The outlook for Saudi Arabia’s banking system is expected to be “stable” this year, as the kingdom’s economy will return to growth in 2018, the latest report by Moody’s Investors Service has stated.
Moody’s expects the Saudi economy to grow by 1.3 per cent this year, after contracting by 0.7 per cent in 2017.
“We expect increased government spending and other stimulus measures to outweigh the impact of the oil production freeze agreed with the Organization of the Petroleum-Exporting Countries (OPEC), supporting a return to modest economic growth in Saudi Arabia in 2018, after a contraction in 2017,” the report said.
“This will benefit Saudi banks’ lending activity, although problem loans will continue to rise from current low levels until the economy recovers more materially.”
Lending growth, driven by corporate and real estate lending, is anticipated to rise by 4 per cent in 2018.
“Recovering oil prices, record budget expenditure and government efforts to protect households from the impact of economic reforms will be the main drivers of credit demand in 2018 and 2019,” said Olivier Panis, vice president and senior credit officer at Moody’s.
“While lending to corporates will recover only gradually, particularly in the construction, manufacturing and transport sectors, retail lending will remain supported by solid growth in mortgages.”
However, Moody’s found that Saudi banks’ ratio of non-performing loans to gross loans will marginally increase to around 2.5 per cent in the next 12 to 18 months, from 1.8 per cent as of December 2017.
“Borrowers in the construction, commerce, and household sectors will remain vulnerable until the economy accelerates. Saudi banks will maintain the highest level of provisioning coverage in the GCC region,” the report said.
“Fiscal consolidation measures and slowing economic growth have affected banks’ asset quality since global oil prices fell sharply in 2014,” said Ashraf Madani, vice president at Moody’s.
Meanwhile, the report also found that Saudi banks’ profitability will remain the highest in the GCC region (net income-to-tangible assets stood at 2 per cent in 2017 versus 1.9 per cent in 2016).
Moody’s expects stronger margins as rising interest, moderately higher credit growth, higher fee income, and low operating costs will outweigh rising provisions.
Stable profitability and moderate loan growth will reinforce banks’ already strong capital adequacy, the report added.