Dubai: The fourth-quarter results of leading Saudi banks show a number of these institutions are facing a squeeze on profits as both loans and deposits decline and asset quality deteriorates further.
At the close of the fourth quarter, Saudi Hollandi Bank, the kingdom’s oldest lender, reported a 2.3 per cent fall in fourth-quarter net profit on higher staffing costs and provisions for bad loans.
Saudi British Bank (SABB), an affiliate of HSBC Holdings, posted a 3.1 per cent drop in fourth-quarter net profit and Riyad Bank, Saudi Arabia’s fourth-largest lender by assets, posted a 19.7 per cent fall in fourth-quarter net profit, in line with analysts’ forecasts as Samba Financial Group, the kingdom’s third-largest bank by assets, reported flat net profit for the fourth quarter.
The notable exception was Al Rajhi Bank which reported a 28.2 per cent rise in its fourth-quarter net profit, but the overall trend points to a grim outlook for the kingdom’s banking sector according to analysts and rating agencies.
Standard & Poor’s said in a recent report that it foresees increasingly difficult operating conditions for Saudi banks over the next two years, due to pressure on government spending and the expected impact on the domestic economy.
Saudi Arabia’s banking system has enjoyed a buoyant operating environment over the past four years, posting double-digit average growth of assets, loans and deposits, alongside a decline in credit losses and a significant improvement in non-performing loan coverage ratios.
But with the drop in oil prices, several challenges emerged in the second half of 2015. While credit growth lost some momentum, local interest rates started increasing in response to tightening liquidity.
“We expect credit growth will contract to mid-single digits, given the strong correlation between oil prices, government spending, and credit growth,” said Standard & Poor’s credit analyst Suha Urgan.
New lending decelerated in 2015 after double-digit credit growth over each of the four preceding years. The decline stemmed partly from subdued private capital investment, owing to the slump in oil prices, particularly in the second half of the year. Regulations implemented in 2014 requiring higher down payment on housing loans also contributed to the trend.
According to the Saudi Arabia Monetary Agency (Sama)’s monthly banking sector data, loan growth in the first 11 months of 2015 was 8.4 per cent (or 9.1 per cent annualised), whereas from July to November, cumulative growth was only 2.7 per cent.
“We expect that credit in the system increased by 9 to 10 per cent last year, compared with 12 per cent in 2014, and we anticipate a further slow down to about 5 per cent in 2016. Over the next several quarters, we see two main constraints to credit growth. First, we believe the government may adopt a more selective stance to infrastructure spending, which would gradually dampen economic activity,” said Urgan.
Countercyclical public spending programmes have historically been a key stabilising factor for economic growth in the kingdom during low oil price periods. In 2015, the government has already tapped heavily into its substantial reserves and has issued long-term bonds to bridge the budgetary shortfall generated by lower oil prices.
“Although we expect absolute public spending levels to remain high and to limit the negative effects of a prolonged low oil price environment on the domestic economy, the planned expenditure slowdown will result in a reduction in credit growth to mid-single digits in 2016,” rating agency Moody’s said in a recent report.
Analysts see credit to the private sector being adversely impacted as increasing government borrowings crowd out private sector borrowers.
The government’s debt issuance programme will affect the amount of liquidity available for private-sector lending. S&P has forecast that the general government fiscal deficit will be 10 per cent of GDP in 2016, down from their estimate of 16 per cent in 2015, but much higher than 1.5 per cent of GDP in 2014.
“We expect Saudi Arabia will finance this deficit by drawing on its fiscal assets and issuing debt. We also believe the banking system is ready to accommodate sizeable government issuance and can comfortably fund $75 billion-$100 billion [Dh275.4 billion to Dh367.3 billon or 11 to 15 per cent of GDP] of sovereign debt by the end of 2016. However, this could gradually reduce banks’ capacity for private-sector lending if further government issuance relies only on the domestic market,” Urgan said.
