Profitability Outlook for Saudi Banks Remains Subdued

Saudi Arabia’s top ten banks reported a marginal increase in deposits compared to the preceding quarter, which improved the banks’ funding position. In Q2, the loan to deposit ratio (LDR) increased slightly to 86.1 per cent. Operating income declined by 3.8 per cent quarter on quarter (QoQ) as the sluggish economic environment impacted all income streams. Net interest income dropped 2.2 per cent QoQ, as reduced interest rates more than offset a marginal increase in loand and advances. Net fee income fell 18 per cent, as lockdowns impacted fee income generated from new business volumes and cards.

Net interest margins (NIM) continued to decline, as system-wide rates touched multi-year lows. NIM fell by 18 bps to 3.01 per cent in Q2’20, largely due to 61 bps decline in yield on credit caused by the lower interest rate environment. Seven out of 10 banks reported a decline in the NIM. Return on equity (RoE) of majority of the banks declined as reduced operating income and increased provisioning impacted bottom-line. Net income fell by 17.7 per cent on account of a dual impact from lower income and higher provisioning. As a result, RoE decreased from 12.5 per cent in Q1’20 to 10.3 per cent in Q2’20. Profitability has seen a deteriorating movement beginning Q4’19 for both the KSA’s and UAE’s banking sector.

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