LONDON, 3 May 2007 — International rating agency Fitch reported yesterday that Saudi banks’ profit growth is expected to be moderate in 2007, but more importantly at sustainable levels, amid lower stock market-related earnings and a slowdown in consumer loans.
In a special report issued yesterday, Fitch said the outlook for the Saudi banking sector remains stable, with banks continuing to benefit from sustained high oil prices and the resultant positive impact on the economy. “As a result, core operating revenues are likely to remain healthy, reflecting stronger business volumes, but banks will certainly feel the impact of lower, but normalized, levels of brokerage fees going forward,” Mahin Dissanayake, associate director in Fitch’s Financial Institutions team, said. “Although the banks were never reliant on extraordinary stock market related revenues, these supported major investments to their networks and franchises in the last three years.”
The key other challenge for the banks is the Saudi Arabian Monetary Agency’s restrictions on the expansion of consumer lending, which is a high-yielding, fairly low-risk asset for the banks. In the medium term, banks will also face competition from the new entrants licensed by the Capital Markets Authority to operate in investment banking, brokerage and asset management.
In 2006, the banks again reported strong results following a now familiar pattern of robust core revenues supported by substantial brokerage fees, low impairment costs and improving efficiency measures.
Despite the stock market correction, brokerage/asset management fees exceeded the 2005 level as transaction volumes remained high throughout 2006.
There was no material change in asset quality, with loan impairment ratios on average below 2 percent and reserve coverage well in excess of 100 percent. Fitch maintained that most banks have good credit controls and given current economic conditions, any future credit losses should be tolerable.
Funding and liquidity are satisfactory, which in Fitch’s opinion is a key rating strength. Banks continue to be well capitalized with strong regulatory capital ratios.