Globally, only Canada and Switzerland have been ranked higher with a Group 1 rating while Saudi Arabia has been placed in the same group as countries such as Germany, France, Singapore, Norway and Sweden.
Both the US and the UK were ranked in Group 3, S&P said in a statement.
The agency pointed out that “Saudi Arabia has posted sizable current account surpluses during the last decade and we expect this to continue”.
It added: “Monetary flexibility is limited because the Saudi riyal is pegged to the US dollar, but this also provides stability for the economy.”
Standard & Poor’s Ratings Services has reviewed its Banking Industry Country Risk Assessments (BICRAs) for 86 countries using its updated BICRA criteria.
“Our BICRA criteria enables an evaluation of individual banking systems, producing scores that classify systems into one of 10 groups, with group ‘1’ being the lowest risk, and group ‘10’ the highest. Contributing to these overall scores are our assessments of economic risk and industry risk, which are the two main elements of the BICRA,” the statement said.
S&P said it had reviewed the banking sector of Saudi Arabia (AA-/Stable/A-1+) under its updated BICRA methodology. Our criteria define the BICRA framework as one ‘designed to evaluate and compare global banking systems.’ A BICRA analysis for a country covers rated and unrated financial institutions that take deposits, extend credit, or engage in both activities. Our economic risk score of ‘3’ reflects our opinion that Saudi Arabia has “intermediate risk” in “economic resilience,” “low risk” in “economic imbalances,” and “intermediate risk” in “credit risk in the economy,” as our criteria define these terms.
S&P said its “intermediate risk” assessment of “economic resilience” reflects the economy’s dependence on the performance of the hydrocarbon industry and the challenges faced in integrating a young and fast-growing population.
The agency pointed out that Saudi Arabia is one of the biggest oil producers in the world and has huge proven reserves.
High oil prices support the government’s policies of modernizing infrastructure, promoting economic diversification, and supporting private sector growth through vast spending plans.
“Monetary flexibility is limited because the Saudi riyal is pegged to the US dollar, but this also provides stability for the economy. Our assessment also takes into account potential political and geopolitical risks over the long term,” S&P said.
“We believe that there are no major economic imbalances, like a credit fueled asset bubble, that pose a threat to the banking sector. The Saudi stock market has been highly volatile over the past five years, but this has had no significant impact on banks apart from the sharp reduction of brokerage fees. This is also true for Saudi Arabia’s real estate market, which we see as being driven by real demand, especially in the residential segment. On the external side, Saudi Arabia has posted sizable current account surpluses during the last decade and we expect this to continue.”
S&P said Saudi banks have adequate lending practices and underwriting standards, as well as a good track record in maintaining strong asset quality indicators.
“Banks mainly deal with large corporate groups involved in government-backed projects. Because of the limited number of large corporate clients and narrow economic diversification, single-name exposures are high. Corporate governance for family owned groups and financial disclosure is improving, but only slowly,” the statement added.
In the retail segment, S&P said salary assignments against personal loans are a protective feature for Saudi banks. Mortgage financing represents less than 15 percent of personal lending and is unlikely to grow rapidly until a new legal framework is in place and has been tested.
The statement added: Our industry risk score for Saudi Arabia is ‘2’. This reflects our “low risk” assessment of the “institutional framework,” “competitive dynamics,” and “systemwide funding,” as our criteria define these terms.
S&P said its assessment of the “institutional framework” reflects its view that the Saudi Monetary Agency (SAMA, the central bank) monitors the banking system efficiently, preventing banks from entering into high risk strategies or dealing with complex products.
“We believe that SAMA was instrumental in recent years in limiting the overall risk profile of banks by controlling credit growth, especially in the retail segment. We assess the regulatory track record as “intermediate.”
S&P said SAMA has consistently favored the building-up of strong capital positions and provision buffers in recent years. Basel II
regulations were implemented in 2008, leading to strengthened risk management practices, including the creation of a credit bureau. However, high single-name exposures would limit banks’ ability to absorb losses on an ongoing basis if a small number of large corporate borrowers defaulted at the same time.
The agency said there are only 12 commercial banks operating in Saudi Arabia, and market positions are unlikely to change markedly, in our view. Banks benefit from a well-protected franchise with good business opportunities.
“We consider that risk appetite is restrained as banks focus on customer driven commercial banking activities and better-controlled loan growth. The Saudi banking sector displays high and resilient profitability indicators. There are no particular market distortions affecting the sector. While various government-related bodies have significant stakes in banks’ capital, we believe that they do not interfere in day-to-day management.”
S&P said banks rely on core customer deposits to fund their business. The loan-to-deposit ratio is capped at 85% by regulation. On the negative side, the maturity of deposits is very short term and there is no significant domestic debt market.
“We classify the government of Saudi Arabia as “highly supportive” toward domestic banking. We recognize the government’s long track record of providing extraordinary support to the banking system in times of stress, and assess its capacity to continue to do so as very high,” the S&P statement said.
