Saudi banks’ aggregate profit reached a 14-month high of SAR7.33 billion ($1.95 billion) in May, marking a 16 percent annual increase, according to newly released data.
Profits before taxes and zakat
The Saudi Central Bank (SAMA) reported that these profits are before zakat and taxes. Cumulatively, banks recorded a total profit of SAR34.78 billion ($9.27 billion) in the first five months of 2024, compared to SAR31.12 billion in the same period last year.
Factors driving strong profitability
A recent McKinsey report highlighted that factors like high oil prices, rapid economic growth, low unemployment, favorable demographics, public investments, and moderate inflation have driven Saudi banks’ balance sheets and profit margins.
Evolving regulatory environment
The region has also seen an evolving regulatory environment with greater openness, new innovation frameworks, and improved ease of doing business. All Gulf Cooperation Council countries maintain their currencies pegged to the U.S. dollar, causing local interest rates to mirror the Federal Reserve’s policies.
Interest rates and profitability
McKinsey’s report highlighted that the headline inflation is projected to moderate over the next year. In 2023, inflation is estimated to have been around 2.6 percent. Looking ahead to 2024, McKinsey forecasts inflation will decrease further to approximately 2.3 percent.
Recent profit growth
Compared to April, Saudi banks’ May profits rose 9 percent, the highest monthly increase in five months. However, McKinsey warned that the current high-rate environment boosting profitability may not persist indefinitely.
Preparing for potential declines
The firm advised banks to not assume high profits are the new norm and instead invest in transformative changes to enhance efficiency and resilience for potential future declines.
The IMF praised SAMA’s efforts to modernize regulatory frameworks and develop financial stability mechanisms.
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