JEDDAH, 8 March 2004 — The 2003 financial results for the nine listed Saudi commercial banks painted an impressive picture of the Saudi banking sector’s performance, with a sizable growth in profits as well as an expansion in assets base. Net profits from operations rose by 14.3 percent to SR9.4 billion last year compared to the scanty 1.2 percent growth witnessed in 2002, and much higher than the 6.7 percent achieved in 2001. With the exception of Samba (formerly known as the Saudi American Bank) profits of listed Saudi banks rose last year reflecting a better operating environment, supported by a higher than expected oil revenues, which in turn expanded domestic liquidity.
Last year’s staggering growth came on the back of a 4.2 percent rise in net special commission income (net interest earnings excluding Al-Rajhi Bank), which increased to SR10.7 billion, largely due to a drop of 19.1 percent in special commission expenses outweighing the 2.9 percent decline in special commission income. Consequently, the combined ratio of commission income to commission expenses for listed Saudi banks (excluding Al-Rajhi) has improved significantly to 392 percent last year from 327 percent in 2002, indicating that the pricing of loans was moving downward at a much slower rate than the decline in interest rates.
At the same time, income from banking services rose sharply by 35.2 percent to SR2.5 billion in 2003, indicating improved diversification of income sources.
Furthermore, with the global economic recovery gaining momentum last year, trading income soared by 461 percent to SR667 million last year from SR119 million in 2002, while realized gains on investment surged significantly by 22 percent to SR4.1 billion, benefiting from further declines in interest rates.
The combined net assets of the nine listed Saudi banks grew by an impressive 8.2 percent to SR423 billion in 2003 following the 7.3 percent growth achieved the year before. The expansion in assets was mainly the result of an 18.4 percent growth in banks’ loans and advances, which amounted to SR166 billion by the end of 2003 (representing 39 percent of total assets) compared to SR140 billion the year before. In addition, Saudi banks’ investment portfolios expanded by 4.8 percent to SR192 billion last year, making up over 45 percent of total assets, while their trading securities portfolios shot up substantially to SR2.5 billion last year from SR119 million in 2002. On the other hand, cash in bank and SAMA fell by 3.5 percent to SR23 billion last year, while due from banks continued to decline by 19 percent to SR22.9 billion, reflecting lower interbanking borrowing.
On the liabilities side, customer deposits advanced by 10.4 percent to SR313 billion last year, up from SR283 billion in 2002.
Meanwhile, shareholders’ equity rose by 3.0 percent to SR44.5 billion in 2003 from SR43.2 billion the year before.
As a result, return on equity (ROE) and return on assets (ROA) both increased to 21.19 percent and 2.23 percent last year, respectively, from 19.09 percent and 2.11 percent in 2002.
A Good Year for ‘Most’ Large Saudi Banks
Samba was the only Saudi bank to report a negative growth in profits last year, with net operating income falling by a sizable 22.7 percent to SR1.4 billion compared to SR1.86 billion in 2002, thereby placing it in the third position in terms of profits among the nine listed Saudi banks. Consequently, Samba’s share of total profits of listed commercial banks fell to 15.2 percent in 2003 from 22.5 percent the year before and 27.5 percent in 2001. Despite the increase in Samba’s operating income, which improved by 6.3 percent to SR3.3 billion last year, operating expenses shot up by 48 percent to SR1.9 billion during the same period, thereby offsetting the rise in income. Provisions alone surged to SR622 million last year compared to SR101 million in 2002, while general administrative expenses increased by 23 percent to SR350 million in 2003 compared to SR285 million the year before.
Meanwhile, Samba’s assets grew by a scant 3.5 percent to SR79 billion last year as the loans and advances portfolio expanded by 2 percent only to reach SR34.9 billion. However, customer deposits growth was in line with other large Saudi banks, growing by 5.1 percent to SR61.8 billion during the same period. Accordingly, Samba’s ROE and ROA fell last year to 16.18 percent and 1.82 percent, respectively, well below the market average.
Al-Rajhi Banking and Investment Corporation came on top last year, with net operating profits soaring by 44.2 percent to over SR2 billion compared to SR1.4 billion in 2002. The bank’s net realized gains on investments rose by 22.6 percent to SR3.5 billion in 2003 compared to SR2.9 billion the year before. In addition, Al-Rajhi’s income from fees and services grew markedly by 83 percent to SR289 million last year from SR157 million in 2002. On the expenses side, provisioning for credit losses increased by 7.5 percent to SR865 million last year, which combined with the rise in general and administration expenses resulted in a 6.8 percent advance in operating expenses.
