Dubai: The worst effects of the liquidity crunch that hit the Saudi Arabian banking sector in 2016 have subsided with fresh liquidity injections by the government into the banking system and reduced pressure from government’s domestic borrowing programmes, according to analysts.
“The banks came through the period largely unscathed, with liquidity coverage ratios recovering and capital strength intact despite a dip in earnings. However, we expect profitability to continue declining in 2017, reflecting rising impairment charges and funding costs. Our analysis shows that liquidity metrics have recovered at banks that have reported their 2016 results,” said Andrew Parkinson, Director Financial Institutions at Fitch Ratings.
Saudi banks’ average liquidity coverage ratio improved to 204 per cent by end-2016, down just one percentage point year on year, having dropped to 156 per cent at end-September 2016. The volatility of liquidity ratios highlights the concentration risk in many banks’ funding.
The improvement in liquidity conditions was largely driven by the injection of SAR20 billion ($5.3 billion) of public-sector deposits into the sector in October 2016 and the introduction of seven- and 28-day repo facilities by the Saudi Arabian Monetary Authority (SAMA). These repo facilities significantly improve the sector’s liquidity prospects and SAMA’s relaxation of the maximum loans/funding ratio to 90 per cent from 85 per cent in February 2016 also alleviated some pressure. Liquidity was further boosted in the fourth quarter of 2016 when borrowers in the contracting sector received an estimated 75 billion riyals (Dh73.4 billion) of overdue payments from the government, allowing them to service their obligations to the banks.
“We understand the government’s arrears have largely been to building and construction companies, a sector which accounts for about 8 per cent of total bank loans, equivalent to roughly one-third of the banking sector’s capital base. The government’s payments in late 2016 should help to support economic activity in the Kingdom,” rating agency Standard & Poor’s said in a rating updat that affirmed Saudi Arabia’ rating at ‘A-/A-2’ unsolicited long-and short-term foreign and local currency sovereign credit ratings with stable outlook.
Impairment charges
The Saudi banking system has been facing margin pressures. For the first time since the global financial crisis, the sector’s net income was down, by 5 per cent to 41 billion riyals, driven by the liquidity crunch and a rise in impairment charges, as lower oil prices took toll on the wider economy. Saudi banks are highly reliant on large deposits from the public sector and falling oil prices triggered the withdrawal of liquidity by various federal bodies and government-owned enterprises.
Funding costs more than doubled in 2016 as banks became more reliant on the interbank market and sourced liquidity from more expensive term deposits and by selling liquid assets. Analysts expect funding costs to continue rising in 2017, particularly as the Saudi policy rate is likely to rise.
Non-performing loan (NPL) ratios for the Saudi banking sector are still low by regional and global standards, rising only marginally by end-2016 to 1.2 per cent compared to 1.1 per cent in 2015. However, tightening sector liquidity has affected borrowers’ ability to service their debt. Several banks provided significant specific and general provisions against their loan books in the fourth quarter of last year, reflecting the more challenging credit environment. In addition, disruption and or delays in payments to construction and contracting sectors are resulting in loan restructurings or extensions.
Despite the pressure on earnings, the main Saudi banks are still profitable by international standards, with an average return on assets of 1.7 per cent in 2016 compared to 1.9 per cent in 2015. This reflects low, but rising, impairment charges and funding costs, and the banks’ emphasis on cost control.
