Fitch Ratings says in a new report that Saudi banks should continue to see strong performance, with ample opportunities for lending provided by a favourable economic outlook. The prospects for Saudi Arabia’s economy are strong due to high oil prices, significant government spending on infrastructure projects and an expanding non-oil private sector.
Fitch’s outlook on the sector is positive, while the Rating Outlook on the sector and on all rated banks is Stable.
The financial performance of the Saudi banks remains sound, driven by business growth and declining loan impairment charges. The banks expanded their loan portfolios in the first nine months of 2013(9M13) by an annualised 12.4 per cent and Fitch expects credit growth to remain strong in 2014.
Asset quality ratios are generally strong and are likely to remain stable due to the benign operating environment, improving underwriting standards and new lending directed mostly towards government-related projects. Despite strong asset growth, the largest Saudi banks continue to be well-capitalised, with an average Fitch Core Capital ratio of 15 per cent at end-9M13.
Funding benefits from ready access to low-cost non commission-bearing deposits which help to alleviate margin pressure on banks, and loans/deposit ratios are among the lowest in the region. Saudi banks also benefit from large volumes of liquid assets including government securities and deposits with the Saudi Arabian Monetary Agency. That said, given the strong growth in longer-term lending, banks would benefit from an increase in long-term funding to address their asset /liability maturity gaps.
A decrease of the sovereign’s willingness to provide support for the banking sector would negatively impact all sovereign support-driven Issuer Default Ratings, but this is unlikely in the foreseeable future. Banks with sovereign-support driven Issuer Default Ratings include The National Commercial Bank (A+/F1), Al Rajhi Bank (A+/F1), Riyad Bank (A+/F1), SAMBA Financial Group (A+/F1), Bank Aljazira (A-/F2), The Saudi Investment Bank (A-/F2), Saudi Hollandi Bank (A-/F2) and Alinma Bank (A-/F2).
The Issuer Default Ratings of Arab National Bank (A/F1), Banque Saudi Fransi (A/F1) and Saudi British Bank (A/F1) are driven by their individual credit strength and are mostly sensitive to a weakening of capital ratios or increasing risk in their investment portfolios.