HSBC's Saudi affiliate SABB bank missed forecasts and two other banks in the kingdom reported sharp falls due to high provisions to counter exposure to troubled Saudi firms and a slowdown in lending.

The second quarter results for SABB, Arab National Bank (ANB), and Saudi Investment Bank (SAIB) on Monday reflect a challenging period for the region's banks as they struggle to cover loan losses in a flat market still reeling from the global financial crisis.

Saudi lenders had a difficult year in 2009 with profitability eroded by a doubling of provisions for non-performing loans to almost SR11 billion as a rising number of Saudi and regional firm ran into financial problems.

SABB, the fifth-largest Saudi bank by market value, said it made a net profit of 447 million riyals ($119.2 million) in the second-quarter, down 34 per cent from the same period in 2009.

Analysts surveyed by Reuters had expected on average net profit of SR613.85 million.

Shares in SABB bank fell by as much as 4.6 per cent after its quarterly earnings missed analysts' forecasts on lower non-lending income and new provisions. Shares in ANB and SAIB fell by as much as 2.5 percent and 3.3 percent respectively.

'The decrease in the profits is mainly due to the bank's conservative policy in increasing provisions to support the bank's financial position,' SABB said in a statement. It did not give further details on the size of these provisions or their purposes.

While it raised its net lending income by 5.5 per cent to SR943 million, SABB saw its non-lending net income fall by almost 15 per cent to SR417 million. Non-lending income includes brokerage, foreign exchange and investment.

Operating costs - which include salaries and provisions for bad loans - rose 29.1 per cent to SR913 million, based on Reuters calculations. Earnings per share by end-June stood at 1.42 riyals down 25.7 per cent from a year earlier.

SABB, 40-per cent owned by HSBC, had to book SR176.5 million to cover loan losses during the first quarter of 2010.
 This followed provisions worth 1.5 billion riyals for all of 2009 which covered less than half of the 3.53 billion riyals of non-performing loans it had by end-2009.

By end-June, SABB's loans portfolio shrank by 5 per cent to SR74.8 billion, while it was down 4.5 per cent by end-March at SR75.7 billion. ANB, 40-per cent owned by Jordan's Arab Bank, saw its second-quarter net profit fall by SR117 million to SR629 million after its net lending income fell by SR119 million to SR775 million.

Loans fell 9 per cent to SR64.8 billion  by end June, while they were down 10.1 per cent at SR65.4 billion by end-March.
 Operating costs rose by about 4 per cent to SR486 million, suggesting a little change in provisions booked during the period.

Provisions led the smaller SAIB to post a second-quarter profit of SR22 million, an 88 per cent drop from the year ago period, despite a relatively-strong 25 per cent rise in lending income.

According to Saudi bourse data, JP Morgan International Finance Ltd holds a 7.4 per cent stake in SAIB which in turn holds a 50 per cent stake in the Saudi affiliate of American Express.

SAIB did not give details about these provisions. Stock exchange data showed that SAIB was the only Saudi lender to have booked lower provisions for bad loans in 2009 - at 554.6 million riyals - although its financial statements showed a sixfold rise in non-performing loans at SR1.79 billion.-Reuters