Bank profits show the income banks have earned after deducting expenses, but looking at profits alone is not enough to understand the quality of their performance. Behind the profit figures is an item that reveals some of the risks banks take on when financing individuals and companies: expected credit loss provisions.

What do the third-quarter results show?

Al Rajhi Bank’s preliminary results showed that its profits rose 11.7% in the third quarter of 2026 to SAR 7.11 billion. Over the same period, net expected credit loss and other loss provisions rose 49.5%, from SAR 570 million to SAR 852 million.

Alinma Bank, meanwhile, reported a slight 0.2% decline in quarterly profit to around SAR 1.59 billion, alongside a 56% increase in net provisions to SAR 400 million.

The two results present different pictures: one bank managed to increase its profits despite higher provisions, while the other saw provisions weigh on profits despite growth in income from financing and investment.

How do banks make money?

Banking relies on deploying funds through financing and investment. A key source of bank income is the difference between the returns generated by these activities and the cost of the funds used to finance them, including the cost of deposits.

Banks also earn additional revenue from banking service fees and other activities, then deduct operating costs, loss provisions, zakat, and taxes to arrive at net profit.

But while financing generates income for the bank, it also carries the possibility that the customer may not repay all of their obligations. This is where the cost of credit risk comes in.

What are credit loss provisions?

These are amounts banks record in their accounts for losses they expect they may incur if customers fail to meet their repayment obligations.

A provision is not necessarily a loss that has already occurred, nor is it cash that the bank sets aside in a separate account. It is an accounting estimate that affects profits and reflects the potential loss in the value of financial assets.

This estimate is based on the likelihood that a customer will default, the amount of financing at risk, and what the bank expects to recover in the event of default, while taking future economic conditions into account.

For example, if a financing portfolio totals SAR 100 million, the assumed probability of default is 2%, and the expected loss rate in the event of default is 40%, the expected credit loss in this simplified example would be SAR 800,000.

Since the introduction of International Financial Reporting Standard 9 (IFRS 9), banks have not waited for a default to occur before recording expected losses. Instead, they recognize them from the time financing is provided and reassess them as risks change.

Does an increase in provisions mean defaults are rising?

Not necessarily.

Provisions may rise as a result of lending growth, even when customers are making their repayments on time. They may also rise because the bank expects greater economic risks, or because some customers have become more likely to default.

In its third-quarter results, Al Rajhi Bank attributed the increase in net provisions to higher additions to provisions and a decline in recoveries from financing that had previously been written off. Alinma Bank, meanwhile, linked the increase in provisions mainly to growth in its financing and investment portfolio.

For this reason, IFRS 9 classifies financing into three stages: financing for which credit risk has not increased significantly; financing for which risk has increased but that is not credit-impaired; and financing that is credit-impaired. The amount of expected loss recognized varies by stage.

How should profits and provisions be read together?

Comparing provisions between two different banks is not enough, because the size, composition, and risk profile of their financing portfolios may differ.

The assessment is more accurate when it takes three related indicators into account:

  • Cost of credit risk: The amount of credit loss expense relative to the average size of the financing portfolio, measured over the same period.
  • Non-performing financing ratio: The share of financing that is not being repaid as scheduled, according to the definition of default, out of total financing.
  • Default coverage ratio: The amount of provisions available to cover non-performing financing, compared with the value of that financing.

These indicators show whether provisions are growing alongside the expansion of banking activity or because the quality of the credit portfolio is deteriorating.

I would say that a bank’s profit growth shows its ability to generate returns, while provisions and credit quality indicators help explain the risks it takes on to achieve those returns.

The question is not just how much profit the bank made, but how it made that profit and what risks came with it.