HSBC's Saudi affiliate SABB bank <1060.SE> missed forecasts and two other banks in the kingdom reported sharp falls due to high provisions to counter exposure to troubled Saudi firms and a slowdown in lending.

The second quarter results for SABB, Arab National Bank <1080.SE> (ANB), and Saudi Investment Bank <1030.SE> (SAIB) on Monday reflect a challenging period for the region's banks as they struggle to cover loan losses in a flat market still reeling from the global financial crisis.

Saudi lenders had a difficult year in 2009 with profitability eroded by a doubling of provisions for non-performing loans to almost 11 billion riyals as a rising number of Saudi and regional firm ran into financial problems.

SABB, the fifth-largest Saudi bank by market value, said it made a net profit of 447 million riyals ($119.2 million) in the second-quarter, down 34 percent from the same period in 2009.

Analysts surveyed by Reuters had expected on average net profit of 613.85 million riyals.

Shares in SABB bank fell by as much as 4.6 percent after its quarterly earnings missed analysts' forecasts on lower non-lending income and new provisions. Shares in ANB and SAIB fell by as much as 2.5 percent and 3.3 percent respectively.

SAAB's PROFITS

The decrease in the profits ... is mainly due to the bank's conservative policy in increasing provisions to support the bank's financial position, SABB said in a statement.

It did not give further details on the size of these provisions or their purposes.

While it raised its net lending income by 5.5 percent to 943 million riyals, SABB saw its non-lending net income fall by almost 15 percent to 417 million riyals. Non-lending income includes brokerage, foreign exchange and investment.

Operating costs -- which include salaries and provisions for bad loans -- rose 29.1 percent to 913 million riyals, based on Reuters calculations. Earnings per share by end-June stood at 1.42 riyals down 25.7 percent from a year earlier.

SABB, 40-percent owned by HSBC, had to book 176.5 million riyals to cover loan losses during the first quarter of 2010. This followed provisions worth 1.5 billion riyals for all of 2009 which covered less than half of the 3.53 billion riyals of non-performing loans it had by end-2009.

LENDING SLOWS

By end-June, SABB's loans portfolio shrank by 5 percent to 74.8 billion riyals, while it was down 4.5 percent by end-March at 75.7 billion riyals.

ANB, 40-percent owned by Jordan's Arab Bank , saw its second-quarter net profit fall by 117 million riyals to 629 million riyals after its net lending income fell by 119 million riyals to 775 million riyals.

Loans fell 9 percent to 64.8 billion riyals by end June, while they were down 10.1 percent at 65.4 billion riyals by end-March.

Operating costs rose by about 4 percent to 486 million riyals, suggesting a little change in provisions booked during the period.

Provisions led the smaller SAIB to post a second-quarter profit of 22 million riyals, an 88 percent drop from the year ago period, despite a relatively-strong 25 percent rise in lending income.

According to Saudi bourse data, JP Morgan International Finance Ltd holds a 7.4 percent stake in SAIB which in turn holds a 50 percent stake in the Saudi affiliate of American Express .

SAIB did not give details about these provisions. Stock exchange data showed that SAIB was the only Saudi lender to have booked lower provisions for bad loans in 2009 -- at 554.6 million riyals -- although its financial statements showed a sixfold rise in non-performing loans at 1.79 billion riyals.

(Editing by Sharon Lindores)

HSBC