JEDDAH: Saudi banks are set for bumper profits this year, thanks to their participation in financing infrastructure and housing projects undertaken by the private sector.

The Saudi Arabian Monetary Agency (SAMA) indicated in its latest monthly report that the Kingdom’s 12 banks could be heading for their best financial year.

SAMA put the total net earnings of the banks at SR 28.75 billion during the first 10 months of 2012, below the full year profits of SR 30.9 billion in 2011 but above the 2010 net income of about SR 26.1 billion.

“These are clearly very encouraging figures,” commented Jarmo T. Kotilaine, a regional economist.

“They largely reflect the normalization of lending activity in an environment where the provisioning cycle is largely over and confidence has returned,” he said.

Kotilaine believes that the lending activity is supported by strong domestic growth, government initiatives and the avoidance, at least to date, of major external discontinuities which might have triggered a renewed deterioration of the global crisis.

“Banks have been able to remobilize from a starting point of low loan to deposit ratios in an environment where, apart from robust growth in key businesses, government reforms have fostered increased lending into key growth areas such as SMEs (small and medium-size enterprises) and mortgages,” Kotilaine said.

Asim Bukhtiar, vice president/head of research at Riyad Capital, said: “Banks’ earnings jumped in H1, 2012 thanks to strong credit demand and surge in trading volumes on the Tadawul which boosted fee income upward of +35 percent Y/Y. However, in the back half of the year, fortunes turned somewhat as provisions spiked and non-lending income leveled off.”

He says investor sentiment on the banks remains weak, which may be interpreted as a leading indicator of more negative surprises in the final quarter.

“We project earnings to moderate heading into the year-end making SR 34 billion in aggregate earnings elusive,” Bukhtiar said.

Previous reports have said that Saudi banks posted a record income of more than SR 34 billion in 2006.

Saudi Arabia’s banks netted their highest profits of SR34.6 billion in 2006 before the income slumped to SR30.2 billion in 2007.

The Riyadh-based Jadwa Investment said in a new report that the bank credit to the private sector continued to expand at a healthy rate in October.

Banks’ liquidity profile remained strong with deposits rising for the third consecutive month in October. The loan-to-deposit ratio slightly declined. Bank excess deposits at SAMA remained high, giving scope for further lending growth.

Saudi Arabia’s monetary situation continues to expand this year, researchers have pointed out.

According to the National Commercial bank report, the Kingdom’s monetary base (M0) recorded an annual gain of 14.3 percent during September as it reached SR 287.8 billion.

The main contributor to growth was, yet again, deposits with SAMA, which rose by 20 percent Y/Y, the fastest pace since January this year.

Saudi banks remain resilient on the back of strong fundamentals that include high liquidity, adequate capitalization and prudent risk management and supervision. These fundamentals, in turn, have enabled Saudi banks to recover after two years of weak performance, with profitability and assets growth improving markedly in 2011 and 2012YTD, amidst a robust macro-economic environment.

The NCB report added that Saudi banks continue to be shielded from external shocks as they build up their total assets.

By the end of Q2, 2012, the 12 locally incorporated banks amassed a total of SR1.59 trillion after breaching the SR1.5 trillion level by the end of 2011.

Industry-wide deposits posted a new record at SR1.21 trillion by the end of Q2.