JEDDAH, 7 November 2004 — Profits of the ten Saudi commercial banks grew markedly during the first nine months of this year, with net income from operations expanding by a substantial 33.7 percent to SR12.5 billion compared to SR9.3 billion during the same three quarters in 2003. The major contributor to this surge in profits was the 14 percent rise in net special commission income, representing about 60 percent of total operating income.
The increase in net special commission income was due to a 9.5 percent rise in commission income in addition to a 4.3 percent drop in commission expenses. Consequently, the commission income to expense ratio widened further thereby providing a 4.6-times interest expense coverage by end-September 2004 compared to a ratio of 4.0 during the same period last year.
However, the net interest margin (NIM), defined as the net special commission income to earning assets ratio, remained stable at 2.23 percent despite the rise in interest rates. In addition, income from fees and services shot up by 71 percent to SR4.25 billion during the first nine months of this year indicating improved diversification of income sources for Saudi banks. As a result, total operating income improved by 16 percent to SR21 billion in the first three quarters of the year, compared to SR18 billion during the same nine-month period in 2003.
On the expenditure side, total operating expenses fell by 2.6 percent to SR8.9 billion during the first three quarters of the year, compared to SR8.6 billion a year ago.
Assets & Liabilities
Balance sheets of the ten Saudi banks improved substantially during the first three quarters of this year, with total assets expanding by 12.9 percent to SR593 billion by the end of September 2004 compared to SR526 billion during the same period last year. This rise was mainly due to a whopping 26.5 percent increase in loans and advances, which amounted to SR259 billion by end-September this year compared to SR204 billion a year ago. Consequently, Saudi banks’ loans and advances portfolio now represents about 44 percent of total assets compared to 39 percent in September 2003.
In addition to that, banks’ investment portfolio also expanded by 6.3 percent to SR257 billion by end-September 2004, but its share of total assets fell to 43 percent from 46 percent during the same period last year.
On the liabilities side, customer deposits increased by 14 percent to SR442 billion by end-September 2004 from SR387 billion a year ago, thereby facilitating the expansion in banks’ investments and loans portfolios. As a result, total liabilities rose by 13 percent to SR529 billion by end-September 2004.
Financial Ratios
Earnings per share for the ten Saudi commercial banks amounted to SR23.8 during the first three quarters of the year compared to SR17.8 during the same nine-month period in 2003. Additionally, the annualized Return on Equity (ROE) for the banking sector rose to 25.96 percent in September of this year from 21.68 percent during the same period last year on the back of the 33.7 percent surge in profits
Consequently, the ten banks’ loans and advances portfolio rose by 26.5 percent, thereby pushing the ratio of loans to deposits higher to 58.45 percent by end- September of this year compared with 52.85 a year ago.
Top Tier Banks
The National Commercial Bank (NCB) generated the largest profits during the first nine months of this year with net income from operations amounting to SR2.6 billion and accounting for 21 percent of total profits. Meanwhile, Alrajhi Bank came in second place in terms of profits with net income rising by 47 percent to SR2.1 billion during the first nine-month of the year compared to SR1.4 billion during the same period last year. The dramatic change, however, was reported by Samba Financial Group with its net profits soaring by 83 percent to SR1.9 billion in the first three quarters of the year compared to its level in 2003.
On the expenditure side, the three largest Saudi banks managed to reduce total operating expenses, with Samba reporting a sizable 30 percent fall in expenses during the first three quarters of the year as a result of an 82 percent drop in provisioning for credit losses. In addition, Riyad Bank reported a 9.6 percent decline in operating expenses as both rent and provisioning expenses fell by 21 percent and 72 percent, respectively, during the first nine months of the year compared to their levels a year ago.
In terms of the balance sheet, NCB’s assets amounted to SR126 billion by end-September 2004, representing a 10 percent increase over the same period last year and accounting for 21 percent of total Saudi banks’ assets. Samba on the other hand, reported a significant 20 percent rise in assets to SR92 billion during the first three quarters of the year compared to SR77 billion a year ago.
Medium & Small Banks
Despite being the smallest bank in the Kingdom, Bank Aljazeera (BJAZ) reported the largest growth in profits among the six medium and small banks with net income soaring by 66 percent to SR119 million during the first nine months of the year compared to SR72 million a year ago. This growth reflected a significant 167 percent rise in income from fees and services, which amounted to SR224 million by end-September 2004.
While net special commission income also grew by 19 percent to SR136 million during the same period, Bank Aljazeera was the only Saudi bank to generate higher income from fees and services rather than from net special commission income.
The Arab national bank was in second place in terms of profit growth, with its net income advancing by 53 percent to SR901 million during the first three quarters of the year.
In absolute terms, however, the Saudi British Bank (SABB) was the most profitable among the six medium and small banks, with net income from operations amounting to SR1.2 billion during the first nine months of the year.
Deposits
With a current 22.1 percent share of total deposits, NCB remains the largest deposit taker among the ten Saudi banks. However, during the first nine months of this year NCB’s deposits grew by 9.6 percent, while other banks experienced double-digit growth rates, thereby reducing its share from 23 percent during the same period in 2003. Samba, the second largest Saudi bank (in terms of assets) recorded a 25.4 percent jump in customer deposits thus boosting its share to 16.5 percent of total deposits during the first three quarters of this year compared to 15.1 percent during the same period in 2003.
(Dr. Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah.)
