Saudi bank sector to remain weak, says Al Rajhi Capital

Al Rajhi Capital, revising earlier expectations, said it now expects the Saudi banking sector’s combined earnings to weaken compared to the same period last year due to higher provisions and moderate commission and fee income.

A 23 percent year-on-year (YoY) increase in ageing financing (financing past due date, but not impaired) may indicate higher provisions in Q1 compared to the same period a year earlier, the brokerage said in an earnings estimates report.

“In the last two years, banks in aggregate had provisions amounting to 5.8-7.7 percent of its ageing advances in the following quarter (Q1 of the following year). Applying this figure to current ageing financing, the potential provisioning in Q1 2017 could be in the range of SAR 1.63-2.15 billion compared to SAR 1.75 billion provisioning in Q1 2016 (based on the sector’s current total ageing advances of approximately SAR 28 billion at the end of 2016),” the report said.

Non-financing income which mainly includes commissions and fee income is expected to decline as the total financing growth has slowed and trading volume on the Saudi stock exchange Tadawul has remained weak in Q1 2017.

After rising sharply in H2 2016, asset yields are not likely to rise in Q1 as much as previously expected due to the fall in the Saudi Arabian Interbank Offered Rate (SAIBOR) towards the end of the quarter.

As per the Saudi Arabian Monetary Authority’s (SAMA) monthly data, the banking sector’s accumulated profit for January and February grew moderately at 3.5 percent YoY, yet a potential increase in provisions could impact profitability for the quarter.