Saudi banks Q2 profit to remain weak, says Al Rajhi Cap

The Saudi banks’ consolidated earnings are expected to remain under pressure in the second quarter of this year, Al Rajhi Capital said in a report on Tuesday.

The weak Q2 would be attributed to an expected decline in asset yields, financing and non-financing income along with net interest margins and flattish provisions in the same period.

Loan growth is expected to remain weak in the foreseeable future as gross capital formation is unlikely to pick up significantly in the near term.

“We are of the view that loan growth is unlikely to revive anytime in the near future and growth in net financing income is likely to be mainly a determinant of any pick up in SAIBOR levels which we believe could be anticipated by mid H2 2017,” the brokerage firm added.

An increase in non-performing loans (NPLs) could be avoided by partial repayment of outstanding dues, however, the risk of deteriorating asset quality remains.

Al Rajhi Capital said that it expects capital expenditure to remain lower than expected, adding that the Kingdom could see further capex cuts to meet fiscal targets in light of the pace of decline in foreign exchange reserves.

Banks’ corporate loan growth is likely to be driven by major government projects. For retail loans, the Saudi government decision to reinstate public sector allowances will help banks achieve moderate growth.

“Key upsides include future financing opportunities from big ticket projects and a mild rise in SAIBOR,” Al Rajhi Capital added.

The Kingdom is projected to issue SAR 70 billion worth of bonds, and banks are likely to take up the issue. Accordingly, the local banks would slowly free up other lower yielding assets to bring in liquidity, which may boost their investment returns as well.

The brokerage firm also ruled out potential mergers in the sector apart from a possible consolidation between the Saudi British Bank (SABB) and Alawwal Bank.