JEDDAH: The expected recovery in domestic credit would boost Saudi banks' profitability, the Saudi American Bank Group (Samba) said. Balance sheets showed the net income of the 12 banks in the Kingdom dipped to SR20.2 billion in the first nine months of 2010 from SR22.35 billion in the first nine months of 2009. On annual basis, the net earnings slipped to around SR26.12 billion in 2010 from nearly SR26.3 billion, Saudi Arabian Monetary Agency data showed. Samba noted in the report that the long-awaited mortgage law, once approved, would usher in more lending. "If passed, then this would provide a major fillip to consumer lending growth, which has, since 2005, been constrained by salary caps," it further said. "Mortgage lending currently accounts for only around three percent of GDP in Saudi Arabia compared with over 50 percent in OECD countries … there is substantial pent-up demand for new housing in the Kingdom, with only around 30 percent of Saudis owning their accommodation," Samba said. With high capital and non-performing loans relatively low, Saudi banks were seen to reap tremendous returns. "Lending growth is expected to gather pace over the next 18 months as public sector projects continue to be rolled out and as private firms spend more on capital investment," the bank said in its report. "Banks have already begun to build their deposit positions in readiness for what is likely to be a period of strong lending growth. We estimate overall lending growth (to public and private sectors) to have reached around six per cent in 2010, and to accelerate to around 18 percent in 2011 as the private sector recovery gains traction. Lending growth will likely be reined back from mid-2012 onwards as L-D ratios nudge towards 90 and we see a somewhat calmer – but still robust - period of lending growth in 2012-13, averaging around 16 percent." Moreover, the report noted that "having weathered the global financial crisis with comparatively moderate distress, the Saudi banking sector is set for a period of strong growth. The sector is well capitalized, and banks have upgraded their risk management culture in recent years aided by Basel II and now Basel III requirements." "Its stability is further supported by strict regulations, close monitoring and systemic government support… NPLs remain low and provisioning (in most cases) is more than adequate." Saudi banks' average loan-deposit ratio currently stands at around 85 as opposed to 100 percent or more in other Gulf countries. Samba report lending by the Kingdom's 12 commercial banks was weak through 2010 amid lack of corporate demand. It noted that the weakness in demand stems from the more liquid positions of contractors, who in many cases are receiving advanced payments from government and therefore have less call for bridging finance. Besides, traders and manufacturers are still working down their inventories built up before the onset of the 2008 global financial crisis, the report added.
