are expected to be squeezed by the double whammy of the coronavirus-related lockdowns and steep drop in oil prices.
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“We expect earnings decline of 14 percent (median for our coverage) as we expect lower net interest income and lower fee income and increased credit costs relative to last year” Shabbir Malik, banking analyst at EFG Hermes, told Zawya.
Net interest margin (NIM), the difference between a bank’s income from loans and mortgages and what it pays out on liabilities is a key component of Saudi banks’ profitability. Al Rajhi Capital expects NIM to decline by 30bps in 2020.
According to Riyad Capital outlook, on a year-on-year basis net income will be affected by lower fee-based income, exchange income and relatively higher provisions, given recent market conditions.
M R Raghu, research head at Markaz, a Kuwait-based asset manager, told Zawya that banks “would have been impacted in the last few weeks of Q1 due to NIM compression and elevated credit costs. We believe the confluence of factors and the resultant impact would fully play out in Q2 and the numbers subsequently could be worse.”
S&P Global Ratings in a report last month on Gulf banks noted that the knock-on effects of lower economic growth and oil prices will further slow lending growth and increase the overall stock of problem assets. “At the same time, interest margins will decline. Combined, these shifts will weaken banks’ profitability.”
According to EFG Hermes estimates, all of the top five banks, Al Rajhi Bank,Riyad Bank, National Commercial Bank, Banque Saudi Fransi, Samba Financial and Saudi British Bank, are set to declines in profit growth.
Al Rajhi Bank, the biggest retail lender in the kingdom, is expected to see a net profit of 2.53 billion, down 2 percent on year, according to the Cairo-based investment bank.
National Commercial Bank, Saudi’s biggest by assets, is set to see a 15 percent drop in net profit to 2.41 billion riyals.
Samba Financial Group will see a 17 percent drop y-o-y in net profit growth to 889 million.
Saudi-based National Commercial Bank has penciled in a 2.6 percent rise in net profit for Al Rajhi Bank to 2.66 billion riyals. It said Saudi Fransi Bank will see near 14 percent drop in net profit to 710 million riyals while Samba’s net profit will drop over 7 percent to 987 million riyals.
For the first quarter, banks are likely to show a moderately healthy loan book growth, as it was business as usual until March, when the coronavirus lockdowns began.
According to Malik, February data suggests that loan growth is decent at high single digit and mortgage growth remains robust.
“However, we expect loan growth to start weakening in March and for the full-year, we expect mid to low single digit loan growth for the sector,” he added.
Nevertheless, banks with higher ratio of corporate loans will come under pressure.
The Saudi central bank SAMA has government has announced a Private Sector Financing Support Program with a total value of about SAR 50 billion to support the private sector, especially SMEs, by providing funding to banks to allow them to defer payments on existing loans and increase lending to businesses
Raghu said the measures deferred payment program may provide temporary relief as the assets would continue to be deemed active and healthy.
“Cost of funds could remain elevated as the economic conditions remain uncertain. Further, the low oil price environment and lock down measures could increase stress across wide variety of sectors,” said Raghu.
According to Moody’s, the slowing economic activity and disruption caused by the pandemic is likely to weigh on the banks’ asset quality.
Malik said while the deterioration may not be visible this early (1Q20 results) but he expected banks to start taking precautionary provisions
“It is clear that the combination of factors (COVID-19 & low oil prices) could stress various sectors and loans could go sour resulting in higher NPAs. However, KSA banks are in better position compared to earlier crisis and boast robust capital in their books,” said Raghu.
Another fear is that due to the economic slowdown company dividends could come under pressure. Saudi banks on average have a dividend payout ratio of approximately 60 to 70 percent of their income.
“Adverse economic scenario could lead to higher provisioning requirements and lower income, pressurizing dividends for the year,” said Raghu.
Malik said he didn’t think there was room for most banks to increase pay-out. “I would expect dividends to track the earnings for 2020.”
Al Rajhi Capital expects a 20 percent cut in dividends for 2020.
“A large part of the customers is going to defer payments to banks–either interest or principal or even both. This implies cash flows could be lower 20 percent y-o-y and hence the dividend cut,” it said in a report.
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