Saudi banks’ consolidated earnings are expected to increase slightly in the third quarter of this year, backed by a modest increase in net interest income (NII), stable non-interest income and provisions, Al Rajhi Capital said in a report on Thursday.
NII surprised last quarter as asset yields increased despite the decline in effective SAIBOR, resulting in higher spread, the report said.
The effective SAIBOR has been mostly flat in Q3 as compared to the previous quarter, while credit growth edged up by about 1 percent month-on-month in July.
“Even if spread remains stable at the elevated level, GII is expected to be mostly flat in Q3. Cost of deposits may slip marginally due to the decline witnessed in SAIBOR,” the brokerage said, noting that this should lead to a slight increase in NIIs for the sector and higher net interest margins (NIMs).
Provisions have been the main factor impacting earnings over the last few quarters as asset quality deteriorated with the slowdown in the economy, cuts in government spending, and payment delays on government contracts.
“Given the current economic scenario, we don’t see any meaningful improvement in asset quality compared to the last quarter and thus expect provisions to be in the similar range as seen in the first couple of quarters (SAR2-2.5 billion),” Al Rajhi Capital said.
Meanwhile, operating costs are likely to remain stable in the third quarter, the report said.
The banking sector has healthy liquidity with a loan-to-deposit ratio of 81.15 percent, backed by improving government deposits in the past few months.
The capital structure continues to remain robust even after some of the banks increased dividends, which reflects confidence in their ability to continue such dividends.
Valuations for the sector are mostly fair at current levels, given that growth prospects also look weak and ROEs are not expected to reach earlier levels in the near term.
"We believe any improvement in asset quality will act as a catalyst for the sector, as rising provisioning have been hurting earnings over the last few quarters," Al Rajhi Capital added.
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