The Saudi banking sector remains sound due to the government's fiscal stimulus, which has sustained macroeconomic growth, the banks' robust financial fundamentals, including strong liquidity and adequate profitability and capitalization, and a prudent regulatory environment, said Moody's in its annual Banking System Outlook on Saudi Arabia.
Catalysts for potentially greater lending activity could include banks' strong liquidity and expectations of a peak in provisioning levels in conjunction with banks' efforts to maintain market share and margins in the current low-interest/low-growth environment. Indications already point to a pick-up in loans to the private sector, with a healthy pipeline of projects expected over the next 18 months, which — coupled with banks' growing emphasis on retail banking — is conducive to stronger private sector growth.
Moody's expects the banks' 2010/2011 net income to be modestly higher than it has been over the past two years.
Commenting on Moody’s report, John Sfakianakis, chief economist at Banque Saudi Fransi, said: “The Saudi banking system has demonstrated resilience during the worst financial crisis the world has witnessed since the 1930s. Banks' profits declined by only 10 percent in 2009 as a result of the provisions taken. The worst is behind us and as the global banking system is trying to come to grips with additional capital buffers going forward, Saudi Arabia's capital adequacy ratio of 16.5 percent is systemically considerable and above many other countries.”
He said the banking sector is beginning to allocate more credit to the private sector at a gradual but healthy pace. The pace of lending is expected to pick up in 2011, as there are plenty of projects, both public and private, which are beginning to enter the initial phase. “I am also not worried about nonperforming loans as Saudi Arabia has among the lowest NPLs. The macroeconomic stability provided offers the appropriate climate for banks to grow,” Sfakianakis said.
“Banks are very strong in Saudi Arabia because of strict regulations and close monitoring from the Saudi Arabian Monetary Agency (SAMA), the central bank. Despite the economic crisis worldwide, there was not a major impact on Saudi banks," said Faisal Alsayrafi, managing director and CEO of the Financial Transaction House (FTH).
Moody's also said SAMA is one of the best regulators in the emerging markets, with tight oversight as well as prudent regulatory requirements and consumer lending restrictions.
It added that most Saudi banks have solid local franchises, as well as a solid share in their respective market segments. Saudi Arabia's gross domestic product (GDP) of SR1.41 trillion ($376 billion) and population of 27 million give the banks a stronger base for franchise positioning than banks in many other Gulf Cooperation Council countries.
The Saudi banks' initiatives to penetrate the retail banking market and expand their Shariah-compliant products have strengthened their business franchises and market positions at a time when foreign banks have been increasingly reluctant to lend to Saudi corporates.
The banks' risk management has been improving and their corporate governance culture strengthened, while their already moderate risk appetite has further diminished, the report said.
In February, the long-term foreign currency deposit and debt ratings of Samba Financial Group, Banque Saudi Fransi and Saudi British Bank were upgraded to Aa3 from A1 (positive). The rating action aligned the banks' foreign currency ratings with their respective local currency ratings following the upgrade of the Kingdom’s ceiling for foreign currency bank deposits to Aa3 from A1.
During the financial crisis, SAMA and the government also acted decisively to combat funding and liquidity problems, ensuring banks remained sufficiently liquid and benefited from a reasonable cost of borrowing. Indeed, placements with SAMA increased to SR124.4 billion in April 2010 (as against SR73 billion in November 2008), reflecting an excess of deposits held by banks. At the same time, banks' foreign assets increased to SR215.9 billion in April 2010 (SR154 billion in December 2008), indicating that excess liquidity was also used to invest in relatively low-risk securities abroad, Moody's said.
However, the report said a low interest rate environment will continue to pressure the banks' margins and also their profitability.
There are currently signs of a pick-up in private sector loan growth, although it will likely remain below long-term averages. The excess liquidity held by the banking system, an expected peak in provisioning and lower interest rates will encourage banks to start lending more aggressively in the second halves of 2010 and 2011.
Saudi banks also benefit from historically robust profitability that gives them a strong capacity to absorb losses, benefiting from a relatively modest macroeconomic slowdown; low funding costs; Saudi Arabia's zero corporate tax rate and relatively lean cost structures. Furthermore, Saudi banks have adequate capital adequacy ratios, Moody' said.
While the banks have been able to recoup certain borrower-specific losses taken in 2009 and to redefine their lending practices, they will need to step in over the next 12 to 18 months and shoulder increased private sector loan demand. The high pipeline of infrastructure projects that is expected to hit the market in the second half of 2010 should fuel loan demand at a time when banks are flush with liquidity.
As demand continues to increase, Moody's said, Saudi banks are also seeing strong growth in Islamic banking services, with four banks — Al-Rajhi Bank, Bank AlJazira, Bank Albilad and Alimna Bank — now fully Shariah-compliant. Service offerings have gone beyond Islamic liquidity and low-cost deposits to include personal, trade and project finance.
The rated Saudi banks' aggregate bottom-line profit of SR25.9 billion in 2009 remains 36 percent lower than the peak profitability reached in 2006, but is nonetheless considered adequate and to have stabilized at current levels.
Over the years, Saudi rated banks have maintained solid liquidity and funding profiles. The banks have retained sufficient liquidity, with cash, SAMA, inter-bank and government exposures accounting for approximately 33 percent of total assets at year-end 2009, compared to 30 percent at year-end 2008 and a net loans-to-deposits ratio of 74.4 percent at year-end 2009, down from 80.1 percent at year-end 2008.
The high liquidity reserves maintained by Saudi banks are also evidenced by their deposits with SAMA, which increased to SR124.4 billion at the end of April 2010 from SR86.2 billion at year-end 2008 and SR72.9 billion at year-end 2007.
The report said Saudi banks derive almost all their earnings from their operations in Saudi Arabia. They therefore remain vulnerable to an economy that is still largely dependent on oil, although they were shielded from the worst during the financial crisis, and that they benefit from the government's commitment to diversification and the market's strong growth potential.
