LONDON: Fitch Ratings says in a special report that Saudi banks are well-positioned to weather a more challenging operating environment, due to their strong fundamentals and government support.
“Given lower expected business volumes in 2009, Saudi banks will be highly reliant on tapping government-related projects and re-pricing their lending to maintain their good performance,” says Philip Smith, Senior Director in Fitch’s Financial Institutions team. “Loan impairment charges, which are expected to increase as the credit cycle worsens and loans season, will be one of the main risks in 2009.”
Nevertheless, Fitch expects Saudi banks to remain profitable in 2009. First-quarter 2009 (Q1’09) results already show a significant improvement on Q4’08, when domestic and international financial markets fell sharply.
Additional impairments on financial assets, if markets do not improve, will add pressure on profitability in the upcoming year, but to varying degrees.
The funding and liquidity base of Saudi banks is a key strength to help them cope with the more challenging operating environment. Customer deposits grew 18 percent in 2008 and Fitch notes that none of the Saudi banks significantly relies on funding from wholesale or debt capital markets, which have virtually dried up.
Fitch also gains comfort from the continuous actions taken by the authorities (such as injecting liquidity into the banks, lowering reserve requirements and repo rates). SAMA (the Saudi Arabian Monetary Agency) is considered by Fitch to be one of the better regulators in the region.
Capital adequacy ratios, while on a downward trend partly due to the implementation of Basel II, continue to be satisfactory to date with an average Fitch eligible capital ratio of 14.7 percent at end-2008.