Dubai: Saudi banks’ standalone credit profiles are likely to weaken as a result of the coronavirus and lower oil prices, despite the timely support measures introduced by the Saudi Arabian Monetary Authority, including prompt payments for government contractors, credit rating agency Fitch Ratings said in a note.
“We will first see pressure on banks’ profitability. Asset quality will also weaken, but the true impact will be masked by loan deferral programmes and regulatory flexibility for banks to recognise impairments under IFRS 9,” said Redmond Ramsdale Head of Middle East Bank Ratings.
Deterioration in core metrics
According to the rating agency, Saudi banks had a pick-up in growth opportunities and maintained sound financial metrics in 2019. Nevertheless, there was mild deterioration across most core metrics in a more challenging operating environment.
Asset quality
Asset-quality remained under pressure in 2019, particularly in the contracting, retailers and retail/wholesale trade sectors, and loan impairment charges (LICs) to average gross loans jumped due to deterioration in the corporate books. However, impaired loans ratios do not show the full extent of asset-quality deterioration because of the high proportion of restructured loans (classified as Stage 2 loans). Loan-loss allowances fell to a still adequate 117 per cent of impaired loans and remain low as a percentage of gross loans (2.7 per cent).
Profitability
Operating profit/risk-weighted assets deteriorated in 2019 due to higher loan impairment charges, mostly against corporate exposures. The average net interest margin remained strong and steady at 3.7 per cent, benefiting from high current and savings accounts (CASA)deposits and higher rates in the first half of 2019. Costs remained well managed, with a 40bp reduction in the average cost/income ratio.
Funding and liquidity
The average gross loans-to-deposits ratio increased slightly in 2019 but liquidity remained sound. Deposits are mostly in local currency (above 90 per cent) and make up more than 90 per cent of total funding (the highest in the GCC). Foreign funding is below 10 per cent of total funding. Retail deposits and non-interest-bearing CASA deposits form a much bigger proportion of funding than in other GCC countries but concentration remains high.
Capital
Reasonable internal capital generation kept core capital ratios strong in 2019 despite high loan growth. The average Common Equity Tier 1 ratio was 17.9 per cent at end-2019 and buffers over regulatory minimum requirements were sound.
“If economic disruptions caused by the coronavirus and lower oil prices remain for longer, the rating agency expects asset-quality problems and lower profitability will put pressure on currently adequate capital buffers. Liquidity is less of a risk as the government has already taken measures, including debt issuance, to inject deposits in the banking system, said Amin Sakhri, director of Fitch Ratings.
