JEDDAH, 21 April 2007 — The credit-rating agency Standard & Poor’s announced yesterday that the decline in first-quarter profits of Saudi banks would not affect the firm’s high credit ratings for the sector.
“The basics of Saudi banks remain sound,” the agency’s rating analysts said. They expressed surprise at the negative response of small-scale shareholders at Saudi bourse toward first-quarter bank results.
Standard & Poor’s said it was expecting a decline in bank profits.
“We have published several reports saying the financial performance of Saudi banks during the past two years will not be sustainable,” Al-Eqtisadiah business daily quoted the rating agency as saying. “We have also said that the partial revenues, mostly coming from stock exchange commissions will be exceptional.”
The Saudi stock market, which performed strongly at the start of this month, retreated during the past weeks apparently under the pressure of shrinking profits of leading banks in the first quarter of the year.
“The TASI (the Tadawul All-Shares Index) was negatively affected by the blue chip decline, particularly the banking sector,” the Riyadh-based Bakheet Financial Advisors (BFA) said, pointing out that the TASI benchmark price lost 2.7 percent following reports that the first quarter profits of leading banks receded from their levels in the first quarter of 2006.
The BFA attributed the shrinking profits of banks in the first quarter of the year to the diminishing income accruing from stock trading commissions. SABB shares fell 6.07 percent, Saudi Hollandi Bank 5.80 percent, Riyad Bank 4.91 percent and Banque Saudi Fransi 4.35 percent in the second week of this month.
Credit rating analyst Muhammad Damaq explained why S&P underestimated low returns made by 11 Saudi banks from stock market activities, saying the agency carries out its analysis on the basis of the banks’ basic activities. “These basic factors are still good and sound,” he pointed out.
“This stand is especially important when we consider that there are more economic opportunities, such as real-estate mortgages.”
Credit analyst Emmanuel Volland said he believed that Saudi banks would make good returns from operations such as loans, increase in deposits and other banking services. “These activities will not be affected by stock market index falls,” he added.
S&P had previously raised its long-term foreign currency credit rating of Saudi Arabia from “A” to “A+” on the basis of the country’s excellent financial performance.
The rating agency also affirmed its long-term local currency rating at A+ and short-term sovereign credit rating at A-1. The outlook on both the foreign and local currency ratings is stable.