At the end of July, Saudi banks posted their results in the second quarter for the current year (April through June 2021). The Q 2 earnings are 10 times the ones achieved in the same period last year, reaching a total of SR 11,061 (USD 2.95 bn). In the second quarter of 2020, all Saudi banks reported profits despite the COVID-19 pandemic, except for one bank with its total earnings reaching only SR 962 m (USD 265.53 m). However, the Q2 profits are less by 7.81% compared to Q1.
If we compare the performance of the first half of 2021 to the same period in 2020, the results show the profits have grown by 111% from SR 10,921 bn (USD 2,913 bn) to SR 23,059 bn (USD 6,149 bn). This significant improvement goes back to a number of factors that helped the Saudi banking sector bounce back and generate profits.
Let's dive into the reasons why Saudi banks have shown better performance in the first half and have increased expectations for the second half of 2021.
INCREASING BORROWING POWER
Since the beginning of 2021, the borrowing power of local banks and foreign banks working in the Kingdom has been boosted due to the growth of the national economy for the first time since the outbreak of the pandemic, which has put banks in a better position regarding their ability to provide loans to individuals and private and public sector.
"The total amount of loans have hit a new record by the end of June 2021 when their value reached SR 2022.2 bn (USD 539.25 bn). The national economy is recovering fast, and banks have solidified their financial positions to increase their borrowing power," financial analyst Mohammed Ibraheem told Majalla.
"Business activities are on the rise. The government has succeeded in controlling the spread of the pandemic without closing the economy. Banks have been providing credit facilities for borrowers, whether they are individuals, public sector, or private businesses, to accelerate the execution of their plans at lower interest rates. That is the reason behind the spike in lending, which has participated in increasing the profits," he added.
OPERATING INCOME, STOCK MARKET
"A big part of the banks' profits comes from what is called 'operating income,' which includes fees coming from banking services, net financing and investment income. For example, many stock traders use banks' special trading platforms to carry out their transactions. Banks themselves have special funds for trading in stocks. The improvement of the performance of the Saudi stocks has had a great impact on the positive results of the banks. Customers are taking more interest in stocks, either by subscribing to stock investment funds or using the banks' platforms," explained Mr. Ibraheem about the several sources of the profits.
The Saudi Stock Market (Tadawul) index has jumped by 30% from the beginning of 2021 until the beginning of August. With this rate of growth, hundreds of billions were invested in Saudi stocks using banks' platforms, and the banks made huge profits.
With the revival of business activities, money transfer fees, internally and externally, grew higher in volume and number, in addition to other financial administration fees.
FUTURE OUTLOOK
Whether banks are expected to continue the upward trend or not, Mr. Ibraheem believes that if oil prices remain higher than USD 70 per barrel, the cash flow will help banks be more resilient and robust as the government deposits the petrodollars in the local banks.
"The Saudi economy is expected to do better and grow in the second half of 2021. This means that more investments and spending will put banks in a better financial position, allowing them to further generate profits. The recovery of the Saudi economy helps the government decrease the budget deficit, while banks continue lending and business activities thrive and prosper," concluded the expert.
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