Al Rajhi Bank’s third quarter net profit falls on higher impairments

The lender has maintained healthy loan margins, most likely driven by higher-yielding mortgages, analyst says

Customers use automated teller machines (ATM) inside the Al Rajhi Bank in Riyadh, Saudi Arabia, on Thursday, Dec. 1, 2016. Saudi Arabia is working to reduce the Middle East’s biggest economy’s reliance on oil, which provides three-quarters of government revenue, as part of a plan for the biggest economic shakeup since the country’s founding. Photographer: Simon Dawson/Bloomberg

Al Rajhi Bank, the biggest lender in Saudi Arabia by market capitalisation, reported a 3 per cent drop in third-quarter net profit as credit impairment charges rose and operating expenses increased.

Net profit for the three months to September 30 declined to 2.66 billion riyals ($709.3 million), the lender said in a statement to the Tadawul stock exchange, where its shares trade. Total revenue from special commissions, financing and investments remained flat at 4.28bn riyals.

“Net income decreased due to an increase in total operating expenses by 13.5 per cent due to an increase in salaries and employee-related benefits, and general and other administrative expenses,” Al Rajhi Bank said. Credit impairment charges also rose 39.9 per cent to 465m riyals during the period.

Total operating income, on the other hand, climbed by 3.4 per cent to 5.1bn riyals as net financing and investment income, fees from banking services and other operating income increased, according to the lender.

The bank’s nine-month net profit fell 5 per cent year-on-year to 7.4bn riyals as operating expenses rose 14.7 per cent, with higher salaries, depreciation charges and other expenses weighing on margins.

Higher credit impairment charges and total operating income also contributed to the drop in nine-month earnings.

Assets at the end of the nine-month period climbed 17 per cent year-on-year to 430.3bn riyals and investments rose 24 per cent to 57bn riyals. Customer deposits during the period jumped 15.5 per cent to 345.3bn riyals.

Earnings for the three months beat expectations, analysts from EFG Hermes said in a note on Sunday.

"Revenue was stronger than expected, on widening of spreads, strong loan growth and non-interest income, while provisioning continues to be low," the note stated.

"Despite low rates, [Al] Rajhi’s asset yield has held up, on account of strong growth in loans, likely driven by high-yielding mortgages," it added.

The company's loan book grew 5 per cent on the previous quarter and 19 per cent on the same period last year.