Dubai: Saudi Arabia’s big-5 banks could face further profitability pressures as government tightens spending, however these banks will largely protect their profitability in the next 12 to 18 months, according to rating agency Moody’s.
“Lower government spending is eroding economic growth and slower growth is dampening credit demand and weakening borrowers’ debt repayment capacity. We expect lending to slow and problem loans to rise, but banks will be able to use their pricing power to offset these pressures and keep profit steady over the coming 12 to 18 months,” said Ashraf Madani, Vice President — Senior Analyst at Moody’s.
Profitability at the five largest Saudi banks such as National Commercial Bank, Al Rajhi Bank, Samba Financial Group, Riyad Bank, and Banque Saudi Fransi could be pressured going into 2018 as lower government spending impacts negatively on economic growth, in turn dampening credit demand and weakening corporate, and to a lesser extent, consumer borrowers’ ability to repay debt.
“As the Saudi government reins in spending, we expect lending to slow and problem loans to rise. However, the big-5 banks will be able to use their pricing power to offset these pressures and keep profit steady over the coming 12 to 18 months,” said Madani.
According to Moody’s, among the top 5, Al Rajhi is best-positioned to maintain its profitability over the coming quarters, reflecting its strong retail-focus, with only limited, albeit expanding, corporate sector exposures; as well as its large Islamic franchise and low cost retail deposit base.
Rising interest rates will offset the impact on banks’ profitability of higher provisions and lower fees and commissions, allowing them to reprice floating-rate corporate loans and achieve higher returns on their investment portfolios, as reflected in Riyad Bank’s strong increase in net interest income in the first quarter of 2017, despite negative growth in total earning assets.
Strong capital buffers
Credit growth will be muted, with most banks already reporting flat or negative lending growth, with the exception of Al Rajhi. Non-oil GDP, a key driver of banks’ business activity, will grow by just 2 per cent, keeping credit growth subdued at around 3 per cent.
Provisioning costs are expected to rise and fee income will fall as the economy slows, with corporate-focused lenders, Samba, BSF, Riyad Bank and to a lesser extent NCB being more vulnerable, as their clients are exposed to reduced government spending on infrastructure and construction projects.
Lower fees, commissions and foreign exchange (FX) income is being driven by lower trade and FX volumes. NCB is outperforming its peers through its ability to protect and grow its foreign exchange business. All five banks have ample liquidity and strong capital buffers.