Saudi Arabia's 10 biggest commercial banks are reporting weaker earnings for the final quarter of 2008, revealing that they have not been spared the cocktail of weaker economic growth, tighter funding and falling asset prices that have battered counterparts across the region.
Saudi Arabia's largest bank, National Commercial Bank (NCB), yesterday issued the latest in a series of weak results, announcing a net loss for the fourth quarter of 2.55 billion riyals (Dh2.49bn). Full-year profits, it said, fell 66 per cent compared with 2007 to 2.03bn riyals. The poor results from Saudi Arabia's financial sector, until now considered relatively sheltered, illustrate what analysts say is a deteriorating operating environment for banks and companies this year. What began as a financial crisis in the West that sparked a global recession is now coming full circle, with low growth and weak corporate profits sapping loan demand and pushing more borrowers into default.
"The difficult global economic environment has begun to have a negative impact on banks in the GCC region and has made the outlook in 2009 for all banks more challenging," Robert Thursfield, Mahin Dissanayake and Philip Smith, analysts at Fitch Ratings, wrote in a report on the results this weekend. But weaker earnings from Saudi banks are a sampling of what is already shaping as a disappointing earnings season everywhere. Of the 92 companies on the Standard & Poor's 500 index that have reported fourth-quarter earnings so far, for example, about 50 have been below analysts' forecasts, according to the Associated Press.
In Jeddah, NCB said its weaker results were due largely to losses on its own investments. "The bank attributed the drop in income mainly to provisions for its investment portfolio which were set aside to address the decline in the current value of these investments," the bank said in a statement accompanying its earnings. Losses on investments also are principally to blame for quarterly losses at Bank Aljazira and Saudi Investment Bank, according to Fitch. The country's seven other major commercial banks - Al Rajhi Bank, Arab National Bank, Banque Saudi Fransi, Riyad Bank, Samba and SABB - are reporting lower profits. Only Saudi Hollandi Bank reported a gain in net profits after recovering from losses on corporate loans last year, according to Fitch.
Less sophisticated and more focused on meeting domestic financing needs, Saudi Arabia's banks had little to no exposure to the kind of subprime mortgage-related securities that have laid low the world's largest financial institutions. And with Saudi Arabia's mortgage market still in its infancy, they do not have as much exposure to property as their Emirates counterparts. "They are not exposed to the real estate market and the risk appetite for most of the banks has been quite moderate over the past few years," said John Sfakianakis, an economist in Riyadh at SABB, HSBC's Saudi affiliate.
Still, a shortage of project financing funds to sustain Saudi Arabia's own construction boom sent the country's banks into the international market for wholesale loans. When global liquidity dried up, therefore, they suffered along with other Gulf banks from the drought. The Saudi Arabian Monetary Agency, the country's central bank, responded by injecting about US$3bn (Dh11.01bn) into the Saudi banking system and liquidity has improved much more quickly than in banks in the Emirates.
The bad news for banks is that their biggest customers now appear to be ailing as well, particularly those with exposure to falling commodity prices. Saudi Basic Industries Corporation (SABIC), the Gulf's second-largest company, said last week that flagging demand from car makers and construction industries for the plastics it produces sent its quarterly profits down by a record 95 per cent. Saudi Arabian Mining, or Maaden, managed a net profit of 116 million riyals in the fourth quarter thanks to hedge contracts on gold. But it posted an operating loss of 27.5m riyals, compared with a loss of 21m riyals the year before.
Even commodity buyers have not fared well. Savola Group, a Saudi food and packaging conglomerate, reported an 83.5 per cent drop in profits for last year to 200m riyals, following last year's spike in commodity prices. Major oil companies are also likely to provide a preview of how hard the Gulf's own oil revenues might be hit. ConocoPhillips, Royal Dutch Shell and ExxonMobil are all due to report earnings this week.
Record oil prices last year are likely to produce healthy full-year results, but analysts say crude's plunge in the past few months will result in weaker fourth-quarter numbers and gloomy forecasts for this year. "The air has gone out of the tyres, the wind's gone out of the sails," said John Olson, an analyst with Sanders Morris Harris in Houston, told the Houston Chronicle. If there is likely to be any bright spots at all this reporting season, analysts say it will come from the region's phone companies. Both the Emirates' dominant telecommunications provider, Etisalat, and Zain of Kuwait are expected to report a 30 per cent increase in net profit later this month as rapid expansions into new markets in Africa and elsewhere begin to pay off.
Conditions abroad are being less kind to the region's banks. Booming growth in the Gulf gave way to a rapid expansion of credit that left them more dependent on international finance and therefore more vulnerable to the collapse of global credit markets in the second half of last year, analysts say. The gloomier outlook from Saudi Arabia's banks is likely to provide a preview, therefore, for what to expect from the UAE's banks. The ratings agency, Moody's Investors Service, said earlier this month that the outlook for banks in the Emirates had turned negative, the first time it has issued a negative assessment since it started rating them a decade ago. Last month, Fitch lowered its ratings for several banks, including Dubai Bank, Abu Dhabi Islamic Bank, Bank of Sharjah, Emirates Bank International and First Gulf Bank.
Principal among analysts' concern is the banks' exposure to smaller developers, who may be hurt by falling property prices. Banks may face a growing problem of non-performing loans, which would drain both capital and profits, they said. Analysts remain confident, however, that central banks have the willingness and, more importantly, the funds to support their countries' banks. Fitch said this was demonstrated by the Federal Government's move to have the government-owned Emirates Development Bank take over the home lenders Amlak and Tamweel.
@Email:warnold@thenational.ae
