The outlook for the Saudi Arabian banking system is stable, according to Moody’s Investors Service report published on Tuesday.
The outlook, which has been stable since September 2009, reflects the benign operating environment, Moody’s expectations of continued low problem loan levels, the banks’ strong loss-absorption capacity, and the benefits of low-cost deposit-based funding. However, the rating agency identifies competitive pressures on lending margins and some corporate sector weakness, which will constrain further improvements in Saudi banks’ profitability.
Over the 12-18 month outlook period, Moody’s expects Saudi Arabia’s banking system to continue to benefit from expansionary fiscal policy. Against this backdrop, Moody’s anticipates that the non-oil sector, where most bank lending is extended, will continue to expand, growing by almost 6% in 2013 and just over 5% in 2014. Balancing these factors is Saudi Arabia’s high unemployment rate as well as tail risks stemming from ongoing regional geopolitical tensions and a sustained drop in oil prices. As a result of the benign operating environment, Moody’s expects problem loan formation to decline, which, in addition to continued loan growth, will lead to an improvement in the problem loans-to-gross loans ratio to around 2% over the next 12 months.
Although Moody’s expects the improving trend to continue, asset quality will remain exposed to event risks, owing to persistently high, albeit declining, single-party exposures in Saudi banks’ loan books, and some vulnerabilities in the corporate sector such as the low transparency of family-owned businesses and the intermingling of investment activities with operating activities.
Moody’s also expects Saudi banks to sustain their strong pre-provision profitability over the outlook period, with the prevalence of low-cost funding, strong operational efficiency, lower loan loss provisioning expenses and continued growth in business activity balancing the margin pressures caused by increasing competition and the low interest-rate environment.
As such, Moody’s expects that Saudi banks’ high profitability will continue to drive robust internal capital-generation and substantial loss-absorption capacity. While the rating agency expects Tier 1capital levels to decline slightly from around 16% at the end of June 2013, capital buffers will remain strong compared to those of similarly rated global peers.
The rating agency also expects the banking system to maintain a solid deposit base, reflecting the system’s strong funding dynamics, underpinned by a cash-rich Saudi government, a growing population and the banks’ well-established deposit franchises. Although high deposit concentrations, primarily from the public-sector, and asset and liability maturity mismatches will remain structural challenges, deposit levels have historically proven stable. Consistent with the stable banking system outlook, the outlooks for the 10 Moody’s-rated Saudi banks are stable. The outlook for the Aa3 sovereign rating of Saudi Arabia is also stable