Loan provisions send SIB's profit into a dive

Saudi bank sees 88% drop in second quarter from last year

Saudi Investment Bank (SIB) is not out of the woods yet, as provisions caused second-quarter earnings to fall short of expectations. The bank said its profit dropped by 88 per cent to 22 million riyals, down from 188m riyals in the same period last year. The results missed analyst estimates significantly, as Deutsche Bank had forecast net income for the second quarter of about 90m riyals. The Deutsche Bank analyst Rahul Shah maintains a sell rating on the stock, with a target price of 19.45 riyals. At yesterday's close, it was down 2.5 per cent to 19.30 riyals.

Other Saudi banks also reported disappointing earnings yesterday. SIB, which was set up in 1976 by royal decree, has a third of its shares floated on the Saudi Tadawul. Its shareholders include JP Morgan Chase, Japan's Mizuho Corporate Bank, the Saudi Public Pension Agency, private institutions and retail investors. The data show the bank's non-performing loans increased sharply last year and that its coverage for them was too low, necessitating further provisions.

On the plus side, SIB's margins are improving. The bank's strategy of expanding its branch network, specifically Islamic-branded branches, appears to be helping it to get more from its high-margin retail business. Still, the company needs to continue attracting higher volumes of retail deposits, a cheaper source of funding. The bank is also dependent on improvement in the capital markets, as it holds about 10 billion riyals of corporate and government fixed-income investments. It has already begun to make provisions against its corporate credit investments, which are at levels somewhat higher than those of its peers.

If the equity market continues to improve, the bank may eventually be able to charge retail investors higher fees to buy and sell stocks. Last year, brokerage fees accounted for 45 per cent of the bank's total income from fees. [e-mail]