Saudi banks’ provisions unlikely to spike in Q4, says Al Rajhi Cap

Saudi Arabian banks’ provisions may not rise as sharply in the fourth quarter this year as compared to same quarter last year, Al Rajhi Capital said in its latest banking sector report.

The brokerage said the forecast is based on its recent study of 60 small-cap companies listed on the Saudi Stock Exchange (Tadawul), with the aim to understand underlying economy.

“While overall operating income of group of companies improved in 2017 after falling sharply in the previous year, the market-cap weighted debt-to-equity ratio of the group also declined during the period,” Al Rajhi Capital said.

Additionally, the number of companies with net debt-to-EBITDA (earnings before interest depreciation and amortization) of more than five times has reduced in 2017, while companies that are cash positive (more cash than debt) have increased.

“This shows that the financial health of the smaller companies in the Kingdom is starting to improve, and the asset quality of the banking sector may not materially decline from here. Thus, we don’t expect see a similar surge in provisions in Q4 2017, as was seen in the same quarter last year,” the report added.

Al Rajhi Capital said its study took into account trends of key ratios such as: net debt/EBITDA, interest coverage ratio, operating income, and debt-to-equity.

The brokerage also noted the possibility that spending on capital expenditure could recover next year, driven by an improvement in oil prices and reports that next year’s budget is likely to be expansionary.

“That will encourage investment by the private sector, which could result in revival in credit growth. This will also have a positive impact on the sector’s credit quality,” it said.

On the other hand, the recent anti-corruption crackdown and related freezing of bank of accounts could weaken bank activities in the near term.

Meanwhile, over the third quarter, stagnant credit and the increase in provisioning pressured banks’ consolidated net income, which was rose 0.4 percent quarter-on-quarter and 14.3 percent year-on-year, the report said. 

The liquidity tightened slightly over the past few months, as indicated by higher loan-to-deposit ratio and rising Saudi Arabian Interbank Offered Rate (SAIBOR).

Credit quality deteriorated in the three months to September, the report added.