Non-performing loans at eight Saudi banks rated by Standard and Poor's could double to four percent by mid-2010 but they will remain manageable even at this level, a senior S&P analyst said. S&P covers Al Rajhi Bank, Riyad Bank, Samba Financial Group, Banuqe Saudi Fransi, SABB, Arab National Bank, Saudi Investment Bank and unlisted National Commercial Bank (NCB). S&P has stable outlooks for all the banks except Saudi Investment Bank whose outlook is negative, said Emmanuel Volland, S&P's senior director of analytical ratings for Middle East and north African financial institutions. “This indicates that under our base case we don't expect downgrades in the foreseeable future for these (rated) banks with a stable outlook. The timeframe for our outlook is two years,” Volland told Reuters in an interview on Tuesday. “We believe that the slight deterioration in asset quality will continue and that non-performing loans could increase up to 3-4 percent by end June 2010. That would still be manageable by Saudi banks,” he said. Volland did not elaborate on reasons for this possible increase. Analysts in the region have said an improvement in the economy takes time to reflect on banks' asset quality. Saudi banks have sharply raised provisions for loans losses this year, and they have more than tripled in the nine months to end-September. “This year, Saudi banks had to set aside more provisions for the lending business,” Volland said, noting that non-performing loans were fully covered by S&P-rated banks. Non-performing loans at the eight Saudi banks almost doubled to slightly more than 2 percent at the end of June 2009 from slightly more than 1 percent at end-2008 Volland said. Saudi banks issue non-performing loan data every six months. “It's still a low level compared regionally and internationally. Our base case is that asset quality will continue to slightly deteriorate over the next two to three quarters, mainly in the loan books. However, banks in Saudi Arabia have been resilient amid the global recession and the debt problems of a few family-owned conglomerates will not trigger credit rating downgrades. “The outlook for all Saudi banks, with one exception, is stable,” Volland said. “This suggests that we don't expect significant negative rating actions in the next two years,” which is the firm's timeframe for outlooks. The debt problems of the two conglomerates, Saad Group and Ahmad Hamad al Gosaibi & Brothers Co., which borrowed $9.6 billion from banks in the Gulf (according to S&P) and a similar amount from international lenders, was “not material enough to trigger any action” for Saudi banks, Volland said. Saad Group's deal with local banks in September to settle SR9.7 billion ($2.59 billion) for its outstanding loans has cut exposure to the troubled firms by half, and improved the profitability outlook for the sector. Lenders in the Kingdom did not experience the crippling wave of losses when the global financial system nearly collapsed last year. Profits have declined, but much less than the rest of the world. Net profit for the first nine months of 2009 for the sector declined 9 percent to SR23.22 billion, according to central bank data. In terms of earnings capacity “Saudi banks are among the most profitable in the region - probably the world,” Volland said. While a return to the years of rapid growth when profits nearly tripled between 2002 and 2006 isn't likely, the low cost of labor and deposits could help fuel strong growth compared to other markets. Saudis shun interest-bearing accounts--adhering to Islam's ban on usury, more so than in other Muslim countries in the region. More than 40 percent of bank deposits don't pay out interest to customers, a “unique feature” in Saudi Arabia, Volland said. And the cost of labor, measured by the cost-to-income ratio, is at 25 percent in Saudi Arabia compared to 60 percent to 70 percent in the US and Europe, he added. Lenders have been reluctant to extend credit this year, and generally reduced risk or booked losses in their loan books and investments as the economy shrank. The deterioration of asset quality is a concern, but the sector's strong fundamentals position banks to take advantage of an economic rebound, especially as the government doles out $400 billion on new infrastructure by 2013. “Banks are talking about getting back gradually to lending, but there has been a shift in risk appetite” that will linger for some time, Volland said.
