The fundamental credit outlook for the Saudi banking system is stable, reflecting the sector’s resilience and its ability so far to absorb the adverse effects of the global financial crisis and deteriorating macroeconomic conditions, says Moody’s Investors Service in its new Banking System Outlook on Saudi Arabia.
Moody’s stable outlook for the Saudi banking system expresses the rating agency’s view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.
Moody’s believes that the banking sector will benefit from the Saudi government’s continued commitment to supporting the economy with an expansionary budget and numerous infrastructure projects. Indeed, the Saudi government has prudently invested its oil revenue windfalls of recent years and has historically been the main driver of economic activity. “The impact of the financial crisis has been contained, as Saudi banks are not significantly dependent on market funding. Moreover, any losses from structured products and other risky investments have been comfortably absorbed,” explains Constantinos Kypreos, Vice President
Senior Analyst in Moody’s Financial Institutions Group based in Limassol.
The ten Saudi banks rated by Moody’s not only benefit from established and defensible local franchises, but have also improved their risk management culture in recent years aided by Basel II implementation.
“The stable outlook is further supported by strict regulation, close monitoring and systemic support, which have ensured that the Saudi banking sector remains adequately funded and liquid, and is well-prepared to cope with economic downturns,” adds Mr. Kypreos.
Moody’s notes that operating conditions remain tough, with nominal GDP in 2009 likely to decline by 10-15% due to the fall in oil revenue. However, although Moody’s expects these conditions to lead to a deterioration in the Saudi banking sector’s financial metrics, the rating agency nevertheless believe that the metrics are likely to remain supportive of the banks’ current ratings.The rating agency points out that downside risks implied by the volatile market conditions could be exacerbated by a further deterioration in the operating/macro conditions and a worse-than-anticipated deterioration in asset quality. (In particular, private sector corporate and family-owned businesses remain the most vulnerable loan category as the recent issues surrounding the Algosaibi and Saad Groups have demonstrated.) If these weaker-than-anticipated parameters do materialise — and this is a real risk — then profitability and capitalisation metrics of Saudi banks would also be affected. Moody’s cautions that such an outcome could prompt us to consider changing the outlook for the sector.
Moody’s notes that other challenges faced by the Saudi banking sector include the high concentrations in lending and deposits; mismatches in the maturity profiles of assets and liabilities; scarce human capital; the continued limited diversification of the Saudi economy beyond the hydrocarbons sector and volatility in the country’s real and nominal output; and the strong loan growth of recent years, which is only now being tested by more challenging operating conditions.