Riyad Bank in Saudi Arabia. The impact of the pandemic on Saudi Arabian banks has been contained, while pressures on the operating environment have eased according to Fitch Ratings. Image Credit: Gulf News Archives

Dubai: The impact of the pandemic on Saudi banks has been contained, while pressures on the operating environment have eased, according to Fitch Ratings.

“Operating environment pressures have reduced, helped by recovering oil prices, high credit growth and resuming economic activity,” said Amin Sakhri, Director Fitch Ratings. “Saudi banks have absorbed the shock for the main part and financial metrics are stabilising. Further asset-quality deterioration will be contained.”

A deterioration in asset quality and profitability was limited and the banks’ financial metrics have stabilised. These have been underpinned by government support measures that included interest-free deposits, but also by the strong loan growth. Fitch revised the outlook on all Saudi banks’ Long-Term Issuer Default Ratings to 'stable', to reflect reduced pressures on the operating environment and a similar 'stable' outlook on the sovereign rating.

Improving economy

While some non-oil sectors remain under pressure, with corporates’ ability to service their debts weakened as some are still absorbing the shock of 2020, Fitch analysts believe these pressures are already captured by the banks’ adequate provisioning and classification. “The pandemic has put pressure on the sovereign’s financial flexibility and ability to spend in the economy, although this has been less than anticipated and recovering oil revenue continue to mitigate it,” said Sakhri.

Asset quality

The sector’s reported asset quality metrics were supported by government forbearance measures and by high credit growth from strong retail mortgage origination. The recovery in the operating environment consolidated this trend in the first-half, with the loan impairment charges (LICs)/average gross loans ratio reducing to 0.8 per cent from 1 per cent in 2020.

The cut in interest rates by SAMA, the Saudi central bank, to a record low of 1 per cent has put pressure on margins. Low trade volumes and economic activity have also reduced fee-income generation. LICs increased in 2020 as banks built up provisions due to weaker credit conditions amid the pandemic.

“Delayed recognition of impairments remains a key risk, but we believe the impact on the sector’s asset quality and overall financial profiles will be contained,” said Sakhri.

Capital buffers, liquidity

The sector’s capitalisation remains sound, with an average common equity Tier 1 (CET1) ratio of 18.1 per cent at end of the first-half, one of the highest globally. This was despite high credit growth and increasing LICs from the challenged operating environment.