Al Rajhi Bank first-quarter profit slides on higher operating expenses and impairment charges

Provisions for bad loans climbed 78% to 693m riyals during the reporting period

ATM machines at Al Rajhi Bank in Riyadh. The lender reported a 7 per cent drop in first-quarter net profit on higher operating expenses and impairment charge. Bloomberg

Al Rajhi Bank, the biggest lender in Saudi Arabia by market capitalisation, reported a 7 per cent drop in its first-quarter net profit as provisions for bad loans rose and operating expenses climbed amid the coronavirus outbreak.

Net profit for the three months ending March 31 declined to 2.38 billion riyals (Dh2.25bn), the lender said in a statement to the Tadawul stock exchange, where its shares trade.

Total operating expenses at the end of the first three months of the year climbed 29 per cent "due to an increase in salaries and employees’ related benefits, depreciation, and other general and administrative expenses”, the bank said.

Impairment charge for financing during the reporting period rose 78 per cent to 693 million riyals, it added.

Lenders worldwide are facing a decline in profitability as loan growth slows and interest rates plunge as the pandemic disrupts the global economy, which is set to slide into the deepest recession since the Great Depression of the 1930s. The International Monetary Fund last month projected a 3 per cent contraction in global output for 2020 and said the outlook for the world economy is worse than the 2008 global economic crisis.

Al Rajhi last month said it is difficult for the bank to determine the size and extent of the financial impact on its operations in the wake of the government measures to suppress the coronavirus outbreak in the kingdom.

"Al Rajhi Bank assures that its financial soundness indicators are strong and able to stand the current economic challenges," it said in a April 28 statement.Saudi Arabia has now eased the nation-wide curfew, but it will enforce it again over the five-day Eid holidays, according to a government announcement earlier this week.

Despite the headwinds, Al Rajhi reported a 7 per cent surge in total operating income to 4.96bn riyals. It attributed the rise “an increase in net special commission income, fees from banking services, and exchange income”.

Net income from special commissions rose 4.2 per cent to 4.1bn riyals during the period, it added.

Assets at the end of the reporting period climbed 8 per cent year-on-year to 392bn riyals and investments rose 9 per cent to 49.6bn riyals. Customer deposits during the period climbed 7.5 per cent to 315.6bn riyals.

Banks in the Gulf are expected to navigate the current downturn without major issues due to their strong earnings capacity, according to a recent report by S&P Global Ratings.

The buffers developed during healthier times by the GCC banks mean they could take a hit worth a combined $36bn (Dh132bn) from the slump caused by Covid-19 and falling oil prices before they sustain losses.

“S&P Global Ratings believes that rated banks' profitability and provision cushions built over past years will help them navigate the current rough waters," the ratings agency said.

Saudi Arabia earlier this week reduced various expenditures, suspended the cost of living allowance and tripled VAT to offset the impact of the coronavirus pandemic on its economy and shore up its finances.

It also undertook various measures to relieve some of the strain on companies whose businesses have been hit by the coronavirus. Saudi Arabia has already announced measures worth 120bn riyals to boost the economy, including 50bn riyals dedicated to support small and medium-sized enterprises.