A Jeddah branch of the Saudi American Bank (Samba). Leading Saudi banks are facing challenges on profitability and asset quality that are getting reflected in their credit rating outlook. Image Credit: AP

Dubai: Faced with tough economic conditions following the sharp fall in oil prices and coronavirus-related economic disruptions, Saudi banks are facing challenges on profitability and asset quality that are reflected in their credit rating outlook.

Rating agency Fitch revised the outlooks on eight Saudi banks’ Long-Term Issuer Default Ratings to 'negative' from 'stable' while retaining the ratings at ‘BBB+’. The banks are Riyad Bank, Arab National Bank (ANB), Banque Saudi Fransi (BSF), Alinma, Saudi Investment Bank (SAIB), Bank Aljazira (BAJ), The Saudi British Bank (SABB) and Gulf International Bank - Saudi Arabia (GIB SA).

Three other banks were placed under negative watchlist earlier - National Commercial Bank (NCB), Al Rajhi Bank (ARB) and SAMBA Financial Group (SAMBA) - were assigned a negative outlook by Fitch in its latest update.

Impact of sovereign ratings

Fitch’s latest rating follow similar action on Saudi Arabia’s sovereign rating earlier this month, which affirmed it an ‘A’ while maintaining a negative outlook. Moody’s had retained its rating of A1, but changed the outlook to 'negative' from 'stable' on the government’s issuer rating in May, reflecting increased downside risks to fiscal strength.

Standard & Poor’s, on the other hand, affirmed Saudi Arabia’s ‘A-/A-2’ sovereign credit rating with a stable outlook considering the country’s strong net asset positions and economic prospects over the next three years.

Fitch said its rating changes reflect continued pressures on the operating environment resulting from lower oil prices and declining growth in non-oil sectors. These are likely to persist in the medium term and put pressure on banks’ asset quality and profitability.

Government support

Despite changing the outlook of leading banks to negative, Fitch said Saudi Arabia has the ability to support the banking sector, given large, albeit decreasing, external reserves. It also reflects a long record of support for Saudi banks, irrespective of their size, franchise, funding structure and level of government ownership.

“We see high contagion risk among domestic banks given that the market is fairly small and interconnected," the Fitch report notes. "We believe this is an added incentive to provide state support to any Saudi bank if needed, to maintain market confidence and stability.”

Signs of recovery

Amidst tough operating conditions, listed banks reported better than expected third-quarter results. Cumulatively, the 11 banks had 11.88 billion Saudi riyals in net profit for the quarter ended September, down 5 per cent compared to a year-ago, helped by lower than expected loan loss provisions.

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Saudi banks' net interest margins (NIM) are expected remain under pressure, with rates at multi-year lows. NIM fell by 18 basis points to 3.01 per cent during April to June on a quarter- on-quarter basis, largely due to 61 bps decline in yield on credit caused by the lower interest rate environment. Seven out of 10 banks reported a decline in the NIM.