NCB Capital, Saudi Arabia’s largest investment bank and leading GCC wealth manager, believes that lower YoY provisions will be a key factor behind strong net income growth for Saudi banks in 3Q11. 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. Longer term fundamentals remain good with valuation levels attractive.
Commenting on the new report, Farouk Miah, Acting Head of Equity Research at NCB Capital said, “Saudi banks’ Non Performing Loans (NPLs) declined 13% YoY in 2Q11 and provision coverage increased to 122%. Off the back of better asset quality, we expect provisions in 3Q11 to decline by 52.8% YoY boosting the sector’s 3Q11 earnings.”
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.
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