Oct 11, 2013
Limassol, October 8th 2013 - The outlook for the Saudi Arabian banking system is stable, says Moody's Investors Service in a report published today. 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.
The new report: "Banking System Outlook: Saudi Arabia", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
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 2.0% 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 businessesand 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 1 capital 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.
Re-disseminated by The Asian Banker