Ratings agency S&P defends decision to downgrade Saudi banks

Ratings agency Standard & Poor’s defended its decision to downgrade five Saudi banks this month because of heightened economic and industry risks and weaker credit conditions in the kingdom.

The agency lowered the ratings of Al Rajhi Bank, National Commercial Bank, Riyad Bank, Samba Financial Group and Saudi British Bank.

However Arab national Bank, Banque Saudi Fransi and Saudi Investment Bank maintained their ratings.

“In our view, the drop in oil prices has a marked and lasting impact on Saudi Arabia’s fiscal and economic indicators, resulting in difficult operating conditions for the banking sector,” the agency said.

Saudi banks are exposed to structurally high concentration risk because of limited business sector diversification and the small number of large corporations.

“We expect credit conditions for Saudi banks will deteriorate through a correction cycle, leading to increased non-performing loans and credit losses, as well as a decline in profitability. Consequently, we think that the economic risks for banks based in Saudi Arabia have increased,” the report explained.

S&P also anticipates that banks will have lower capacity to generate earnings to cover risks although they will have to continue supporting infrastructure projects and the real estate sector.

Hence the agency has also revised its Banking Industry Country Risk Assessment on Saudi Arabia to group 4 from group 3, on a scale of 1- 10 with group 10 indicating the highest-risk banking systems.

“We now view the trends for both economic and industry risks for Saudi banks as stable, versus negative previously,” the report said.

“Our assessment of the stable trend in economic risks includes our expectation of a decline in lending opportunities and higher risks in some sectors, such as construction.

“Still, we think the impact on Saudi banks will be manageable thanks to their high loan-loss reserves and strong capitalisation,” it added.

The Saudi banking system benefits from strong regulation and supervision while lenders continue to gain from a low-cost domestic deposit base, S&P said.

The latest move comes after agency lowered the rating on Saudi Arabia from A- to A-2 in February, primarily because of the slump in oil prices.

Although mainly oil-dependent, Saudi is looking to diversify its economy and has revealed plans to set up a $2 trillion sovereign wealth fund to help it thrive in the post-oil era.