NCB sees big Q3 income for Saudi banks
Riyadh, September 29, 2011
Lower year-on-year (YoY) provisions will be a key factor behind strong net income growth for Saudi banks in the third quarter of the year, according to a report from NCB Capital, Saudi Arabia’s largest investment bank.
However, despite the improved asset quality, expanded loan books and strong fee income, top-line growth is expected to remain subdued due to the low interest rate environment, the report said.
Longer term fundamentals remain good with valuation levels attractive.
“Saudi banks’ non performing loans (NPLs) declined 13 per cent YoY in 2Q11 and provision coverage increased to 122 per cent. Off the back of better asset quality, we expect provisions in 3Q11 to decline by 52.8 per cent YoY boosting the sector’s 3Q11 earnings,” said Farouk Miah, acting head of Equity Research at NCB Capital.
NCB Capital expects Saudi banks’ loan books to increase in 2011 on higher public spending which is likely to drive corporate loan books. Retail loans are also expected to remain strong on supportive demographics.
Furthermore, the existing low loan-to-deposit ratio, increased low cost deposit base and better asset quality have enabled Saudi banks to grow its lending portfolio. This is likely to keep both retail as well as corporate loan growth healthy in 2011.
Net interest spreads of the Saudi banks are likely to remain depressed due to the low interest rate environment.
“Although we expect NIMs to contract marginally in 2011, an increase in loan books is likely to off-set this decline,” said Miah. “Furthermore, strong non-interest income will make up for the decline in net special commission income leaving a minor impact on total operating income.”
According to the report, Saudi banking stocks have declined more than 13 per cent YTD on global economic concerns.
However, NCB Capital remains positive on the sector’s fundamentals and believes current low stock prices offer an attractive entry point.
“Our top-picks in the sector remain Al Rajhi Bank and Banque Saudi Fransi. We are overweight on all other banking stocks except Bank Al Jazira and Bank Al Bilad where we are Neutral,” Miah explained. – TradeArabia News Service