Al-Rajhi’s assets expanded by 9.4 percent to SR64.7 billion last year, aided by a 12.7 percent increase in the bank’s investment portfolio, which amounted to SR54.4 billion, representing 84 percent of total assets. This increase was facilitated by an 8.3 percent increase in customer deposits, which totaled SR49.3 billion by the end of 2003. As a result, Al-Rajhi bank produced the highest ROE and ROA among the nine listed Saudi banks, with ROE amounting to 28.12 percent while ROA came at 3.15 percent last year.
Riyad Bank, the second largest listed bank in terms of assets, enjoyed high performance last year, with net profits increasing by 12.4 percent to SR1.6 billion, despite a 2.1 percent drop in net commission income, which fell to SR2.2 billion in 2003 from SR2.2 billion the year before. However, the bank’s income from trading surged to SR447 million last year from SR90 million in 2002, while income from fees and services improved by 11.1 percent to SR380 million by the end of last year. Riyad Bank’s assets grew by 6.4 percent to SR71 billion aided by a 17.2 percent increase in loans and advances as well as 5.4 percent rise in the bank’s investments portfolio. At the same time, customer deposits increased by 6.7 percent to SR46 billion, helping expand Riyad bank’s investment and loans portfolios. Consequently, ROE improved to 18.62 percent last year while ROA rose to 2.23 percent during the same period.
An Exceptional Year for Medium and Smaller Banks
Of the six medium and small Saudi banks, the Saudi British Bank (SABB) generated the highest profits totaling to SR1.3 billion last year, and representing a 29 percent increase over 2002. SABB’s rise in profits were mainly due to an 11 percent advance in net special commission income, which amounted to SR1.6 billion last year, in addition to a 34 percent increase in income from fees and services, which totaled SR377 million during the same period.
Aljazira Bank, the smallest of the nine listed Saudi banks, reported a substantial 58 percent growth in profits, which rose to SR93 million last year from SR59 million in 2002. Aljazira’s profit increase were mainly due to a 35 percent rise in net special commission income, which increased to SR158 million in 2003, in addition to a 135 percent in income from fees and services, amounting to SR113 million during the same period. Aljazira’s impressive increase in profits came despite a 616 percent rise in provisioning which rose to SR79 million in 2003 from SR11 million the year before.
In terms of the balance sheet, five banks reported an expansion in assets, while SABB was the only bank to report a 0.36 percent decline in assets last year. Despite the 28 percent rise in the loans and advances portfolio, which increased to SR26 billion last year, SABB’s assets were affected by the 22 percent drop in its investments portfolio, which declined to SR16 billion last year from SR20 billion in 2002.
Aljazira’s assets on the other hand expanded by 57 percent to reach almost SR9 billion by the end of 2003, mainly as the bank’s loans and advances doubled to SR4.7 billion last year from SR2.4 billion in 2002. This was also facilitated by a 57 percent increase in Aljazira’s customer deposits, which totaled SR7.5 billion during the same period.
The Saudi Hollandi Bank maintained the highest return on equity among the six medium and small banks with a 23.56 percent ratio last year, while SABB recorded the highest return on assets among these banks with a 2.73 percent ratio during the same period.
Performance by Business Segment
Listed Saudi banks publish their assets and net income on business segment basis, which helps to identify return on assets for banks’ different operations. Across the nine listed banks, total assets of the retail banking sector totaled to SR89 billion last year, while net income generated from retail operations amounted to SR4.9 billion, resulting in a 5.5 percent return on assets ratio, well above the 2.23 percent overall ROA ratio for all banking operations combined.
At the same time, assets of the corporate banking segment totaled SR150 billion while net income from corporate operations reached SR2.4 billion, resulting in 1.59 percent ROA. In addition, treasury assets stood at SR169 billion while net income from treasury operations amounted to SR2.1 billion resulting in a 1.24 percent ROA ratio. Consequently, retail banking business seems to be the profit center for Saudi banks, generating higher net income both in absolute terms and as a percentage of assets as they continue to enjoy high levels of current account deposits as well as large spreads on loan advances.
(Dr. Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah)
