Saudi Arabia’s National Commercial Bank (NCB), the kingdom's biggest lender by assets, reported a 22 per cent drop in its second-quarter profit as total operating expenses including impairments for bad loans climbed and operating income decreased.

Net profit for the three months ending June 30 declined to 2.09 billion Saudi riyals (Dh2.05bn), the lender said in a statement to the Tadawul stock exchange, where its shares trade. Operating income during the period slid 5.6 per cent to 4.76bn riyals.

Total operating expenses iclimbed 18.4 per cent during the period, “mainly due to higher net impairment charge for expected credit losses". They were partially offset by a decrease in salaries and employee-related expenses, rent and premises-related expenses, depreciation or amortisation of property, equipment, software and ROU (right of use) assets, and other general and administrative expenses, the statement said.

The net impairment charge for expected credit losses rose 155 per cent year-on-year to 828 million riyals, it added.

The lender did not give a reason for the higher impairment charge, but banks across the world have been setting aside more provisions to deal with souring loans as the economic fallout from Covid-19 spreads.

The lender's total revenue from special commissions/financing and investments dropped 8 per cent in the second quarter to 4.6bn riyals.

During the first half of 2020, net profit dropped 10 per cent to 4.92bn riyals, on higher total expenses, net impairment charges for expected credit losses and depreciation/amortisation of various assets.

The net impairment charge for expected credit losses in the six-month period climbed 160 per cent to 1.2bn riyals, according to the statement.  Total operating income increased 0.7 per cent to 10bn riyals.

"With the exception of loan growth (positive surprise), underlying trends were broadly in line with our expectations," EFG Hermes said in a note on Monday.

Last month, NCB entered into a framework agreement with Samba Financial Group, to explore a merger of the two lenders that could create the third-biggest banking entity in the Arab world by assets.

If the two sides agree terms, NCB will be the merging bank and Samba Financial Group being the merged bank.

The merged entity would be the third-largest lender in the Arab world with more than $213bn (Dh781bn) in assets as of the end of March 2020, about 5 per cent higher since the end of 2019. The lenders had a combined 29 per cent market share as of the end of last year, based on total deposits held.

NCB finished the period to June 30 with customer deposits of 380.4bn riyals and total assets of 557.31bn riyals.

Saudi Arabia's sovereign wealth fund, the Public Investment Fund, holds a 44.29 per cent stake in NCB, and a 22.91 per cent share of Samba Financial Group, according to stock market data. The Public Pension Agency also owns 5.36 per cent of NCB and 11.54 per cent of Samba, while the General Organisation for Social Insurance has a 5.18 per cent stake in NCB and 7.09 per cent of Samba.

A potential tie-up between two of the kingdom's biggest lenders has generally been looked upon favourably by analysts, who believe the move would give the combined entity greater pricing power in a generally low-interest rate environment, as well as providing useful cost synergies.

Analysts from BofA Securities said the deal "could (conservatively) be 7-10 per cent accretive to NCB earnings by the end of 2022" in a note late last month.

“We believe the merger harbours sound strategic rationale given it could yield significant revenue and cost synergies, make better usage of Samba's underutilised balance sheet and liquidity, and afford greater scale to fund mega-projects,” BofA's analysts said in a note.

Al Rajhi Capital said that Samba Financial is "a more strategic fit" for NCB than a previously-considered tie-up with Riyad Bank, which was abandoned late last year.