Despite the prevailing uncertainty in the regional financial sector brought about by the protracted European debt crisis and weak global economy, Saudi banking fundamentals remain positive. A recent study by NCB Capital, Saudi Arabia's largest investment bank and leading GCC wealth manager, noted that Saudi banks' “longer-term fundamentals remain good with valuation levels attractive”. The study forecast that Saudi banks' loan books would increase in 2011 on higher public spending which is likely to drive corporate loan books. Retail loans are also expected to remain strong on supportive demographics. Furthermore, the existing low loan-to-deposit ratio, increased low cost deposit base and better asset quality have enabled Saudi banks to grow their lending portfolio. “This is likely to keep both retail as well as corporate loan growth healthy in 2011,” it added. Lending and investing activity increased during this year's second quarter (April-June) at many of the banks. According to SAMA data, retail lending increased 10.7% year-on-year (YoY) while corporate loans grew 5.9%. The manufacturing sector, accounting for 13% of total lending grew 27.9 percent YoY and commerce grew 6.3%. Loans and investments of banks grew 5.2 and 11.7% YoY respectively. Net interest spreads are expected to remain low but stable The lower interest rate environment has kept Saudi banks' net interest spreads muted during 1H11. NCB Capital does not expect notable improvement in interest rates during this year's second half, leading to pressure on net interest spreads of the banks. However, growth in high yielding retail loans and lower cost demand deposits will enable Saudi banks to maintain their NIMs (net interest margins) by repricing their liabilities to match lower yielding assets. Furthermore, increased volumes are likely to partially offset decline in NIMs and marginally impact growth in net special commission income (0.8% YoY decline) in 2011. The study also said that fee income and other non-interest income is expected to offset decline in net special commission income. Increased banking activity and relatively improved market conditions YoY have kept the bank's non-interest income growth strong during the first half of the current year. Moreover, social welfare spending by the government along with bonus salaries are likely to keep demand for corporate as well as retail loans high in the Kingdom. Furthermore, strong growth in the deposit base, lower loan-to-deposit ratios, adequate capital levels and improved asset quality allow Saudi banks to expand their credit portfolio, the study said.
