dh1.17bn) at the end of September, according to the National Commercial Bank (NCB), the country’s largest bank. “Since the beginning of the global financial crisis in August 2007, it was apparent that no country, industry or individual will escape the unfolding negative repercussions, whether they emanate from the mere psychological fear or the weak macroeconomic fundamentals or both,” NCB said in its weekly economic bulletin, sent to Emirates Business. “As a result, the kingdom was no exception in being relatively impacted despite the fact that the economy continued to achieve healthy twin surpluses in the fiscal and current account balances. Accordingly, it is appropriate to view the Saudi banking performance in this current context especially that the first decline in profitability this year by 22.2 per cent Q/Q in 3Q08 came in after positive growth rates of 29.1 per cent and 8.3 per cent in 1Q08 and 2Q08, respectively.” But NCB stressed it remains implausible to largely attribute such performance to the delayed impact of the financial crisis on Saudi banks. It said this is because most global banks had reported losses for the past four quarters, with most asking for liquidity injections or capital contributions. “In addition, the current mark-to-market accounting standards do not give banks ample room to manoeuvre when it comes to hiding huge losses on their trading and available for sale investments, which would have been apparent along the 15-month period of the ensuing crisis,” it said. “Finally, although the SR1.21bn in loan loss and investment provisions had clearly weighed heavily on the banking sector’s Q3 profitability, it does represent an efficient way of managing profitability in times of stress rather than an implicit declaration of future losses.” In another report, a key Gulf investment bank said the global financial crisis has impacted Saudi banks despite what it termed as their limited exposure. “The Saudi banking sector, with its limited exposure to the global financial markets, was somewhat able to escape the severe implications of the global financial distress. However, being an important part of the intertwined global markets, some of the dampening effects were directly or indirectly translated into the kingdom’s banking sector performance,” said the report by the Kuwait-based Global Investment House (GIH). But the report presented a good outlook for those banks given the kingdom’s strong macroeconomic fundamentals, a surge in investment, reforms in some sectors and the government pledge to support the banking sector. “Saudi Arabia’s strong macroeconomic outlook, favourable demographics, increased infrastructure investments along with sectoral reforms will provide various economic sectors, especially banking, with enormous future business opportunities. The increased economic activity will enhance both the financing appetite and customer deposit base,” it said. Nadim Kawach