Dubai: Outlook for the Saudi Arabian banking system remains stable, reflecting strong operating environment, driven by high government spending and robust domestic consumption, according to the latest assessment by rating agency Moody’s
The rating agency expects the Kingdom’s banking sector to benefit from continued low problem loan levels, strong loss-absorption capacity in the form of high capital buffers and stable internal capital generation, the benefits of low-cost deposit-based funding, and large liquidity buffers.
“Over the next 12 to 18 months we expect continued high government spending, robust domestic consumption and increased private-sector business activity to drive economic growth,” said Olivier Panis, a Moody’s Vice President-Senior Analyst.
Low government debt levels and sizeable reserves are expected to fuel expansionary fiscal policy, allowing the non-oil sector, to which most bank lending is extended, to grow by 5.2 per cent in 2014 and around 5 per cent in 2015.2
Although current oil prices remain above the government’s fiscal break even oil price (estimated by the International Monetary Fund at $86.1 for 2014), the downside risk of further sustained price reductions — below the fiscal break even oil price — would have a pronounced effect on confidence and hence economic growth. Moreover, credit growth and asset quality could also be impacted negatively by tail risks stemming from the ongoing regional geopolitical tensions.
“As a result of the solid operating environment, we expect asset quality to remain stable into 2015 with problem loans 3 to gross loans likely to remain below 2 per cent (the ratio was stable at 1.6% between year-end 2013 and June 2014), which compares favourably to those of other GCC banks,” said Panis.
Despite this stability, analysts see little room for further significant improvement in asset quality, as banks will remain exposed to event risks. These stem from persistently high, albeit declining, single-party exposures in the banks’ loan books, and opacity in the corporate sector, particular among the large family owned conglomerates.
Over the outlook period, we expect the continued prevalence of non-interest bearing deposits to allow Saudi banks to sustain their strong pre-provision profitability and their strong operational efficiency. Lower loan loss provisioning expenses, and continued growth in business activity, will support stable bottom-line profitability, helping to balance margin pressures from increasing competition among the very liquid Saudi banks.
Saudi banks’ high net income is expected to continue to drive robust internal capital generation and substantial loss-absorption capacity. Although capitalisation levels to decline slightly as the banks increase lending.
Saudi banking system’s strong funding dynamics, underpinned by a cash-rich Saudi government, a young and growing population and the banks’ well-established deposit franchises, will continue to translate into a solid system deposit base. Although high deposit concentrations, primarily from the public sector, and asset and liability maturity mismatches will remain structural challenges, deposit balances have historically proven stable.
Moody’s outlook report follows double digit third quarter profit growth reported by leading Saudi banks. While Banque Saudi Fransi (BSF), Arab National Bank (ANB) and Saudi British Bank (SABB), delivered more than 20 per cent year on year net income growth in the quarter; Samba, Riyad Bank and Saudi Hollandi Bank (SHB) saw high-single digit growth. Al Rajhi lagged peers with year on year contraction on both net interest income and net income levels.
“For the seven banks we cover, net income growth accelerated to 12 per cent year on year compared to 7 per cent year on year in the second quarter of 2014 on the back of NIM [net interest margin] resilience, double-digit non-interest income growth and sharp provision declines,” wrote Suha Urgan and Taher Safieddine, analysts at Shuaa Capital in a recent note.
